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M&A Considerations Part I - When the Seller is Leaving

By Ray Sclafani | January 7, 2022

One of the critical factors you’ll need to consider as a buyer is whether you’re acquiring the business with the intent of having the acquiree exit the practice, or whether you intend to fold them into your firm in some way, shape, or form. In fact, what you’re looking for in terms of deal metrics may be very different based on that overarching objective.

If the former is your goal—acquire and transition out—then the first thing you need to do is carefully assess the actual assets you’re acquiring. Essentially, you’re acquiring a revenue stream and the talents of the team. Perhaps there’s a building or facility. Maybe there’s a specialized area of expertise or a unique niche. And in some instances, there might be a strongly recognized brand.

Financial deal metrics

Most importantly, you need to assess the ‘quality’ of the firm’s earnings—looking beyond the current numbers to project future numbers.

  • What steps has the seller taken to improve the life stage diversity of their client base to avoid an over-concentration of older retirees deep into the decumulation phase?
  • How has the seller laid the groundwork for building solid relationships with the next generation of clients?
  • As the seller transitions out, what’s the retention risk? A key consideration here will be to assess the relationship team’s engagement and effectiveness with clients.

When you compare the cost of acquisition for your own clients to the cost of acquisition for this client roster, will you realize sufficient growth out of the deal to financially justify an acquisition rather than simply seeking to generate the same growth on your own? Also, when you look at the P&L you’ll need to ask yourself, “do I need all the current talent?”

The great news about wealth management businesses is that they’re highly profitable, high recurring revenue businesses. But often, advisors carry unrealistic M&A expectations—assuming they’ll see a return on investment overnight, whereas it often takes time for an acquisition to pay off.

Keep in mind, you’re benefiting from an immediate arbitrage if you’re folding a smaller acquisition into a larger firm (e.g., a $1 billion firm buying a $300 million book of business). There’s an instant pickup to be enjoyed. But very different metrics will apply if you’re a $300 million firm acquiring another $300 million advisor.

Creating a smooth, successful transition out

One of the best things any buyer can do is help their seller define what a successful transition looks like. Having a clear direction—something next that they’re moving towards—will help create a sense of genuine happiness and joy as they exit the practice. Why care so much about the seller’s happiness? Because they’re deeply and intimately connected to every one of those clients you’re acquiring!

Not too long ago, I was consulting with an advisor on the acquisition of a business and asked him “what’s the seller going to do when they leave?” His response was “I don’t really care…we’re buying the client roster and keeping the team…that’s all I’m concerned with.” He was completely overlooking the fact that there were hundreds of relationships with clients, centers of influence, vendors, and others in that town which the transitioning advisor would continue to hold significant influence over.

As a fiduciary adhering to the highest level of care, you owe it to those clients to maintain a positive relationship with that departing advisor. And it will go a long way to enhancing the likelihood of extending those existing client relationships to future generations. The deal’s got to be good, and the advisor needs to be happy walking out the door. You may even want to give serious consideration to maintaining ties by hiring them back as a business developer or a firm ambassador (where you pay them a referral bonus for any new clients they send your way).

Interested in exploring important considerations when acquiring a firm where the seller will remain with the business? Click Here to read Part II.

Coaching Questions from this article:

  1. What factors and qualities would make a firm an ‘ideal fit’ for your existing organization as either a merger or acquisition candidate?
  2. How would you gauge your team’s current capacity and appetite to take on the challenges of acquiring and integrating another business? And are their steps you can begin taking now to improve that capacity?
  3. In addition to client base diversity, next gen client relationships and strong team engagement, what other factors would you consider important measures of the quality of a firm’s earnings?

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