Mergers - A Nontraditional Growth & Acquisition Strategy

Mergers & Acquisitions – everyone’s favorite topic. Understandably so when one of the fastest ways to grow is to acquire and as such, add exponentially more clients (and assets) to your business in one fell swoop.

But what about mergers? Mergers are often lumped in with conversations and statistics about acquisitions, but their role and effect on an advisor’s future is much different than an outright sale or purchase. In our book, “Buying, Selling, and Valuing Practices – The M&A Guide,” FP Transitions’ president, David Grau Sr., JD, clarifies that mergers are, legally speaking, “the joining together of previously separate companies into a single entity.” Unlike an acquisition or sale, a merger means that some or all of the owners of the previously separate companies become owners of the post-merger entity. 

Mergers can be an important part of exit and growth strategies alike. Consider this example from the book: Henry, a practice owner who is 62 years old, has his practice valued and is pleased to learn that the market data supports a value of approximately $875,000. The reality, however, is that Henry does not have any employees who are ready or willing to buy into the business or take over ownership. In addition, Henry is experiencing some health issues, but isn’t ready to fully retire. He will do his best to maintain his current client base but given the circumstances, may need to enter into a revenue sharing arrangement with another advisor to help service his clients.

In this example, a merger with a larger firm would provide solutions to many of Henry’s issues. If he were to merge his practice with a larger business, Henry would become an equity partner in the larger business, effectively exchanging the value of his original practice for stock of equivalent value in a more valuable business that is still growing. By becoming an owner of a business that has multiple owners, Henry will have a built-in succession plan, which provides continuity and protection for himself, his co-owners, the business, and its clients. In addition, he would gain a support base and more extensive resources to help him better service his clients. As an owner of the post-merger business, Henry will receive a base salary commensurate with the time he spends providing service to clients, which could decline by choice or due to health issues, but he will also receive profit distributions proportionate to his ownership percentage and will experience stock value appreciation over time.

While Henry will no longer retain sole control of his business and operational decisions, he will gain value, infrastructure, and security. The larger business owner, Olivia, will experience her share of benefits as well, including:

•    a larger client book and increased cash flow;
•    exponential growth;
•    additional personnel to support the growing business;
•    continuity protection; and
•    succession options.

In this case, growth was the main goal for Olivia. In a different situation, however, securing a legacy and building a succession plan could be the driving force behind a merger. A larger firm could merge with a smaller practice that has a talented younger advisor at the helm, not only to help grow the business but also to incorporate the new talent as part of a larger succession plan. As we noted earlier, most or all of the owners of the separate businesses will retain some ownership in the post-merger entity. In this example, the younger owner can expect their ownership percentage to grow over time, and with it their control and equity, one day assuming majority ownership of the firm.

It’s exactly this tactic that FP client, Michael Lutz, has used as part of a larger growth strategy that has included outright acquisition, organic growth, and next gen advisor recruitment. In this way, Lutz’s growth plan is also his succession plan. Watch how he made them one and the same in the video below. 

Mergers open up options for advisors who are seeking immediate growth, building a succession plan, or are on the fence about selling their practice. As with any transaction, mergers have their own unique tax and regulatory considerations and must be tailored to meet the specific circumstances of the parties. While the benefits of mergers may be appealing to many, the split control or relationships of the parties can sometimes be a deal breaker. 

Whether you’re choosing acquisition targets, looking for the perfect buyer, or recruiting a suitable successor, don’t disregard the possibilities a merger can open up as you contemplate your growth and/or exit strategy.