2021 is just about behind us, and 2022 is knocking at the door. What are the 2022 trends in the financial planning advisory space that we consult? We had an opportunity to ask our experts what they see in their respective crystal balls...
Topics: Selling Your Practice, Acquisition, Multi-Generational Ownership, M&A, Business Value, Deal Structure, Financing, Bank Financing, Buying & Selling, State of the Market, Mergers, Tax Regulations, Building Your Team, Valuation & Appraisal, Transactions, Trends
KPIs, or Key Performance IndicatorsDuring a recent webinar hosted by FP Transitions, several attendees had questions about KPIs. Marcus Hagood Director of Equity Management System at FP Transitions, and Mike McKennon, EMS Consultant at FPT, had previously hosted a webinar on KPIs, and many of those key points are featured in the following post.
Knowing the KPIs
The industry is flush with discussions of KPIs. Surely, you’ve heard the term before, or perhaps seen these indexes described as performance metrics, key variables or key success indicators. At FP Transitions, we use the term Key Performance Indicator; but ultimately, the data these terms convey is the same. KPIs are a unit of measurement leveraged to help you determine where your business is at, where you want to go, and will ultimately provide you with a road map of how you should proceed on your journey.
Wealth management firms seeking rapid growth are increasingly turning to mergers and acquisitions (“M&A”) as a solution. As such, we are seeing a lot of M&A activity involving firms with multiple owners, staff, and even real property. Many practices are looking to be acquired or merge with a larger business to spur growth, to benefit from economies of scale, to offload compliance and day-to-day operations, to increase bandwidth and offerings to clients, or to assist with the retirement of one or more senior owners/partners, among other reasons. Given these complicating factors, negotiating and documenting these M&A transactions can often be more time consuming than the parties expect, which creates the perfect incubator for deal fatigue.
Deal fatigue is a condition during negotiations when one or more of the parties begins to feel frustrated, hopeless, irritated, or even angry about the pace of the transaction. Deal fatigue–at some level–is almost impossible to avoid in a complex transaction, but if caught early and prepared for it can almost always be successfully managed. If not, deal fatigue is one of the surest ways to destroy a transaction. The key is to know the causes and signs of deal fatigue as well as the tools to minimize its negative impact.
Causes of Deal Fatigue
There are of course many causes of deal fatigue, but some of the most common ones that we routinely see are:
Deal fatigue is typically correlated with the time it takes to complete an M&A transaction. Typical transactions take about three months. Parties can get frustrated if they feel like they’re being rushed, while others may feel frustrated if the process starts to feel too drawn out. Striking a balance between the two is important.
It’s hard to keep secrets in a small office. The rooms are tight, the walls are thin, and it’s just a matter of time before everyone knows everyone else’s business. Even when an owner has quietly decided to sell their practice, they should assume that staff members will eventually find out (if they haven’t already). In our experience, it’s best that employees hear the news from someone they trust: the owner.
Prospective sellers are often reluctant to speak to staff members about their exit plans because they aren’t sure how the selling process will pan out and they don’t know how the staff will feel about the change. While it’s important to be sure of your decision before announcing your plan, looping your staff into the process can increase your success and can even help shape the structure of your sale.
The Sell and Stay® approach to selling a financial services business was developed by the professionals at FP Transitions to fulfill the preference of many sellers to gradually exit the business by giving up their ownership obligations while continuing to service clients and earn an income. This arrangement can be customized in a hundred different ways, but often entails an owner selling the majority–or all–of their ownership to a third-party buyer and remaining as an employee of the business for a set number of years (typically 3-5) before fully exiting.
Buyers who are open to this type of transaction not only access a larger acquisition pool, but can enjoy other unique advantages as well. You, of course, enjoy all the benefits of a traditional acquisition: immediate growth, available financing options, expansion into different areas and niches, and economies of scale. In addition, the acquisition can help you tackle some other areas of your long-term growth strategy through:
- Client Continuity and Retention
- Turn-key Practice / Office
- Talent Acquisition
- Reduced Training Costs
- New Competencies and Service Offerings
- Institutional Knowledge
Whether you are buying or selling, it is important to understand what is being bought and sold and what expectations both the buyer and seller have of each other. Absent these details, it is difficult, if not impossible, to determine if an offer is fair. After all, “fair” is a relative term. The question of fairness would be easy to answer if all deals were done the same way, but the reality is they are not. Nonetheless, there are still common attributes to most deals that can shed light and aid in understanding the underlying terms. This in turn helps both buyer and seller assess the reasonability of an offer.
WHAT IS BEING BOUGHT AND SOLD?
The sale of many, if not most, financial service businesses are completed as asset sales as opposed to stock sales, where all ownership rights are transferred to a third party. In an asset-based sale, both buyer and seller receive more favorable tax treatment when compared to a stock sale. Since financial services businesses are primarily relationship-based, providing mostly intangible services, what is being sold in an asset sale is rights to a future benefit stream—namely, revenues. However, given the intangible nature of the assets, there is no certainty that a buyer will receive the same amount of revenue from the clients as the seller did. This is why the ability to leverage the seller’s goodwill (the primary asset being bought and sold) to establish proper deal terms that create a shared risk, shared reward scenario become important.
Over the past two and a half decades of working in this industry, as a regulator, an attorney and now at FP Transitions, I can safely say that I have never seen a better time to be the seller of an independent financial services or advisory practice. The commonly applied term, “a seller’s market,” barely does this observation justice. We are seeing so many supporting elements (price, terms, taxes, financing, demand, etc.) come together right now, that this may be the peak for sellers for years to come.
So here is my message: If you’re thinking about selling what you’ve built and handing the reins to a strong, next generation acquirer at any time in the next two to three years, you need to start thinking about these items today. You really need to understand why this may be the perfect time to call it a day and to sell for the full value you’ve built over the length of your career and to let someone else be responsible for the future. In a nutshell, here are the elements that are creating, perhaps simultaneously, this great opportunity at the peak of your career:
The financial services industry is a personable one. Professional networking and client prospecting depend on your charisma and ability to connect beyond surface pleasantries. But when it comes to selling your business, it’s important to keep your cards close to your chest.
It’s very easy to get excited about the prospect of transitioning your business and moving forward in life–especially, when you’re talking with a colleague you’ve known for years. However, the excitement can cloud your ability to think through details and maintain a healthy level of confidentiality. It’s important to avoid casual negotiations and hashing out deals without proper documentation.
These casual conversations–also referred to as handshake agreements, or napkin negotiations–can lead to a lot of problems, including a loss of realized value.
SHARKS IN THE WATER
The first issue that could arise from the casual mention that you’re even thinking about selling your business is the influx of phone calls or visits from people who want to buy. It’s like blood in the water. And while buyers flocking to you may seem like a boon, it can quickly become overwhelming. Without an efficient screening system, it becomes time consuming and difficult to sift through the phone calls to find serious and qualified candidates, let alone the person who fits your ideal criteria to take over your business. You also make yourself vulnerable to predatory buyers.
In our experience, the smoothest, most successful deals come from buyers and sellers who build a rapport and cultivate trust through transparency.
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