In 2001, when there was a big surge of M&A activity to help retiring advisors sell their firms, the common advice was to acquire a group that was similar to the buyer’s own company: same location, same target clients, same services provided, etc. Many of today’s firms owe their success to having followed that advice.
Unfortunately, it seems that over the years that wisdom has been lost. Many of today’s owner-advisors looking to grow through an acquisition seem focused purely on the size of firms to be acquired — and how much that new addition will boost their total annual revenues and profits.
Of course, that’s how Fortune 500 companies tend to operate. But remember, those firms have massive financial and managerial resources they can rely upon to make those acquisitions successful. And even then, their deals don’t always work out.
Most independent advisory firms don’t have access to these kinds of resources. Consequently, their owners need to take a different approach to growth.
A good example is the publishing business. If you owned a few smaller, but profitable, magazines, such as those that cover the advisory industry, and you wanted to grow your business, would you try to buy Forbes, Fortune or Vogue?
No, and for two good reasons. First, they would cost a fortune (no pun intended), and second and more importantly, they already are well-run businesses. Your chances of running them more profitably, and thereby boosting their future value, are low.