TRANSITION TALK

Completing an annual valuation on your business is the financial service industry equivalent of undergoing your annual physical. I’ll turn 55 this year and I have resigned myself to the fact that prescription medications have officially become their own food group and an annual physical is no longer optional. My annual pilgrimage happens to take place in the spring tucked neatly amongst the sporadic appointments to see specialists for knees, elbows, near sightedness, far sightedness, rotator cuffs and something about my lumbar.

Now, the key word here is annual. If I had my cholesterol checked 10 years ago and then never again how am I going to know if what I am doing is working? An annual examination provides a historical record of your overall health including your vital signs enabling you to make changes in order to perform at your best. The good news is that, unlike my annual physical, your valuation results should get better as your business matures.

Your business is a living, breathing entity. Just like the investments you make on behalf of your clients, it needs to be nurtured, protected, and developed in order to realize its maximum value. It’s important that your valuation be updated annually. The monetary value of your practice is just one of many pieces of information to be gleaned from a professional business valuation.

“Instead of focusing on the circumstances that you cannot change—focus strongly and powerfully on the circumstances that you can.” –Joy Page

One of my favorite movies of all time is Casablanca. This 1942 American romantic drama is revered for its cinematic quality, lead characters, fantastic writing, and pervasive theme song “As Time Goes By.” It is set in a time of war, upheaval, and great uncertainty; in fact, the movie is the perfect foil for the underlying message that we control our fate through direct action. There are many scenes that highlight that message, but Joy Page was a part of one particular scene that foreshadows the ending of the movie and reinforces her thoughts as expressed above.

In this scene, Humphrey Bogart, playing the lead character Rick Blaine, tells the husband of a newly-wed Romanian couple to make a bet on the roulette table at Rick’s Café Américain casino. To summate the plot line, earlier in the movie, Rick had turned down helping the newly-wed wife played by Joy Page citing that he helps no one to avoid the suspicion of the Vichy police.

As the plot line continues, Rick has a change of heart and whispers in the husband’s ear to make a risky bet on the rigged roulette table. With a little help, the husband wins enough money to buy a passage out of Casablanca for himself and his new wife. The action that Rick takes in this scene foreshadows his later actions that free Victor Laszlo and his wife, Ilsa Lund, from the Germans and Vichy Police in Casablanca. The rest is cinematic history.

In times of uncertainty, it is always wise to focus on what you directly control, as pointed out by Ms. Page’s quote. Whether we look at current politics, markets, regulation, news, or the current state of the financial services industry, there have been (and always will be) many events outside of your control as a practice owner that affect your work. How do you deal with this constant noise? Recognize it for what it is and focus on the things you can control with direct action.

The last thing any business owner and professional needs is to deal with more ambiguity and uncertainty than the global situation has already dealt us. In our highly regulated industry, many advisors are asking questions about how to keep their teams safe and do their part to "flatten the curve" while remaining compliant in operations and client communication. Many industry experts and institutions are weighing in on how to maintain business continuity, protect your clients, and remain compliant during the COVID-19 pandemic. Below are some of the resources we found most valuable on these subjects:

Ongoing developments with COVID-19 have prompted a number of advisors to contact us and make sure their death and disability continuity plans are up to date. It’s worth noting that only about 30% of advisors have any type of formal, written death and disability agreement in place. That leaves 70% with little to no protection for their business and clients.

What is Continuity Planning?

Business Continuity Planning is required by most regulatory organizations in the financial services industry. The common objective is preserving client service and asset management continuity in the event of natural disaster, national emergency, or exit of the licensed principal. Death or disability agreements provide a contingency plan that ensures a seamless transfer of control and responsibility for the business in the event of an owner’s unplanned and abrupt departure.

In the wake of COVID-19, we’ve seen many of these operational contingencies enacted by advisory firms nationwide, and that the preparation for a sudden exit is equally as crucial. Highly transmittable and difficult to predict respiratory viruses aside, you never know when an unexpected event will prevent you from performing your role as owner and advisor.

Mergers are transactions that can take on many shapes, apply to almost any size advisory enterprise, and are infinitely customizable depending on the unique details and situations of the participating advisors.  

