Finding the Right Acquisition Partner for Your Financial Services Firm

As you’re well aware, one constant in financial services is change. Between an aging advisor population and new Department of Labor regulations, the opportunity in the coming months and years to add “bolt-on” acquisitions to well-positioned practices—at the right price—is worth assessment. In fact, industry sources have claimed that in the next 5 to 10 years, there could be as much as a 50-percent turnover rate in financial advisory practices.

If you’d like to grow your business by finding the right acquisition partner for your financial services firm, here are the steps you should consider, plus some valuable merger and acquisition tools and strategies.

Before exploring potential deals, the first step is to look internally at your practice, which may help mitigate any unexpected challenges.

SWOT analysis. Conducting a SWOT analysis is a valuable way to orient you and your practice to the environment in which your business operates today. After all, you need to know where you’re starting from before deciding where you’d like to go. A SWOT analysis clarifies how well the internal attributes of your firm align with the external environment. Once you have a realistic picture of where your firm stands, you can brainstorm strategies to find appropriate acquisition candidates that will improve your practice’s strengths.

Scale and capacity. After assessing your total practice with a SWOT analysis, the next step is to drill down further to your most valuable asset: your clients. Specifically, you need to internally assess the ability of your firm to take on another practice by analyzing the revenue sources and profitability of your current book. To help position your practice to integrate new acquisitions, consider the following: 

1. Identify your ideal client profile. Once you do this, you can work toward replicating those types of households when assessing new practices you would like to integrate.
2. Set standards for the specific services offered to each client category. This will aid you in reviewing the number of hours you provide to particular client segments, which in turn will align time commitments with the profitability of each segment.
3. Pinpoint internal procedures that can present potential bottlenecks in your current service model. Identifying these challenges and finding efficient solutions before taking on additional clients through acquisition is paramount to successful transitions.

Financial snapshot. Finally, take a financial snapshot of your practice at least annually, which will allow you to make more educated decisions. This includes examining many basic but important factors and ratios, including revenue, practice demographics, client overview, and expenses, which informed advisors use to study the compatibility and merits of joining two firms. By performing this annual analysis, you’ll be able to quickly decide whether an outside firm has the potential to meet your standards of quality and structure.

When looking to “bolt on” the appropriate practice, there are a wide range of tools and strategies available. Here are a just a few that Commonwealth’s Practice Management team usually discusses during consultations with our advisors.

LinkedIn. Many of you likely have a LinkedIn account, but are you leveraging all of its strengths? Beyond connecting with clients and prospects, using LinkedIn’s Advanced Search tab with key search words can aid in networking with other advisors with niches and/or geography similar to yours. While I wouldn’t advocate adding competition to your network of connections, properly summarizing that you are open to growth through practice integration can develop relationships and forge opportunities.

Break-even calculation. Many businesses make the common mistake of dividing the purchase price by the trailing annual revenue when calculating a break-even number. Often overlooked, however, are the variable costs incurred through an acquisition. The chart below offers a rework of the traditional break-even formula that you might consider when evaluating the attractiveness of an acquisition candidate. You’ll notice that examples of potential variable costs are also included. This list is by no means exhaustive, and you may have additional costs to examine, depending on your acquisition candidates.

Keep in mind that the formula here is intentionally kept simple to create a base from which to start. If you’d like to get more analytical, you can create additional scenarios by adjusting the revenue number to account for growth, retention, and/or market action.

Terms and financing. In a traditional model, practice acquisitions are financed between the seller and the buyer, where the buyer puts a down payment in the range of 20 percent to 40 percent of the total purchase price. The balance is then essentially financed by the seller, as the buyer makes payments over a period of time—usually three to five years. While this structure is still popular, the introduction of outside financing sources, such as Live Oak Bank, has become attractive in helping facilitate deals for acquisition and succession purposes.

When it comes to knowing your firm’s needs, you are the smartest person in the room—but be sure to leverage the expertise and experience of others you trust. After all, it always helps to have a sounding board to discuss any opportunity that comes your way. Plus, by using the tools and strategies discussed here, you will be well positioned when you find the right acquisition partner for your firm.

What other steps would you take to find the right acquisition partner? Do you use LinkedIn to network with other advisors? Please share your thoughts with us below!