3 non-traditional methods for acquiring a financial advisory practice or book of business

Buyers may find that the path to acquiring the scale they want is much more achievable than they thought

Feb 7, 2017 @ 10:00 am

By David Grau Sr.

In the highly-competitive acquisition landscape for independent financial advice practices, successful buyers need an edge. Embracing non-traditional acquisition methods provides an essential set of tools that may make the difference between a successful growth strategy and getting stuck in neutral.

Most acquisition strategies center on the stereotypical seller: usually someone who is in his or her mid-sixties and wants to fully retire, if only they can find the perfect adviser to whom they can sell their practice. The fact is, though, many successful acquisitions involve sellers who were nowhere near ready to sell when they were first approached. Engaging such potential sellers requires stepping outside traditional deal structures that buyers may have employed in the past.

(More: Banks, credit unions could start buying advisory practices)

Over the past several years in particular, the following three non-traditional methods for acquiring a practice or book of business have emerged as especially successful pathways:

1. Mergers. Since a true merger is defined as the statutory combination of two previously separate companies into a single economic entity (and since the management teams of both parties typically stay with the resulting entity for several years), the idea of a merger may strike some acquisition-minded advisers as counterintuitive. In certain situations, however, a merger may provide the perfect route for strengthening both companies while setting the stage for a de facto acquisition when the acquired firm's founding adviser and/or other leaders move on.

A merger can also offer significant potential benefits if it qualifies as a tax-free reorganization, in which the owners of one company exchange their shares for the stock of the surviving company without paying taxes.

(More: Smarter sellers, buyers bog down RIA M&A activity)

2. Buy-sell agreements. A buy-sell agreement builds on the idea of the acquirer purchasing a stake in a larger practice or firm (typically a minority interest), while simultaneously receiving a contractual right to become the eventual successor when the founder or current lead adviser leaves the business.

In legal terms, a buy-sell agreement specifies how a privately-held company or its owners will redistribute the ownership of the company in the event that one of the owners dies, becomes disabled, retires or otherwise separates from the business.

This structure is often ideal for young prospective acquirers who are looking for opportunities to build experience and new skills, while offering more than money or a promissory note to sellers who may not be ready to leave just yet: a capable and motivated successor. In a sense, this option offers the possibility of merging the founding generation with the next generation.

The buy-out process under this option can also be aided through a variety of funding mechanisms such as life insurance or even bank financing.

3. Continuity planning. A continuity agreement is a formal, written contract that assures a smooth transfer of control in the event that one of the firm's owners suddenly departs for any reason. Identifying the right adviser to serve as a continuity partner can be extraordinarily challenging, especially in the case of one-owner, one-generational practice models.

Prospective buyers with strong businesses can provide an important solution. A strong and enduring advisory business can and should serve as the continuity partner for five or six smaller practices or books within the same region or broker-dealer network. Once the continuity plan is formalized, the two parties can enter into a buy-sell agreement as outlined above.

(More: 2017 to be year of independent broker-dealer mergers)

In working with potential acquirers in the independent financial advice industry, I often hear the refrain, “I want to grow by acquisition, but there aren't enough sellers in my area.”

In fact, given the right structure and opportunity, aspiring buyers will find there are many more advisers willing to sell than they might have realized. By utilizing these three non-traditional approaches to making acquisitions, buyers in growth mode may find that the path to acquiring the scale they want is much more achievable than they thought.

David Grau Sr. is the president and founder of FP Transitions, which partners with independent advisers to build businesses. The above is adapted and excerpted from his second book, "Buying, Selling, & Valuing Financial Practices: The FP Transitions M&A Guide," published by John Wiley & Sons in August.


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