These days, with the growth of independent advisory firms slowing and competition from brokers and breakaway brokers increasing, more independent advisory firms than ever are looking to grow through acquiring other firms.
This can be a very successful strategy when it works—and it can also be a complete disaster when it doesn’t. Unfortunately, as far as I can tell the odds are about 50-50 either way.
The biggest problem occurs once firm owners find a likely merger candidate: they’re usually far more focused on “making a deal” than they are on determining whether the merger will actually work.
Here are the elements that I’ve found to be essential in making a successful merger (including my personal experience with failed mergers) and how owner-advisors on both sides should think about them:
1) Who Will Be Top Dog?
I know, this seems pretty obvious, right? Yet I’ve seen more than few mergers unravel over just this issue. The key here is understanding that it’s hard to overestimate how much most independent advisors like their independence. It’s the reason most advisors started their own firms, and being in control of one’s working environment can be very addicting (believe me, I know).
Yet, perhaps surprisingly, I’ve found that in the excitement of a merger, many owner-advisors tend to underestimate the importance of control for advisors on both sides of the transaction. Typically, the owner(s) of the larger, acquiring firm simply assumes that he/she/they will simply continue being in charge while the owner of the acquired firm will become another “junior” partner. What they fail to understand is that owner of the acquired firm is equally used to calling their own shots, and whether they know it or not, going to work for somebody else is going to be a very different situation.
So it’s important for owners on both sides to understand this is going to be an issue. The way they handle it—during the merger negotiations and, more important, after the papers are signed—will determine whether it becomes a problem. The key is for the acquiring owner to recognize that this potential problem can easily derail a merger in the first few months, and to include the new owner as a valued member of the management team, even if the ‘team’ is only two people.
This will take some adjustment on the part of both owners, but will greatly increase the chances of a successful merger.