When purchasing a firm, advisers enter contact with an unpredictable asset: clients.
Advisers pursue other firms and books of business bright-eyed and bushy-tailed about the prospects for higher assets, revenue, profitability and income. But it turns out that only one-quarter end up “very satisfied” with a purchase.
Should we be surprised?
LESSONS FOR ADVISERS
This finding from a recent Aite Group survey, noted in last week's issue by reporter Mason Braswell, makes more sense than it might first appear and holds keen lessons for advisers eager to build their business via acquisition.
The greatest hurdle: retaining clients. Even the most successful firms in the Aite study garnered an average retention rate of just 76%.
In speaking with advisers on this topic an answer arose about why it's so difficult to know what buying a practice will produce.
“You're buying relationships,” one adviser said. It's not a capital-intensive industry. In essence, what you're purchasing is contact with an unpredictable asset.
Obviously, a few company or book fundamentals help the buyer gauge the ultimate outcome. The Aite study pointed to assets under management, client service model, revenue mix, business longevity and cash flow from operations. But a big clue to future success comes back to relationships — this time with the seller.
As Mr. Braswell reported, more than half of the successful deals in the Aite study were between a buyer and seller who knew each other before the transaction. The familiarity seemed to breed compatibility and communication — essential when turning over a business and its clients.
But finding a seller you know is going to get even tougher. The 2014 InvestmentNews Financial Performance Study of Advisory Firms found that one in three advisers wants to buy a business, while only one in 20 is looking to sell.
That means this will be a sellers' market and that buyers, for the most part, will have to be content to scrape up what they can or abandon the effort altogether. Not a recipe for buyer satisfaction.
An entrepreneur is indomitable, and often an optimist focused on a deal's potential. Learning from colleagues' experiences, however, can help them walk into an acquisition a little less expectantly and walk out a little more satisfied.
