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The human side of advice practice mergers & acquisitions

11 October 2021 Gareth Stokes

There are three ways to build a mega-financial advice practice… You can grow your business organically over decades; you can accelerate your growth by merging with practices of similar mindset and size; or, assuming you are a heavyweight financial services provider (FSP), you can acquire advice practices that meet your shareholders’ needs. FAnews frequently interacts with FSPs who are on the hunt for books of business, especially in the short-term commercial space. So, if you are considering an exit from your commercial short-term practice, we encourage you to get in touch with us for a possible introduction.

The merger or acquisition of financial advisory practices was a hot topic during the 2021 Financial Planning Summit, hosted by The Collaborative Exchange. In a fast-paced panel discussion, held on day two of the event, practice owners were reminded to consider what was good for their clients in addition to the price when weighing up a merger or acquisition offer. “You must ensure that the negotiations are carried out with regard for your interests alongside those of your clients,” said Reg Thomson of Delport & Thomson Wealth Associates. He warned against getting swept up by the promise of big money and losing sight of the important soft issues, most notably the human side of the transaction. 

Collaborative merger versus outright sale

The debate touched on a range of important acquisition- and  merger-related topics including client diversification, financial stability, succession planning and valuation, among others; but it got underway with some basic definitions. Marc du Plooy of Wealth Associates said it was important to distinguish between mergers and acquisitions. “A merger is a joining of equals, where each gives inputs into how the business is going to operate and how it will be run,” he said. And a sensible merger between two like-minded parties offers a range of benefits for clients. Mergers are seen as a more collaborative than acquisitions, which typically involve an advice practice selling out a stake to a ‘big brother’ shareholder. 

The panellists observed that there were considerable differences in outlook between an acquiring firm and a small financial advice practice, shining a spotlight on the conflicts that exists between the participants in such deals. “An acquiring firm approaches things from a business transaction point of view,” said Bruce Kirsch of Renaissance Wealth Management. “They are thinking about profitability and ask corporate-type questions about assets under management, the margin, the payback and the earn out”. In contrast, smaller practices are often more concerned with how safe their clients will be in the new environment, whether their staff will still have jobs and the impact of changes that may have to be made to client portfolios as a result of the deal. 

Intellectual property, money or skills?

Money is just one of many factors that smaller financial advisory practices should consider pre-merger. Oftentimes a merger is motivated by the balance of skills between the two advice practices. The complexity of the financial advice product landscape means that few small practices have the internal resources to cover all bases. “A one person show could say to another: your expertise is completely different to mine, if we combine our resources we can add value to [the combined] business and consequently, to our clients,” said Thomson. Du Plooy agreed that participants in mergers were often ‘on the hunt’ to complement their existing skill sets, with the aim to improve the overall service offering. 

Those in the market for acquisitions often come across as predatory. They will, for example, approach smaller practices as the key individuals (KIs) near retirement age and are under pressure to pull the trigger on a succession plan. “Many acquirers will pay top dollar to accumulate assets and soak up the additional margin; and that is where it starts to become quite difficult for the person exiting the business to answer: am I doing this for my clients or am I setting myself up for the future?” said Du Plooy. This realisation set the scene for a deep dive into relationships, which were singled out as a critical factor in both the merger and acquisition space. The panellists agreed that good relationships between clients and advisers, between merger partners and between the advice practice and acquiring firm were non-negotiable for a transaction’s success. 

“By adding to your skill sets, you give the client a broader range of services and a deeper relationship; and that relationships is what an acquirer is buying,” said Kirsch. He added that there was immense value in client relationships that had been built up over 20 or 30 years. A deep understanding of this value is important for smaller financial advisory practices when considering an acquisition offer. Failure to understand value could mean that the seller is poorly compensated for the future cash flows that accrue from continuing relationships with beneficiaries after primary clients pass away. 

The ‘ego and personality’ deal breaker

The panellists warned that ego and personality were potential deal breakers in the merger space. “When groups get together, whether for an acquisition or merger, it is easy to put everybody on one bus … the difficulty lies in which seat they occupy,” said Thomson. One alternative to having two ‘top guns’ vying for leadership control post-merger is to parachute an independent CEO into the new business. According to Du Plooy, this strategy worked very well for Australia-based David Haintz, who merged many firms under the Shadforth Financial Group before exiting the business. “None of the previous owners became CEO; they appointed a non-financial person with specific business skills,” he said. 

The final minutes of the panel discussion were devoted to valuation and the disconnect that often exists between the seller’s expectation and what the buyer is prepared to pay. “Valuation is a big issue. An acquirer is not buying revenue, but margin; and if they overpay using a multiple of revenue they will forever be answering to shareholders for inadequate return on investment,” said Du Plooy. He quipped that advice practices could not expect to change hands at similar earnings multiples to US-listed technology shares. 

Kirsch weighed in by introducing some important valuation considerations, including normalised earnings; the mix of up-front and annuitized revenue in the business; and the number of suppliers in the practice. “All of those affect the multiple,” agreed Du Plooy. “You must adjust the multiple based on your proper due diligence”. 

Writer’s thoughts:
It is impossible to cover the complex merger and acquisition topic in a single newsletter; but we hope we have offered some useful insights into factors that affect these transactions. A successful merger brings huge benefits to both client and practice owner… And that make it important to cover all bases before signing a deal. Have you ever walked away from a proposed merger or acquisition process? If so, what were the main issues that prevented the deal from going ahead? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected]


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