5 Things that Make an IA Financing Deal Succeed

As the leading independent lender to financial advisors, we have seen our fair share of IA financing deals. Some go right—and others go very, very wrong. From surprise last-minute changes to bumps within the seller transition, there really is no guarantee when it comes to selling or buying a book of business.

Many acquisitions fail: key staffers quit, clients drift away. In fact, according to 2012 research by consulting firm Aite, one in three advisors who acquire a practice as part of building their own book of business found that they retained fewer than 50% of the client relationships they had purchased—certainly far from the result they’d hoped for. The firm you acquire is important, and so is how you go about implementing the deal.

We have watched hundreds of deals, and we have learned. There are several key variables that will help determine a positive outcome for an acquisition or sale. We have chosen five that we believe are essential to a successful deal. None of them will surprise you. What is surprising, though, is how often these key attributes of a good deal will go ignored.

1) THE CULTURES ARE A GOOD MATCH. Greg Friedman, CFP®, a registered investment advisor whose firm, Private Ocean, was formed by a merger with another very successful planning practice, has famously observed, “a merger is like marriage, just without the sex.” So the first question you need to answer positively is, are your businesses compatible? Having harmonious attitudes toward client service, investments, financial planning, office management and demeanor are essential to the success of a long-term relationship—for you, your staff and your clients.

A merger or acquisition is a big change, even if you’re not moving offices or switching technologies. Your clients will be wary. They chose you for a reason, and they want to make sure that they still are getting what they need to feel well-served and secure. They may have a comfortable relationship with a staffer that they want to preserve. The more complementary the fit between buyer and seller, the more reassured they will be.

The same is true for staff. Say “merger,” and workers think “layoff.” They will be concerned about their future and competitive with their new colleagues. (Of course, you may benefit from that!) What’s more, if your staff is a tight-knit group—as is the case at many small firms—they’re going to worry about how they’ll get along with their counterparts. You don’t have to make them besties, but the cooperation of both staffs will ease the process of bringing clients along. Similar office styles, from workflows and client service standards to dress codes, will reduce the chance for confusion.

2) FINANCIALS ARE STRONG—ON BOTH SIDES OF THE DEAL. We are talking about an acquisition and merging firms, not a rescue! Changing a business costs money—you’ll likely need new branding, new marketing materials and an outreach program to put the newly configured firm in front of both clients and prospects. Both partners should have strong businesses with positive cash flows. This places the combined business on a steadier financial footing, with resources to grow. If you are financing the deal with loans, the new, combined entity will have those payments to make as well. The stronger you are from the get-go, the better the odds of success.

3) THERE’S A ROADMAP TO THE NEW FIRM, AND IT ENGAGES BOTH PARTNERS’ STAFFS. A documented strategy for merging firms, one that involves the staffs at both firms, should include timelines, benchmarks and accountability. The staffs can teach each other about their respective practices and share information—the process should help them coalesce into a single team. The partners or buyer can determine the new policies and workflows. Don’t leave the transition up to chance.

4) THE SELLER DOESN’T WALK AWAY. If one principal plans to leave the firm, it’s essential to create a written transition plan with benchmarks for the seller. A written plan focuses the attention and the payout motivates the spirit. In the plan, include more than client introductions—the seller should brief the buyer on each client, include the buyer in client meetings and actively talk up the buyer as someone who will provide all the expected high-quality service and more. How long the seller is expected to stick around is flexible—the buyer may be eager for the seller to take off so he or she can start implementing changes, but balky clients may need the seller to stick around for a while and make a more leisurely transition.

5) YOU NEVER LET THE CLIENTS SEE YOU SWEAT. Clients of both firms deserve clear communication throughout the transition process. They don’t need to know every grisly detail, but should feel like the process is transparent and easy. You may discover that a lot of clients resent the fact that ANY change has to take place. Some may find a transition to be their opportunity to vent about everything they’ve ever been dissatisfied about.

Your mission, as you go through the time and work of a business transition, is to make sure clients never feel as if you’re ignoring their needs to concentrate on your own. This is a service business, after all—and clients need to feel well served.