Among the independent financial adviser community, merger and acquisition discussions tend to revolve purely around acquisitions. But mergers also represent a very useful strategic path.
By merger, I am referring to the joining together of two or more previously separate entities into a single surviving company. The owner of the merged entity becomes part owner of the surviving entity and remains fully active in it for some years afterwards.
We've found that there are four key questions advisers should ask themselves to determine whether pursuing a merger versus a standard buy-sell transaction makes the most sense:
1) Can you truly build your succession plan around the younger advisers already in your practice? Sometimes the path to an internal succession plan is clear when a practice already contains one or more younger advisers with good business sense and a strong work ethic. But what happens if you don't have that option?
(More: Private-equity firms ramp up M&A in RIA industry, Charles Schwab report shows)
This is when a merger into an entity that has a strong next generation can be a wise move, both in terms of ensuring great service for clients over the long run and in obtaining an ownership stake in an enterprise that has greater long-term value creation prospects.
In particular, the adviser prompting such discussions should bear in mind that merging into a larger entity with several competent junior advisers would be the optimal path forward, versus merging with a firm that is overly reliant on just one or two "rising star" advisers.
2) Can your practice sustain itself in the event of a "break the glass" emergency event? Continuity planning is all about having a living, active, “break the glass” emergency plan. Any independent adviser in a small or solo practice who senses health or family problems potentially on the horizon needs to give a continuity-plan-driven merger serious consideration.
Not only can such a merger bring a solo or smaller practice owner-adviser into a group that is large enough to handle the extra work flow when unanticipated things happen to staff members, but it may also create greater opportunities to offer enhanced client service and value creation opportunities.
3) Do you love client service and business ownership, but hate the operational drudgery? Successful independent financial advisers often find that they are slogging through tedious paperwork, regulatory hassles and operational burdens that sully the joy of their work.
While hiring more internal staff is a solution, this often leads to the adviser becoming the default manager, with even more administrative details to address. Mergers, however, can allow the adviser to enter a business where management and back-office operations are handled by someone else, while keeping an ownership stake in an enterprise that could create even greater future value.
(More: Savant targeting acquisitions after attracting $50M to buy out co-founder)
4) Are you a successful yet younger adviser who wants to work with senior advisers who can serve as mentors? The merger of a junior adviser with a successful older adviser can bring opportunities for growth as well as a flourishing mentor-mentee relationship.
In situations where a natural mentor doesn't exist for a junior adviser, he or she may benefit greatly from accessing the experience and wisdom of a senior adviser through a merger. The senior adviser, in turn, will find not only a successor, but someone who can carry on his or her legacy — and perhaps even introduce valuable new methods and fresh ideas.
As industry and regulatory trends continue to drive the need for further consolidation and scalability, perhaps it's time for independent financial advisers to start paying more attention to the “M” in M&A.
David Grau Sr. is the president and founder of FP Transitions, which partners with independent advisers to build businesses of enduring and transferable value. 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.
