For Advisors, M&A Is a Hot Topic

Merging to Survive

Looking at the growth rate–measured by the change in assets under management in 2002 from 2001 levels–we can observe that the merging firms are the ones that bore the brunt of the languishing market conditions of the last three years, seeing their assets tumble by 33% (sted one-third) last year alone. For the selling firms, the positive growth in assets of 4.73%, albeit meager, is one of many indicators suggesting that sellers are cashing out while their businesses are still fairly healthy, as opposed to quitting the market after enduring substantial hits. Once again, the buyers in this market are the stronger firms, sporting healthy growth rates of nearly 15% last year alone.

Sellers Cashing Out, Not Running Away

The revenue and profit margins figures further portray the same picture among the three groups. The buying firms, with healthy revenues of nearly $900,000 and above-average profit margins of 23.86% (average for the industry is 21.5%), are better suited to employ acquisition strategies as a means to growth or expansion. The merging firms, on the other hand, are clearly showing signs of faltering with revenues of $200,000 and squeezed profit margins of 11.40%, nearly half the industry average. Once again, the selling firms don’t exhibit weak financials, with profit margins as high as nearly 20% and revenues of over $500,000–further reinforcing the conclusion that sellers are putting solid practices up for sale.

Is Competition Really a Factor?

A close examination of the impact of competition on the three groups in 2002 reveals another variable that appears to be contributing to the mindset of buyers, sellers, and merging firms. (See chart 3: Comparison of Competition below.)

As chart 3 above shows, firms seeking mergers, i.e, firms with low assets, negative growth rates, meager profit margins, and dismal revenues, have also lost a sizable portion (10.63%) of their client base to competitive forces in 2002, which partially explains their feeble financials. Sellers have also lost a fairly large chunk of their clientele (7.78%) to competition, but are closely in line with the industry average of 8.02%. It’s fair to conclude that the magnitude of clients lost to competition for each of the three groups is also a factor of their respective size, as larger firms tend to be less vulnerable to losing clients. The mere 2.97% of clientele lost to competition for the buying firm is, therefore, likely to be a result of their large size ($109 million). By the same token, the relatively large loss for both the merging and selling firms is due to their relatively small size ($24 and $50 million, respectively.)

Regardless of your firm’s size, if you are considering any similar M&A activities–or have already undergone them–it is important to benchmark yourself to your peers in the marketplace.

To receive a customized benchmarking analysis report of your practice, visit the free online tool www.AdvisorBenchmarking.com

AdvisorBenchmarking.com is a free online resource of research and analysis on the RIA marketplace. The service is aimed at helping advisors grow and enhance their practices. By participating in the online surveys, advisors can see how their businesses fare against other advisors, as well as learn best practices based on the most successful advisors in the business. The instant analysis they receive offers valuable insight that can help them take their practices to the next level and weather the challenging market conditions.