When a good friend recently purchased a house in an exclusive local neighborhood notorious for low turnover and minuscule inventory, we all congratulated her on an amazing find. When asked how she was able to discover such a rarely available home, she gave an interesting answer: “Sometimes the appearance of scarcity outpaces actual scarcity and that's when the determined buyer has more opportunities than you'd think.”
After moderating a recent session at this year's First Allied Securities national conference in San Diego about buying and selling independent practices, I realized that these thoughts can also be applied to independent advisory practices that other advisers would like to acquire.
(Related: What's your acquisition strategy?)
All too frequently, independent advisers seeking to build their business through acquisitions simply give up too quickly. Would-be acquirers get dispirited after a few stalled conversations and sometimes just when they hear anecdotal stories about how incredibly difficult it is to find successful practices on the market.
Granted, this is a seller's market, and “inventory” (to borrow the real estate industry's use of the term) is indeed tight. But independent advisers interested in making acquisitions should not allow the appearance of scarcity to dissuade them from trying.
One of the first facts of financial life is that illiquid assets that carry deep emotional ties and are competitively sought after in a tight marketplace require a much greater level of negotiating finesse, flexibility and target planning from the outset. And this is absolutely the case when it comes to acquiring an independent advisory practice.
The following are four tactics for independent advisers who are serious about growing by acquisitions:
1) Probe beyond the numbers to understand what the acquisition target really wants and show flexibility in helping to meet those objectives. When you begin to identify potential acquisition targets, the most important thing is to understand what the practice owner really wants beyond price. Is he or she truly looking to maximize the dollar value of a one-time change-of-control transaction? Or is there unexpressed receptivity to a more phased transaction that gradually eases the current practice owner into a business exit over a period of time and helps to preserve his or her lifestyle and professional goals?
Remember that advisers generally go independent for reasons that far transcend the dollars and cents. The majority of advisers choose to go independent out of a desire to control their own professional lives, free from interference from a larger organization or competing outside agendas. Accordingly, the dollar value of what an adviser is asking for his or her practice in a one-time, change-of-control deal may simply be a reflection of the value they are placing not just on the business side of their practice but on the lifestyle and professional fulfillment that ownership of the practice represents.
Therefore, it is essential to make an effort from the outset to understand why the adviser chose to build an independent practice in the first place, what they enjoy the most out of their work and how it might be possible to structure a more “flexible exit” transaction that enables all parties to get what they truly want out of the process. This will make the current practice owner more immediately comfortable with you as a potential acquisition partner, and potentially open the door to a broader range of transaction structure possibilities.
2) Demonstrate a shared set of values and commonality of culture. Showing a genuine interest in what the adviser-practice owner wants beyond a dollar figure is just the first step toward maximizing the success of a deal discussion process. Equally important is recognizing that most successful independent advisers have a certain legacy of client service values and organizational culture that they want to ensure is preserved. All successful advisory businesses are built on relationships and the same mentality must be extended to the buyer-seller relationship as well.
As such, it is vital for would-be acquirers to make an effort to understand their acquisition target's values and actively demonstrate how your business culture dovetails with theirs.
Consider, for example, asking your potential acquisition target to spend a day visiting your own offices to observe client interactions and to understand precisely how you operate your business on a day-to-day basis.
3) Use your broker-dealer for acquisition targets and financing. There is no reason why any adviser seeking to grow through acquisitions should feel that they need to “go it alone.” Remember: It's in your broker-dealer's best interest to support your practice growth, whether it is organic or through acquisitions of other practices.
Your broker-dealer is the most logical place to start to identify potential acquisitions from within the same network that may be culturally similar to your practice and are a good match from a business standpoint. Many broker-dealers have templated resources available to help their advisers in a step-by-step manner as they work through acquisition opportunities. Moreover, many broker-dealers today provide loans or other forms of financing for their advisers to acquire practices within the same B-D platform. While many methodologies exist to value advisory firms, from revenue multiple-based to discounted cash flow, B-D loans are typically structured as bridge financing to assist in the down payment of the deal and can average between 20%-30% of the trailing 12-month revenue generated from the book with payback terms between two to seven years.
4) Show your grasp of the practical issues that will make you a reliable “closer” for the transaction. While showing cultural affinity with a prospective acquisition and underscoring a willingness to structure a transaction that meets his or her lifestyle goals is important, it remains mission critical for any would-be acquirer to show a grasp of the practical issues that make the adviser a reliable deal closer. Executing a non-disclosure agreement is the first logical step in this process and connotes the seriousness of the discussion between buyer and seller. This also means being fully prepared to show your financials over a multiyear period, your strategic business plan as well as a clean compliance track record, and to have a concrete plan for how you intend to serve a newly acquired book of business, so that the selling adviser knows his client relationships will be well supported.
In today's hypercompetitive market for purchasing strong and stable independent financial advisory practices, potential acquirers need to realize that successful deal making is no longer purely about the immediate dollars and cents. The appearance of scarcity — and the valuation markups driven by such perceptions — can indeed dissuade many prospective buyers from even trying to make an acquisition. But advisers in the market for acquisitions who show a willingness to listen to goals beyond a monetary basis and approach the process from the standpoint of strategic fit on multiple levels could find their efforts well-rewarded.
Richard Whitworth is senior managing director of business consulting at First Allied Securities.