Acquisition strategies are varied and diverse; how an advisor or a firm pursues acquisitions will depend on their business model and philosophy. While the approach to acquisition should be personalized, it is a mistake to do it alone. In addition to the successful transactions presented in this report, FP Transitions works with many advisors who have endured failed sales or stalled deals.
The story of a failed transaction often begins with one or both parties hesitating to hire a mediator, the perception being that their deal is “simple,” and that buyer and seller can save money if they do it themselves. The information we gather from these clients about their failed sales gives our consultants broader perspective on what works and what doesn’t in an evolving marketplace. When we combine this information with the data gathered from successful deals, it is clear that investing in a mediator improves results for both buyers and sellers in terms of success rate, speed, and value.
One misconception advisors often share with us is the belief that one-on-one negotiations are easier and brokers will just get in the way of a personal connection between buyer and seller. This perception is understandable, as it is essential that buyer and seller have a mutual affinity and have aligned interests in order to transfer and retain client relationships after the deal is done. However, mutual affinity is not sufficient to get buyer and seller over basic negotiating factors, such as valuation, deal structuring, and tax allocation of the purchase price. These are complex topics where a mediator can provide expertise and perspective to both sides and advance the deal forward.
Financial services is such a regulated industry, with the added complexity of requiring a long transition, that it is common for a sale to get bogged down in “paperwork.” So, while each party does need representation, there also needs to be a knowledgeable and neutral mediator who can be responsible for keeping everyone on track, offer solutions, and has data to show why one side’s objection is or is not valid.In a related fallacy, advisors often assume that a consultant will add unnecessary expense to the deal; buyers in particular may be cautious of hiring a consultant, believing instead that they can get a better price by negotiating directly. Attorneys and banks may have a reputation of complicating negotiations and accruing expensive fees, but hiring a consultant can be a useful litmus test of either party’s genuine commitment to the sale. What’s more, an impartial mediator will actually return value to both parties by enhancing alignment and providing guidance as to the contracts to reduce the need for endless revisions.
When we look at what makes transactions succeed or fail, we can see that unmediated deals are fraught with challenges. Advisors often relate that they commit four to five years to their acquisition strategy before turning to an expert for help. Considering that successful acquirers can purchase a new practice each year, five years amounts to a substantial investment and a significant wasted opportunity. Even sales that are completed may be deemed unsuccessful in hindsight: a 2014 study of acquisitions across the industry disclosed that one in three advisors were “dissatisfied” with their purchase, some swearing off future acquisitions altogether.¹ This was a surprising statistic within our offices, as most advisors who complete purchases with our consultants report strong client retention—typically greater than 95%—and continued, even heightened, interest in acquiring.
A third-party mediator provides benefits that make acquisitions more successful. Mediators uphold accountability and momentum: in the 2018 FPA/Janus Henderson survey on succession planning, three out of four advisors had no transition plan, but nearly 60% of advisors who had a documented plan had used an outside consultant.² A review of all transactions brought to FP Transitions shows that 85% of mergers and acquisitions that were initiated reached closing. For most deals, the timeline from start to finish was within 14 weeks (longer timelines are often based on year-end tax considerations). For the transactions that did not close, the reasons are telling: buyer or seller did not pass due diligence, the broker-dealer prevented the sale, the parties could not agree on terms, the seller decided to postpone retirement, or the seller demanded a higher price. In situations where the seller is not committed or has outlandish expectations of value, a mediator will help a buyer have confidence when they leave the negotiating table.
When advisors use FP Transitions’ Open Market listing service to find their ideal buyer and mediate the sale, sellers receive 15% higher value than one-on-one negotiations involving sellers with a similar business model and AUM. As consultants to the sale, our aim is to keep the sellers focused on the match over the price. The reality of the open market is that competition will influence the purchase price; buyers can protect their investment with balanced deal terms and vetted contracts that support the successful transition of clients and assets to their business.
Whether you are a buyer or seller, the data supports investing in a mediator to get the deal done. Mergers and acquisitions have a reputation for being highly adversarial as both sides fight tooth and nail for the best terms. Within a relationship-focused business like financial services, a successful transaction will balance the interests of buyer and seller so that both are satisfied with the outcome. An experienced mediator will help maintain momentum and alignment so that both sides are enthusiastic about the outcome. In a delicate process like acquisition, where the impact and investment are substantial, a good mediator will pay back their value indisputably.
¹ “Alpha Acquisition: Maximizing the Return on Your Practice Investment,” AITE (July 2014), https://www.aitegroup.com (subscription required).
² “The Succession Challenge 2018,” Janus Henderson Investors & Financial Planning Association, https://www.onefpa.org/business-success/Documents/FPA-Succession-Planning-Report-0418FINAL.pdf