TRANSITION TALK

Whether you are buying or selling, it is important to understand what is being bought and sold and what expectations both the buyer and seller have of each other. Absent these details, it is difficult, if not impossible, to determine if an offer is fair. After all, “fair” is a relative term. The question of fairness would be easy to answer if all deals were done the same way, but the reality is they are not. Nonetheless, there are still common attributes to most deals that can shed light and aid in understanding the underlying terms. This in turn helps both buyer and seller assess the reasonability of an offer. 

The wealth management M&A arena is extremely competitive. Sometimes it seems like just about everyone is racing to buy a business. On average, our marketplace sees over 50 inquiries for every acquisition opportunity listed. That number can be upwards of 120 under the right circumstances. The key to cutting through the crowd is by mastering the first step of the process: the inquiry.

Inquiring on a business for sale in the FP Transitions Open Marketplace has two parts. First, there’s a questionnaire where you’ll provide specific business details to help evaluate the buyer/seller match. The second piece is the inquiry message.

You’ll be asked two things: “Why do you think your firm would be a good fit for this opportunity?” And “Is there anything else that you’d like to share about your firm?” These are where you can provide additional context for your firm and highlight any unique business qualities that make you a good fit for the sale. It’s a place to share things like your growth plans, investment philosophy, culture, or mission.

Remember, your inquiry is the first communication you will have with the seller.

Your inquiry messages should strike a good balance between providing too many firm details and not enough. Inquiries that merely state, “I have cash,” “Let’s talk,” or “See our website for more information,” are often eliminated from consideration during the first review. Your inquiry should be:

• Concise and clear;
• Address specific criteria laid out in the opportunity details;
• Provide relevant information that isn’t discernable from your questionnaire input.

In short, your inquiry is your chance to make a strong first impression and communicate your value as a buyer. The most experienced and successful buyers always take the time to make this opportunity count.

Few Words, Big Impact

The best way to know what to say and how to say it, is to have a clear picture of your business value, growth plans, and acquisition priorities. Professional valuation and benchmarking evaluations aren’t just for setting a selling price or monitoring growth. They can help you identify strengths that make you an attractive buyer as well as areas for improvement that will help you establish a targeted and successful acquisition strategy.

By tailoring your M&A priorities meet your biggest opportunities for growth, you can avoid wasting time inquiring on businesses that might not be the best fit for you. Instead, you can more efficiently navigate the process by homing in on the best opportunities that align with your goals.

Understanding exactly what you want from an acquisition, as well as what you have to offer, will help you to craft a more articulate and impactful inquiry.

Two Dos and a Don't

Besides a clear and concise inquiry message, the following are three important things to keep in mind:

DO double check your data and proofread your message. Submitting complete and accurate business data will help ensure your inquiry moves through the initial match screening. Additionally, attention to detail is a requirement in this highly regulated industry. Be careful. For some, small mistakes can be a red flag and taken for indications of performance on a larger scale.

DO submit your inquiry in a timely manner. It is true that the M&A arena isn’t “first come first served” and that it’s essential to take some time to craft a tailored message. However, it’s also important that you don’t drag your feet. The window for submitting an inquiry is short, usually around two weeks. To a degree, speed shows a heightened level of interest.

DON'T try to identify the seller and contact them outside the open-market process. Privacy and confidentiality are paramount. Violating them shows a lack of regard that is likely erode trust and get you quickly dropped out of consideration.

As with most things, your actions can speak just as loudly as your words.

If At First You Don't Succeed

Understanding your business and articulating what you have to offer a seller goes a long way to improving your chances of success, but it’s not a guarantee. As we’ve discussed, the average acquisition received over 50 inquiries, and still, in the end, there will be only one buyer. Which means, even though you may be a great fit, you might not be the best fit.

In these cases, preparation for the next opportunity might include further improvements to business and strategy. 

• Pay attention to any lessons learned during the previous experience.
• Explore and engage in complimentary strategies for growth and improvement.
• Evaluate and make any adjustments to your acquisition criteria to ensure that you’re targeting the best possible opportunities.

Experienced guidance and professional business analysis can help you know where to focus and what to do next–something our EMS™ memberships are tailor-made for.

Your inquiry is just the start of the acquisition journey, and putting your best foot forward is the key to a smooth road. Understand the strength of your business and your value in the M&A partnership, be able to clearly articulate this to a seller, maintain a clear strategy, and show respect with your actions. Follow those guiding principles and your inquiry will be on its way to the head of the pack, moving you through to the next stage of the process.

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.  

Setting up and agreeing to proper and reasonable payment terms is an essential part of the selling or acquisition process. The following questions are common for both buyer and seller when it comes to deal structuring, especially in regard to financing the transaction:

• What types of financing are available?
• What is seller financing?
• How are payments structured to promote post-closing co-operation and motivation for both parties?
• Are there contingencies to the payment of the full purchase price?
• Does client attrition affect the final purchase price?

SELLER FINANCING

Underlying virtually every acquisition is the assumption that the seller will offer some kind of financing to support the transaction. There are four primary types of seller financing, the last three of which include contingencies that may alter the final purchase price.

1. A basic promissory note
2. An adjustable or performance-based promissory note
3. An earn-out arrangement
4. A revenue sharing or fee-splitting agreement

Seller financing is less a matter of the sufficiency of a buyer’s cash reserves and more the basic payment structure technique that recognizes the importance of keeping the seller motivated to help with post-closing client retention. Post-closing seller motivation and support is critical in a transaction that involves a relationship-based business.

Last week our president and founder, David Grau Sr., JD, joined BMO Global Asset Management’s Better Conversations. Better Outcomes. Podcast to discuss buying or selling financial advisory practices. The 30-minute podcast explores:

• How to prepare to buy or sell,
• The current acquisition marketplace,
• How to be a qualified buyer,
• How to assemble a team to help you through the process,
• And what success looks like from both buyer and seller perspectives. 

Click here to listen to the podcast.

Podcast is also available through iTunes and Google Play.

The following sections are excerpted from the book Buying, Selling, and Valuing Financial Practices by FP Transitions president and founder David Grau Sr., JD.

Let's highlight the importance of having a strong transition team in your corner as either a buyer or a seller. In fact, it's important to have a comprehensive team when jumping into most business evolutions, including (but not limited to) entity creation, compensation restructuring, and internal succession planning.

Assembling and Managing Your Team

Advisors who want to buy or sell a business will need some help to do the job right. A typical team for this purpose will include:

- A qualified valuation analyst

- A tax professional

- A lawyer

- Someone familiar with your regulatory structure and your IBD/custodian’s rules & procedures

- A qualified and impartial intermediary

To be clear, this list applies to both buyers and sellers. Both parties typically need their own team, with some slight overlap.