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
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.
Happy New Year!
More than ever, we look forward to 2021 with the sense of reset and resolution that comes with the changing of the calendar year. We can breathe a sigh of relief that we made it through the chaos and onslaught of 2020.
If we take a moment to look back before we look ahead, we can see just how far we’ve come and how resilient we’ve been as a community of global citizens, financial professionals, and business owners.
In terms of M&A activity, the financial services industry has held its ground despite the market downturn that came earlier in the year. This is a reflection of the shrewdness of professionals like yourself. In the face of market uncertainty, you rose to the challenge, adapted as necessary, and pushed forward.
Earlier this year, with the global pandemic raging and markets in decline, we promised our clients and the industry that we would continue to provide an inside look as to what was happening in the M&A market for financial advisory practices.
Today’s independent financial advisors face an endless array of opportunities (and challenges). The key is to identify impediments before they arise and to develop strategies for tackling the issues that present the greatest opportunities for improvement and growth.
There are four main challenges essential to the success of your business:
Over the last ten years, increasing numbers of advisors have begun the process of creating sustainable businesses. Many advisors started out as a book or a practice—one-generational models. They took steps to create much more valuable, multi-generational businesses by focusing on enterprise strength and setting up or restructuring essential business structures.
The M&A marketplace is becoming increasingly competitive. Businesses need a strong value proposition to step away from the crowd. Owners who have taken steps to work on building their enterprises are in the best position to leverage their unique business aspects to access more growth opportunities and become successful acquirers or merger partners.
Independent financial advisors face an almost overwhelming set of challenges, but with challenges come opportunities. Many of these challenges fall into areas of:
- Mergers & Acquisitions
- Growth & Profitability
- Talent Retention
- Succession Planning
These opportunities and challenges are often interrelated. Tackling one challenge often helps solve another, thereby strengthening your business in other ways. A successful acquisition is supported by a strong enterprise that is capable of handling exponential growth, and building a strong enterprise requires the incorporation of next generation talent. Retaining and nurturing next generation talent is made possible with the proper compensation systems, and maintaining an effective compensation system demands business profitability. Bottom-line profitability increases when it is properly balanced with top-line growth. Finally, to bring it all together, growth is supported by building a strong, sustainable enterprise.
In this new webcast, President and Founder David Grau Sr., JD, discusses the top challenges and opportunities of the profession and how they can be addressed using an end-to-end, integrated strategy.
There has been a fair amount of talk over the past decades about consolidation in the financial services industry. Most of the white papers and articles addressing this concept have presented it in a negative light as though it signals the end of the lifestyle practices that dot the landscape in this profession. Industry regulation, growth, technology, fee compression, competition, and aging advisors forced smaller practices to consolidate just to survive. At least that was the working theory.
As the original organizers of the open marketplace for independent advisors seeking to sell or to acquire, we have a slightly different perspective on consolidation; we view it in a very positive light. Consolidation looks very different than what the prognosticators laid out decades ago. From our vantage point of working with businesses below $2 billion in AUM, we’ve observed the industry is indeed experiencing some consolidation, but not only due to acquisitions or roll-ups by companies like Focus Financial, United Capital, or Dynasty. The consolidation that we see every day is owners of stronger, sustainable enterprises acquiring smaller, one-generational books and practices.
Viewed in this light, how better to look after 250 clients or households when a single-owner advisory practice nears retirement than to find a very similarly structured business that can step in, take over, and provide for the staff members as well? This process works for the buyers, the sellers, and, most importantly, the clients.
Our new Trends in Transactions and Valuation Study includes expert insight, commentary, and predictions for the state of the financial services industry. The study dives into last year’s M&A numbers and examines how industry businesses and their values have evolved over the last five years.
This comprehensive, 50-page study features:
Setting up and agreeing to proper and reasonable payment terms is an essential part of the selling or acquisition process. The following questions are common for both buyer and seller when it comes to deal structuring, especially in regard to financing the transaction:
- What types of financing are available?
- What is seller financing?
- How are payments structured to promote post-closing co-operation and motivation for both parties?
- Are there contingencies to the payment of the full purchase price?
- Does client attrition affect the final purchase price?
Underlying virtually every acquisition is the assumption that the seller will offer some kind of financing to support the transaction. There are four primary types of seller financing, the last three of which include contingencies that may alter the final purchase price.
- A basic promissory note
- An adjustable or performance-based promissory note
- An earn-out arrangement
- A revenue sharing or fee-splitting agreement
Seller financing is less a matter of the sufficiency of a buyer’s cash reserves and more the basic payment structure technique that recognizes the importance of keeping the seller motivated to help with post-closing client retention. Post-closing seller motivation and support is critical in a transaction that involves a relationship-based business.