Successful merger and acquisition strategies for planning practices

With the industry likely to experience a flurry of merger and acquisition activity in the wake of the global financial crisis, Nick Brinkworth outlines strategies for ensuring post-acquisition success.

Now that share markets have stabilised after a strong recovery in 2009, the industry is ripe for a flurry of merger and acquisition activity.

I am sure there are many smaller practitioners who wanted to retire two years ago but have held off selling until recurring revenues and profits recover.

Meanwhile, many financial planning principals are in the buying mode and are ready to take on more risk, feeling quite bulletproof having survived the downturn.

Getting it right

So much emphasis is put on price during the negotiation stage of a sale.

Negotiations can take months and it is all about the dollars. But I can tell you that six to 12 months after a business is sold, success has nothing to do with what you paid and everything to do with whether the buyer’s and seller’s expectations have been met.

Often, acquisitions involve the integration of staff from the old practice into the new, or at the very least, the seller is often required to ‘hang around’ for at least six to 12 months to introduce the clients to the new firm.

Discussing issues of ‘cultural alignment’ might feel a bit soft and fluffy during the sale negotiations, but if expectations of what life will be like after the sale aren’t set well before the deal is consummated, acquisitions can prove disastrous.

The seller arrives at the buyer’s office on day one after the deal is done expecting something very different from what the buyer had in mind.

To make sure that the new business is genuinely integrated (and to avoid a toxic ‘us and them’ scenario), the buyer and seller need to have absolute clarity about two key issues before the deal is done.

Agree on the message to be delivered to the acquired clients

The first issue that needs to be agreed to is that the seller is willing to position the buyer’s client value proposition (CVP) to the newly acquired clients. If the seller’s pre-sale CVP is the same as the buyer’s then this is easy. If it is not, this can be extremely difficult for the seller.

For example: for years the seller has had a CVP based on researching and rebalancing individually managed funds for clients with an aim of outperforming the market.

This is what the clients have been paying for, in their minds, for years.

The buyer, on the other hand, has a CVP around advice strategy and all investment decisions are outsourced to a multi-manager.

In this case, the seller effectively has to turn around and tell clients that this new firm has a better approach to building portfolios that they should adopt.

It is not impossible, but the acquired clients can become confused and the seller (on his way out the door) suddenly has to tell a completely different story after years in business.

Sometimes buyers do not want to push their CVP onto the new clients too early, feeling that it is better to not take the newly acquired clients through too much change at once.

They let the seller keep doing what they’ve always done to ensure the clients stick.

This is not the right thing to do. In my experience, it is better to guide the new clients through one big change, rather than some change now (new office), some change six months later (new adviser) and then further change 12 months down the track (new CVP).

This approach means clients are integrated very quickly and do not end up with two client segments that have different service and pricing expectations.

Agree on how the new team will work with the old

The second issue relates to how the seller and their staff will work in their new environment. Usually, the seller is used to running the business and calling the shots. Once the business is sold, this is no longer the case. The seller needs to understand this.

Clear expectations need to be set between the buyer and seller around:

• the end-to-end process to be used to transition the clients to a new adviser;
• the level of back-office support available for the integration of the new clients;
• compliance and office process requirements;
• the messages to staff that come across as a result of the sale as to why the seller is selling and why they chose the buyer; and
• working hours and office behaviour.

The seller needs to be open to change and the buyer needs to integrate the seller and their staff into everything the ‘old’ team does — essentially make sure they feel at home.

Documenting your expectations using the above headings in your contracts of sale ensures the buyer and seller know exactly what the first 12 months will look like.

Get it right and the business will have digested the acquisition well. The clients and new staff will be happy and your combined team will be ready to take on the next acquisition.

Nick Brinkworth CFP is general manager at Strategic Planning Partners.