In today’s M&A rich environment, every advisory firm and financial advisor wants to get in on the action. Unfortunately, though, most would-be buyers and sellers come up empty. Why? Because of unreasonable expectations.
As an attorney who was in private practice specializing in business law for twenty years, and has a decade of experience as co-owner of a recruiting and consulting firm in the financial services space, I look at the mergers, sales and acquisitions of advisory firms from a unique perspective. While assisting owners and principals of wealth advisory firms in their efforts to be acquired or to purchase other firms, I have found one constant: The more motivated the party (buyer, seller or both), the more reasonable and flexible they will be when it comes to valuation, deal structure and contract terms. And, consequently, the greater probability that a transaction will occur.
Of the hundreds of advisory firms we connect with – almost without exception – each fancies themselves a buyer because they believe they have built a great firm that could be just the “right fit” for a would-be seller. This occurs despite the fact that they have never previously done a deal or that they are smaller than most potential sellers in the market place.
Similarly, of those sellers that are truly motivated either to sell their practice outright or to merge it with a larger firm, more often than not the principal has a purchase price in his or her head—one that he arrived upon after reading about some eye-popping deal.
So, we have learned that even if we are able to find a “stellar seller” and an “awesome acquirer”, rarely is that sufficient to close a transaction. The key to any transaction occurring is the motivation and reasonableness of all parties.
The Vetting Process
When we vet a potential acquirer we look at a few threshold criteria:
- Have they successfully negotiated and closed deals in the past and if not, why?
- Do they have a unique and compelling value proposition?
- Why do they want to do an acquisition? Is it to just grow their assets or do they have a bigger goal of building an enterprise and maximizing its value?
- Are the principals clear on how they see an acquisition fitting into their overall strategy and the roles that the seller principals would play?
- How do they envision structuring a deal? Will at least 20% of the purchase price be paid in cash at time of close?
- Do they have access to capital and, if so, what is the source?
- Is the firm influenced by outside interests or is all equity controlled internally?
- Are they willing to bring in outside counsel to help structure the deal and be guided about realistic valuation and deal structure?
- How will they help the acquired firm grow its business? Put another way: will the acquired firm grow faster with or without being acquired?
- If they have a history of acquisitions, how have they been integrated? What has been the experience of those firms?
Correspondingly, when we assess a prospective seller, we take them through a similar dialogue:
- How long have they been trying to consummate a transaction?
- What are they looking to accomplish?
- Have there been other suitors and, if so, why didn’t the deal close?
- Are they looking to sell and leave the business immediately or do they have a longer runway and want to participate in the growth of the combined entity?
- Are the expectations of the principal(s) realistic in terms of valuation and deal structure?
The way each side answers these questions will be the first determinant of whether a deal will – or even should – close. For example, if there is a seller that has $500 million in assets under management and annual revenues of $6 million, yet isn’t profitable and thinks his business is worth an unrealistic multiple, a deal is not likely to get done. By the same token, if the potential acquirer has $250 million in AUM, is seeking to purchase another advisory firm that is more than twice its size and does not have an uber-compelling growth story to tell, the deal isn’t likely to get beyond the initial introduction.
Then reasonableness steps in…
Conversely, take a scenario like this: an experienced acquirer, who sees real value in joining forces with another firm, believing in the premise of “1 + 1 could equal 3”. This happens when two imperfect firms come together in order to solve for capacity constraints, succession issues, accelerated growth, expanded geographical requirements, a need for additional bench strength and a hundred other things that are too numerous to list. Said another way, “when a deal is meant to get done, it does.” If both sides are motivated to make this deal happen and are coming to the negotiating table with reasonable expectations, things are off to a good start.
Even when everyone concerned views a prospective deal as a marriage made in heaven – with both firms seeing the world the same way from a client service and investment perspective – there isn’t a guarantee that a deal will be consummated. Deal making is hard and “you have to kiss a lot of frogs before you meet your prince.”
Not all parties are suited to merge, so finding those key areas where there is a win-win for both sides is what makes a sale happen. Only then will reasonableness drive the parties to a positive outcome.