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Capital to Grow: Acquiring Other Financial Advisory Firms

By Ray Sclafani | October 15, 2015

Revenue is vanity. Cash flow is sanity. But cash is king.

It’s an age-old business saying that has increasing relevance for today’s advisor who’s looking to jump-start growth through the acquisition of another practice. There’s no question that managing cash flow is essential both to your team’s ability to weather short-term bumps in the road, as well as the long-term growth and sustainability of your practice. Yet far too many advisor CEOs focus on the “cash is king” part of that saying – treating their business revenues as personal income.

In fact, it’s not at all uncommon for advisors to take 100% of net income out of the company each year. After all, you’ve worked hard to build your practice: it’s only natural to want to enjoy the fruits of your labor. However, by extracting all of your annual revenues rather than retaining a fixed percentage in the business, you’re leaving yourself little leverage to fund ongoing growth or future expansion.

Finding the right balance for your business

Typically, the lion’s share of funding a deal will be paid out of the cash flows of the acquired business. But you will need to come up with the down payment portion, typically around one-quarter to one-third of the purchase price. For a $100MM AUM practice, that could mean a $500K to $650K cash outlay on a $2MM purchase price.

A number of larger broker-dealers offer acquisition loan programs, and banks (although often unfamiliar with the advisory business model) are generally receptive to financing the acquisition of predictable, recurring revenue streams. A number of custodians are also making a foray into deal financing, but the process for all of these avenues can be very time consuming. Being able to fund most or all of the down payment through retained revenues affords you a considerable advantage.

Keep in mind, however, that acquisitive growth isn’t merely predicated on access to sufficient capital. The most critical driver of a successful acquisition or lift-out isn’t likely to be whether or not you can fund the deal with decent terms, it’s whether you strategically select potential acquisition targets that are closely aligned both culturally and philosophically with your existing business model to help maximize client retention and ensure the sustainability of those relationships over the long-term.

Determining what’s right for you and your practice depends greatly on your long-term vision and growth aspirations. However, if a future acquisition is a consideration, don’t wait until a potential deal falls into your lap to begin thinking about how you might go about financing the necessary initial cash outlay. Now’s the time to begin building your coffers so that when the time is right, you’ll be able to act quickly.

Coaching Questions from this article:

  1. Think about your long-term business strategy. What sort of growth do you envision for your practice? Do you expect to achieve that organically or do you envision one or more acquisitions to achieve that vision?
  2. What’s your timetable and strategy for identifying prospective acquisition targets? How will you build and cultivate a network of contacts to unearth potential fits, and then proactively reach out to those firms periodically?
  3. How can you add more financial discipline to your practice in order to begin retaining cash to fund future growth?

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