Advisors commonly think of a merger as the statutory combination of two practices into one in a tax efficient manner, but it’s better to think of the merger process as the combination of two or more advisors’ strengths, client bases, and cash flow streams, while reducing or eliminating weaknesses and inefficiencies – lofty goals to be sure, but readily achievable.

The reality is that mergers can be used to address a much wider set of challenges and opportunities including:

1. Growth through acquisition (i.e., by merging a small practice into a larger practice, and then setting up an internal succession/continuity plan);
2. Finding a successor, or becoming a successor (by first creating an internal, minority equity partner who later completes the buy-out of the founder’s S-corporation or LLC);
3. Establishing a practical and reliable Continuity Plan and protecting the value of your practice against your sudden death, disability or retirement is best accomplished by having an equity partner such as may be created through a merger;
4. Improving Enterprise or Revenue Strength through increased efficiencies and the added strengths of other advisory owners;
5. Expanding market territory, expertise, and services;
6. Building a strong, enduring business by combining the diverse strengths of multiple contributors.

To help illustrate these benefits, consider the following three examples as discussed in our recent Roundtable Talk, “Every Merger Is Unique,” below, each representing an actual merger between independent advisors that we helped orchestrate in 2018: 

One of the fastest ways for independent financial service businesses to grow is to acquire another book of business, adding a lump of clients and their assets to a portfolio all at once. The reality is, however, that setting out to buy a business isn’t that simple. 

First, your business must be able to handle a sudden influx of new clients. Your infrastructure must be strong, you must have the people and resources available to provide quality service to clients immediately following the transition, and you must have the financial means to purchase. Second, the current marketplace right now is favoring sellers more than ever. Not only are we experiencing a 50:1 buyer to seller ratio on the open market, but values are at a high and the competition is stiff. We’re seeing a greater number of experienced buyers vying for a seat at the table, and we’re seeing more savvy sellers making strategic decisions. Finally, being able to meet the asking price alone doesn’t necessarily constitute a good fit. Even if you have everything in place to make an acquisition, you must meet a seller’s specific criteria in other areas to be considered.

The good news is that our industry has several other ways to achieve the same exponential growth as buying a book of business without a “traditional” acquisition. Strategies like mergers, continuity partnerships, succession planning, strategic partnerships, and sell & stay tracks offer alternatives for advisors who may not have the enterprise strength to execute a traditional acquisition strategy. The following avenues take planning and patience, but they can yield incredible growth and value in the long run.

“Mergers & Acquisitions” is a phrase that gets used off-handedly, but those are substantially different transactions. An acquisition itself is a complicated enough process. But in a merger there are the additional components required to wholly integrate two separate businesses into one surviving entity.  Those complexities are why each merger engagement presents circumstances and challenges unique to the companies, and individuals, involved. Those complexities can be solved, but the path to the solution is often not apparent to the inexperienced or unwary. 

There are threshold issues a business owner should consider before jumping into the process of merging his or her business with another business. In the video below, two of our transactions experts, General Counsel, Rod Boutin, J.D. and Assistant General Counsel, Ericka Langone, J.D., discuss some of these important considerations.

You took the risk to become independent, hung out the shingle, and spent a myriad of sleepless nights worrying about how to build a business that paid the mortgage. A few bumpy months led to a smoother ride over the years; you now have a strong entity and responsibility over the lives of your clients and employees. As you stabilize, concern shifts from survival to how to perpetuate something that has become bigger than you. Your focus becomes generating growth that secures your future, as well as that of those onboard.

With Growth Comes Challenges

Floyd Green, Founding Partner at Cornerstone Wealth Management in Raleigh, North Carolina faced one of the biggest challenges of his life. Unexpected circumstances forced Floyd to quickly reduce his work hours from 45 to 20 hours a week. Too young to retire and with a staff that had “come to expect a paycheck,” he had to consider how to ensure his business not only survived, but thrived, without him as the sole growth engine.

Thanks to existing relationships, recruiting advisors who shared his vision, values, and passion was the first hurdle cleared; deciding how to effectively incorporate them into the ownership structure would prove more difficult. The issue was not only one of compensation, but also cultivating the motivation and mentality required to be an owner amongst Floyd’s key producers. He wanted to encourage ownership of outcome, a decision-making mindset that considers the future impact on the business.