Alternatives to a Traditional Acquisition

One of the fastest ways for an advisor to grow their business is to acquire another advisor’s book of business. Most advisors see this “traditional acquisition” route as a quick and easy way to increase their revenue and managed assets, but if unprepared this growth path can be challenging and technically complex.  

There has also been a significant increase in competition for traditional acquisition opportunities in recent years resulting in the transactions not being as economically viable as in years past–especially for an advisor seeking to use the cash flow of the acquired book to pay for the acquisition.

Luckily, there are a few other strategies that offer the potential for meaningful growth and, over time, might even provide greater enterprise value.  Strategies like mergers, continuity partnerships, equity pathways for next-generation owners (G2 owners), strategic partnerships, and Sell and Stay® transactions offer alternatives for advisors who may not have the enterprise strength or firm depth for a traditional acquisition.  These alternative options take planning and patience, but can yield incredible growth and value in the long run. Many of these strategies also present powerful opportunities to create enterprise value when combined with an advisor’s organic growth.  

MERGER

Mergers – the M in M&A – are often discussed but are not commonly deployed in the wealth management space.  The majority of transactions you read about in the wealth space are acquisitions, albeit sometimes described or disguised as mergers. A traditional merger occurs when two separate businesses combine into a new entity. The resulting entity must accommodate a melding of teams, resources, and clients. Mergers provide benefits and growth that go beyond simply acquiring assets. Most mergers occur because the principals of the merging entities realize the resulting firm will be greater than the sum of its parts.  Given the permanency of a merger, this is not a growth strategy that should be hastily deployed.  But, given the right fact pattern, a merger can be an excellent acquisition alternative for smaller practices and younger advisors looking to build a sustainable enterprises. 

CONTINUITY PARTNERSHIP

A formalized continuity plan is essential to protect a solo advisor’s business from an  unplanned exit.  It is important for an advisor to be methodical when choosing a continuity partner.  It is equally as important that the chosen continuity partner to understand what they are signing up for and for them to be ready, willing and able to quickly mobilize if the continuity plan is triggered. 

While we are not suggesting that an advisor’s growth strategy should be to rely solely on continuity partnerships, as a continuity partner you may find yourself in the position to acquire the business in the event the owner decides to have a planned exit. It’s not about waiting for tragedy to strike; it’s about building trust. While continuity partnerships as a growth strategy do not yield immediate results, and hopefully are never triggered, you are building a strong, trusting relationship with the owner and if, or when, they find themselves in a position to sell or slow down, as a trusted partner, you’ll likely be at the top of the potential buyer list.

SELL AND STAY™

This unique strategy, pioneered by FP Transitions, involves the owner of an advisory firm selling their business, but unlike a traditional sale, they remain engaged with the acquiring firm post-sale. Sell and Stay® transactions are an increasingly popular strategy for advisors who would like to stay engaged in the advisory business, typically working with a subset of clients, but would like to offload their managerial tasks, including compliance, and establish a defined guide path to retirement.  A Sell and Stay transaction provides advisors the ability to customize their glide path so that they are assured of a soft landing.

As a prospective buyer, it’s important to be aware of this alternate to a traditional acquisition. This alternative is mutually beneficial for both parties as it provides the retiring advisor an established glide path to retirement as opposed to an abrupt end while providing the acquiring advisor/firm the ability to benefit from a methodical client transition.

PARTIAL BOOK ACQUISITION

A partial book acquisition isn’t a drastically different strategy than a traditional acquisition, but it is an option that is often overlooked.  Most advisors out of necessity started out in the business by accepting as a client anyone that walked through the door.  As their business matured they became more selective, but in most instances retained the client relationships that contributed to their growth.  While not a universal truth and difficult for a firm to admit, these clients may be better served by an advisor with an offering that better aligns with the current needs of these clients.  

For an advisor looking for non-traditional methods for growth, offering to acquire a partial book of business from a firm can be an effective growth strategy.  These opportunities are not typically broadcasted by putting up a preverbal “clients for sale” sign.  These are foundational relationships that are most often only offered to trusted advisors that are going to be good stewards of these client relationships, not the first person to walk through the door waving around their checkbook.  

STRATEGIC ALLIANCE

This strategy falls somewhere between networking and continuity partnership. Make connections and build relationships with other service providers (e.g., CPA firms, law firms, bank partners, brokers, lenders, etc.) can help position your firm as your client’s financial quarterback.   Forming trusted alliances with other service providers can help strengthen the relationship you have with your clients, especially if your alliance partners share your same values and approach to client service.  

As an alternative growth strategy, strategic alliances can help increase your client base but these relationships take work and should not be viewed as a one-way street.  Proper deployment of a strategic alliance will necessitate your recommending the services of your alliance partners to your clients so it is important that this tool is not hastily deployed in terms of the number of the number of strategic alliances you establish.  

EQUITY PATHWAYS FOR G2 OWNERSHIP

While new advisors are mostly focused on learning their craft, its never too early to start preparing them to think like business owners.  Providing equity pathways for G2 advisors, if deployed correctly, can help catapult a firm in terms of growth and in turn enterprise value. 

It is important that G2 team members are mentored. They need to be provided with opportunities to think like business owners and to participate in ownership level decisions. G2s are going to make mistakes, just like most advisors do early in their career.  But with a properly built mentorship program in place, they will learn from their mistakes and become meaningful contributors to the firm and its growth.  While internal succession isn’t the right path for an owner looking to coast, if done right, it can be extremely rewarding and help you create a sustainable, multi-general business providing services to your clients and stable employment to your team long past your retirement.   

Fit is Paramount

No matter which strategy you employ–traditional acquisition, merger, partnership, or some other path–fit is Paramount. None of these strategies are quick in their deployment.  Each requires the parties to work together for a certain amount of time to build foundations and allow for a smooth transition of client relationships and business resources. Everyone has different values and priorities for the transaction; it is important to take time early in the process to ensure that you are aligned with the party across the table. 

In a traditional acquisition on the open market, provided seller criteria will give potential sellers a clue as to fit from the start of the process. Other methods and relationships as described above take more time to unearth a good match. Communication is key.

Finding Opportunities

Aside from the open market, which is a good place to find traditional acquisition offerings, partial-book sales, and Sell and Stay® opportunities, there are other places you might find potential sellers or partners. The FP Transitions Equity Management Solutions® (EMS) membership program offers continuity and succession matching services, in addition to numerous other foundational business growth tools including comprehensive valuation and benchmarking analysis. Additionally, professional and local networks (i.e. BD/Custodial networks or organizations like FPA, NAPFA, and NAPA) provide a good opportunity to make connections that might one day develop into something more.   

Setting Your Own Path

There are many strategies for achieving growth, and there is always one–or more–that will work for you, whatever your current situation is, as long as you know what opportunities to be on the lookout for. 
Taking a creative approach to growth is about being open to other paths beyond the traditional transition of clients from one advisor to another. By thinking broadly, and more strategically, you open up your options and likely build a more sustainable enterprise.