Growing Your Business: To Merge or Not to Merge?

At some point in their careers nearly all advisors consider a merger or acquisition as part of a growth strategy. Particularly with the market in such a state of flux and advisors’ books off significantly from a few years ago, some might sense opportunity knocking. But how do you know if a merger or acquisition could be right for you?

“Now is a great time for wealth managers to grow through mergers and acquisitions. While it is relatively easy to appreciate this fact, M&A is not for all firms,” said Tyler J. Resh, principal with ECHELON Partners, a Manhattan Beach, Calif.-based investment banking and consulting firm for the wealth management industry.

“Only firms with solid wealth management platforms, a track record of healthy organic growth, and proper financing should consider themselves well-positioned for these opportunities,” Resh said.

While there is no cookie-cutter approach to effective deal-making there are several things advisors thinking about becoming a buyer should consider, namely: strategic rational, chemistry, culture, and structure. “If you miss on any one of those points you lower your probability for success,” said Liz Nesvold, managing partner of Silver Lane Advisors LLC, an investment banking and strategy consulting firm in New York.

As a potential buyer, you need to have a well-defined strategy. You have to think about how the merger or acquisition fits into your long-term plans, making sure that your business is on solid ground before you even think about expanding. For starters, ask yourself what you are trying to accomplish. Are you trying to build out existing capabilities, branch out into additional geographies, or is there some other reason you want to grow?

Next you need to understand your own infrastructure to know what size and type of merger or acquisition you can support. Things to consider include work flow, technology, systems and staffing. “You need to know what you can handle, what are your limits,” said Roger Verboon, senior practice management consultant with Securities America Inc. in Omaha, Neb.

Consider this: What effect will a merger or acquisition have on your top clients? “Your A-plus clients should never suffer, and if they will in any way, you and your team and your systems are not ready to handle it,” said Verboon, who runs a coaching program for advisors who are interested in buying practices.

While in the planning stages, make sure you don’t forget about the additional clients you’ll need to service. Make sure, for example, you have a good customer relationship management system in place, as well as a precise integration plan on how to communicate with new clients and how to service them. If you plan ahead properly, your retention levels can be in the high nineties, Verboon said.

You’ll also need to consider the culture of your organization and the chemistry you have with your potential partner. Ask yourself questions like: Where are the synergies? Where are the overlaps? How can you grow together?

“It's like a marriage, and if you don't gauge the fit properly you'll find yourself like Britney Spears in Vegas looking for an annulment,” said Nesvold of Silver Lane Advisors.

Structure is also important. Do you have the cash to buy another firm outright, or is a merger more plausible? Ask yourself questions like: Who will be in charge? How will the business be run? Who will run it? Have we incorporated a succession plan into the deal?

“In this market, a fly-by-the-seat of your pants approach is probably a bad idea because you might be acquiring a bad asset that could ultimately derail your own business,” said Paul Lally, president of Gladstone Associates LLC, an investment banking boutique in Fort Washington, Pa., that focuses on the financial services industry.

Also consider the commitment level it takes to do a deal. “If you think you’re going to wake up at seven in the morning and complete the transaction by four, you are mistaken. It takes time, energy and a strategy to complete a successful transaction or transition,” Lally said.

To be sure, becoming a merger or acquisition partner is not for everyone. Indeed, the supply is limited compared with the number of would-be buyers. In fact, the 2008 Moss Adams LLP “Financial Performance Study of Advisory Firms” found that among those practices surveyed, 29 percent had considered a sale, while 55 percent said they were interested in buying another firm or practice.

Of course over time there will likely be an even bigger supply of potential sellers based on demographics. Indeed, there are a lot of advisors who need to think about succession as 52 percent of the planners are 51 and over according to Cerulli Associates in Boston.

The trick is to connect buyers and sellers, said Verboon of Securities America. “If you’re a buyer, you want to be the one who sticks out and offers actual solutions to these people who are ready to retire and sell.”