TRANSITION TALK

Today’s Independent financial advisors face an endless array of challenges and opportunities. Identifying challenges before they arise is key for finding solutions and developing strategies for tackling the issues that present the greatest opportunities for improvement and growth.

The four biggest opportunities are:

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: 

Last month FP Transitions President and Founder, David Grau Sr., JD, joined Scott and Pat on the Advisor2Advisor podcast to discuss common concerns related to mergers, and an all too prevalent (and costly) mistake that some mature advisors make when they fail to capitalize on the equity they’ve established by creating a viable succession plan. Listen here.

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.

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: