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Acquiring Minds Want to Know

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There has been lots of chatter among advisors about succession planning, mergers, and acquisitions over the past few years, but scant activity. Nowadays, though, the M&A pace is picking up, and it can be attributed to three trends: more advisors are retiring, banks and CPA firms continue their search for more fee-based revenues, and a growing pool of consultants and online “supermarkets” have cropped up to service transactions, according to new research released by Tiburon Strategic Advisors.

“There is some activity now,” versus a couple of years ago when Tiburon examined the trends in succession planning and M&A activity, says Chip Roame, managing principal of the Tiburon, California-based research firm. A few years ago, financial roll-up type firms hit the scene announcing their plans to acquire anywhere from 20 to 100 firms and shoot for an IPO, he says. But they fizzled. Today, “firms with much more strategic bent are acquiring advisors–CPA firms and some banks, and even other advisors are buying each other and merging together; those are much more strategic deals than what was out there a few years ago.”

Roame predicts 500 advisory firms will be acquired in the next five years, and estimates that 72 fee-only advisory firms were snapped up over the past year.

Mark Tibergien, principal in charge of succession planning at consulting firm Moss Adams LLP in Seattle, says it’s not surprising that deals are more strategic in nature since advisors are looking for ways to cushion their firms from increased competition and falling stock markets. “The dramatic market slide has caused the foundation of [advisor] practice revenues to deteriorate, especially in cases in which revenues are almost tied solely to asset management fees,” he says. Advisors are merging with other firms to not only create economies of scale, but also to spread fixed overhead costs over more revenue, eliminate duplicate positions, create a more dominant market presence, and provide more services to clients, Tibergien says.

Another conundrum advisors face is the skyrocketing cost of doing business, Tibergien says. Moss Adams’ annual benchmarking study of financial planners performed for the Financial Planning Association (FPA)–which was scheduled for release in late July–found advisors are “sucking wind on the cost side,” says Tibergien. The average expense ratio, not including owner or professional compensation, is now at 41.7%, he says, which compares to 35% two years ago and 30% four years ago. The jump “is a function of not managing costs and [of] revenue decline.”

The M&A Process

In Tiburon’s report, “Trends in Succession Planning, Firm Valuations, & the Growing Acquisition Market for Financial Advisors,” Roame details five steps advisors should take to ensure successful transactions: develop a strategy; value a firm; conduct a search for a suitable merger or acquisition candidate; negotiate a transaction and secure financing; and prepare the firm for close.

When developing a strategy for transition of ownership, Roame says it’s usually always best to stick with a strategic buyer, like a CPA firm or a bank, because they are able to pay the most. But money isn’t always the motivating factor. For Mark Balasa, a planner with Balasa, Dinverno, Foltz and Hoffman in Schaumburg, Illinois, a Chicago suburb, merging with another planning firm that complemented his firm’s “skill set” was the right way to go.

When valuing a firm, there are some common valuation techniques, Roame says, including multiples of assets, revenues, and cash flows. But Tiburon believes the best valuation method is a discounted future cash flow analysis. Tibergien concurs. Those who use a multiples-of-revenue method are “the greater fools” of the acquisition and merger market because they often end up “overpaying for marginal practices,” Tibergien says. This approach also relies too heavily on past performance. Roame says the multiples-of-revenues approach is the most common way advisors buy practices, which implies that “many of the buyers are still fairly uneducated about how to value practices.”

It’s more prudent to use a discounted cash flow analysis, Tibergien says, because a buyer “can understand the future potential of the existing client base, determine what it’s going to cost to serve that client base (including the cost of their own salary), and arrive at a valuation on a net number based on future expectations.”

Roame says the average valuation these days for an advisory firm is $650,000, with a median closer to $450,000. That figure is actually on the rise, he says, as the average valuation at the end of 2000 was $500,000.

Finding the Perfect Match

Looking for a firm to buy or merge with has become easier as the number of Web-based succession planning services has grown. There’s FPTransitions (, a firm that allows planners to buy and sell firms over the Internet. Tibergien says FPTransitions specializes more in sales of retiring planners’ books of business. All of the sales via FPTransitions are performed on an earn-out basis, he says, which is basically seller financing–the seller gets his money over a period of time, but only if he can hit certain revenue bogies. This method encourages the seller to stick around and help the firm meet revenue goals.

Roame also recommends advisors use iValue (, which is sponsored by SunAmerica Financial Network. Another resource is Practice Exchange, a Web site proffering advice from Moss Adams, valuation models, and articles on transitions. And yet another is an independent consultant, Ken George, a former advisor who now performs acquisition searches.

Roame says advisors should look far and wide when performing a search, and take advantage of supermarkets, networking at industry events, broker/dealer and product company referrals, and advertising.

For planner Balasa, a merger partner was right in his own backyard. Last June, Balasa decided to merge with Armand Dinverno, a planner in a neighboring Chicago suburb that he’s known for nearly seven years. But being bosom buddies wasn’t the deal-clincher. Balasa was motivated by the industry consolidation trend, and more importantly, the desire to create a real business atmosphere at his firm. “We had gotten to 10 people, and in that range you start to find out you need processes and management, motivation, structure–and our firm didn’t have that,” he says.

Merging the two firms was easy, Balasa says, because they both had similar philosophical views on how to run a planning firm. “We were very similar in how important we thought planning was in the wealth management process, and we both had very similar investment philosophies in terms of balancing passive and active” investing strategies.

Balasa and Dinverno used Moss Adams’ Tibergien to help negotiate the transaction, value the firms, and decide on compensation, Balasa says. Negotiating a compensation structure was the most challenging part, he says, since “there’s a million and four ways to define” it. Both firms decided that “the equity owners [would] split compensation according to a market-based salary that was actually modeled after Tibergien’s [2001] FPA study about salaries for a given job function,” Balasa says. “We then have a bonus on top of that program for principals, and on top of that, it’s an ownership component.”

Transitioning the firms has been also tough. One of the hardest decisions was where to consolidate the firms, Balasa says. Both firms settled on Balasa’s neighborhood of Schaumburg. Another tough spot was which contact management system to adopt, and which planning software to use. “We both use Advent, but we have to physically merge the systems, which isn’t easy,” Balasa says. “Then once you physically get together, you have to redesign the workflow, and that’s an ongoing challenge because you have different players and processes, so that takes a lot of work.”

Balasa cautions other advisory firms to forego merging just to leverage economies of scale, because “there’s very little value added in terms of cost.” And merging just to get a larger practice should also be avoided. “I think that’s a temptation, and [merging to become a bigger firm] should be a consideration, but don’t do it just for that reason because it’s a fleeting thing; size in and of itself isn’t necessarily good because there are headaches–like management headaches–associated with it.”