Six Things Advisors, Firms Need to Know Before Making Any Acquisition
August 23, 2011 12:00 AM
1. Advisors Are Rushing For The Exits
1. Advisors Are Rushing For The Exits
More than half of all independent advisors are over age 50, and that group controls more than half of all the revenue at independent broker-dealers and custodians, according to Tiburon. The glut of advisors in their 50s and 60s who are ready to move on has helped lower deal prices, according to Charles Roame, managing partner of Tiburon Strategic Advisors, in Tiburon, Calif.
So now's the time to start getting serious about taking the plunge.
2. Make Them An Offer
2. Make Them An Offer
Of those fee-based advisors who plan to sell their business, 27% intend to sell to a partner or employees of the firm, according to Tiburon. Another big chunk, 21%, plans to sell to institutional buyers -- a group that includes aggregators. A measly 5% plan to sell to competitors, but that may be misleading: 26% dont have an exit strategy, which means theyll probably listen to offers.
3. Bigger Targets Sometimes Are Better, Easier To Bag
3. Bigger Targets Sometimes Are Better, Easier To Bag
Acquirers shouldnt limit their sights to companies that are smaller than their own. There are plenty of examples of smaller firms acquiring larger firms, says Roame. The scenario is frequently that the larger firms principal is older and wants to retire, and the smaller firm has younger principals who have been successful and still have capacity to spare.
4. Forget About Revenue Totals -- Focus On Cash Flow
4. Forget About Revenue Totals -- Focus On Cash Flow
Many firms base their value on their current revenue picture. But a more accurate gauge of a firms overall worth is its discounted cash flow, says Roame. By using discounted cash flow models, acquirers can convert projected future earnings into a current value. And after all, future earnings -- not past revenues -- are what acquirers are paying for. A firm with $50 million of assets under management may be worth up to $400,000 or so using the discounted cash flow model, according to Tiburon.
5. Be Realistic About Integration
5. Be Realistic About Integration
Melding a new firm with your own is frequently more expensive and time consuming than acquirers expect, notes Roame. One reason: Many acquirers make silly predictions about expected cost cuts, which rarely emerge in spades, he said. And expect integration to be drawn out as you smooth over cultural issues with the selling principals clients and employees. Finally, be ready for the selling principal to cling to power -- they often cant accept the fact that theyre no longer in charge. As a result, they continue to eat up time participating in decision making, says Roame.
6. Change Begets Change
6. Change Begets Change
You should expect to lose as much as 20% of the clients of the firm you acquire. No matter how strong one feels that their client relationships are, when one asks clients to move to a new pricing mechanism, a new fee, a new statement, whatever, some will use this as a chance to exit, Roame said.
Six Things Advisors, Firms Need to Know Before Making Any Acquisition
Six Things Advisors, Firms Need to Know Before Making Any Acquisition
More than half of fee-based financial advisors plan to sell their businesses prior to retirement, according to Tiburon Strategic Advisors, in Tiburon, Calif. That means there is ample opportunity for other firms to quickly add scale through acquisitions.
Here are six things every advisor and firm needs to know before investing the time, money and effort required to complete a successful acquisition:
