The M in M&A

Posted by FP Transitions on Oct 26, 2016 9:10:40 AM


M&A. Mergers & Acquisitions. Everyone’s favorite topic. Understandably so when one of the fastest ways to grow is to acquire, and as such add exponentially more clients (and assets) to your business in one fell swoop.

What about mergers though? Often mergers are lumped in with acquisition talk and statistics. Their role and effect on an advisor’s future, however, is much different than an outright sale or purchase.

Our new book, “Buying, Selling, and Valuing Financial Practices–The M&A Guide,” written by FP Transitions president David Grau Sr., JD, clarifies that mergers are, legally speaking, “the joining together of previously separate companies into a single entity.” And unlike an acquisition / sale, a merger also means that the owners of the previously separate companies remain in the newly formed entity and retain some amount of ownership stake. 

Mergers can be an important part of exit and growth strategies alike. Consider this example from the book:

A practice owner who is 62 years old has his practice valued and is pleased to hear that the market data supports a value of approximately $875,000. The reality is, however, that the owner isn’t actually ready to fully retire. The problem is that the owner has no employees ready–or willing–to buy in or take over ownership of the business. And with some pending health issues, continuity has become an issue as well. The best the owner is able to do is to continue working at capacity, enter into a revenue share with an advisor across town, and maintain his current client base.

In this example, a merger with a larger firm offers a good solution to many of the issues for this owner:

  • The owner will become an equity partner in the larger business, effectively changing the value of the original practice for equal stock in a larger, stronger, more valuable business that is still growing;
  • Multiple owners provide continuity and protection for the business and its clients;
  • A built-in succession plan is now a possibility with multiple owners depending on the owners’ exit strategy;
  • The owner gains a support base and more extensive resources to help him better service his clients;
  • And the owner will continue to receive profit distributions, appreciation of stock value, and a base salary commiserate to time spent in the office – which could decline due to health or choice without eroding the business or client service.

While the original owner in this example no longer retains sole control of the business and operational decisions, he has gained value, infrastructure, and security

The larger business owner has her share of benefits as well, including:

  • A larger client book and cash flow;
  • Exponential growth;
  • Additional personnel to support the growing business;
  • Continuity protection;
  • And succession options.

In this case, for the larger business owner, growth was the main goal. In a different situation, however, securing a legacy and building a succession plan could be the driving force behind a merger.

A larger firm can merge with a smaller practice with a talented younger advisor at the helm in order to not only grow, but incorporate the new talent as part of a larger succession plan. As we discussed, both owners in a merger situation retain some ownership stake–here the younger owner can expect their ownership stake to grow, and with it their control and equity, one day assuming majority ownership of the firm.

It’s exactly this tactic that FP client Michael Lutz has used as part of a larger growth strategy–which also includes outright acquisition, organic growth, and next gen advisor recruitment. In this way Lutz’ growth plan is also his succession plan. Watch how he made the two one and the same in the video below. 

Mergers open up options for advisors on the fence about selling, looking for quick growth, or seeking a succession team. This type of transaction, of course, has its own unique tax and regulatory considerations, in addition to deal structuring tailored to the specific situation. And while the benefits of mergers may be appealing to many, the split control is sometimes a deal breaker.

Don’t disregard the possibilities a merger can open up as you contemplate your growth and/or exit strategy–whether you’re choosing acquisition targets, looking for the perfect buyer, or recruiting a suitable successor.


Merger Excerpt Download

Topics: Selling Your Practice, Acquisition, Business Growth, M&A, Buying & Selling, Mergers