Buying an Advisory Practice: Let the M&A Journey Begin

Jessica Mellos
Jessica Mellos

10.18.23 in Marketing & Practice Management

Estimated Reading Time: 5 Minutes (934 words)

Advisors shake hands after reaching an agreement to buy an advisory practice

Are you thinking about buying an advisory practice? If you’re aiming to increase your revenue, hit your growth targets, diversify your book, or expand your scope, chances are you’ve likely considered it. Whatever your ultimate business goal may be, acquisition is a major strategic move requiring plenty of time and resources. So, what’s the plan for turning this vision into a reality?

Here, we’ll map out the buyer journey, including what you should know before hitting the road and what to expect when you reach your destination.

Understanding the M&A Landscape

In any buy/sell situation, taking stock of the M&A landscape in financial services is a vital first step. A look at the numbers will give you a lay of the land:

  • According to Cerulli, 37 percent of financial advisors are expected to retire within the next 10 years. One in four of those advisors is “unsure of their succession plan.” That equates to $10.4 trillion in assets that will need to be managed.

  • The number of buyers far outweighs the number of sellers—by a margin of 83:1, as reported by Succession Resource Group. In other words, there are limited opportunities, so buyers need to differentiate themselves in the M&A space.

For a prospective buyer, these stats mean that you’re likely to have a few “at-bats” before winning a transaction, which may be a drain on your time and resources. On the flip side, those same at-bats will provide an excellent opportunity to refine your process for differentiating your advisory firm in a competitive marketplace (more on that later) and grow your understanding that you, as the buyer, can say no when it’s just not the right fit.

Locating the Opportunities

Once you’ve assessed the landscape, it’s time to start searching for opportunities for buying an advisory practice. Many advisors use LinkedIn and their firm’s website to market themselves and relay the message that they are looking to acquire. Another pathway is to network at industry meetings and connect with centers of influence (e.g., at CFP® and CFA® meetings), letting them know your intent to acquire a practice and gathering information on any connections they may have.

One important note here: be sure to keep your expectations in check. Finding the right match can take up to two to five years.

Differentiating Your Advisory Firm

Next, you’ll want to pull away from the pack of other potential buyers. There are a few things you’ll need to make that happen.

In a competitive market like we’re experiencing today, your value proposition can be a true differentiator. A clear value prop should convey what constitutes “success” for you while providing insight into what potential sellers may be looking for in a buyer. For example, what would you include in your code of values? What is your approach to client service? And how do the services you provide speak to your firm’s goals?

To figure out the answers to those questions and how a sale might affect their clients and employees, the first thing many sellers will do is (what else?) Google you. Does your website provide transparency into your firm’s culture and guiding vision? Have you created a pitch book that highlights the benefits of associating with your firm? It can include everything from your financial metrics and KPIs, to your fee schedule, to any previous M&A experience.

From your perspective, is the seller’s culture and vision similar to yours? As you begin preliminary interviews with sellers (about one year out from the actual deal), you’ll want to discover the seller’s intentions and uncover potential synergies. This process will help ensure that clients are well-positioned to eventually transition over and feel at ease with the culture you’ve cultivated.

Structuring the Deal

You’ve done the work of refining your value prop and differentiating your firm. Now, it’s time to structure the deal. Understanding the options available to both parties—which range from the commonplace to the more creative—will create an ease of negotiations and a significant opportunity to find some common ground. Let’s start with the basics.

Common deal structures. There are three principal payment methods when it comes to buying an advisory practice, with most deals incorporating a combination of two or three of these methods. (Click the headings below to expand each section.)

A down payment serves as security for the seller and is usually calculated as 30 percent to 40 percent of the agreed-upon price. By requiring a down payment, sellers are guaranteed a minimum sum and protect themselves from buyers who are only interested in skimming off a book’s best clients. On the other hand, the down payment amount is a risk to the buyer because future revenues are never guaranteed.

Promissory notes, which include the principal and interest to be paid and the terms of repayment (via an amortization schedule), guarantee sellers a fixed-sum payment across a set time frame. Like down payments, the buyer and seller share the risk.

The buyer assumes the risk associated with a promissory note, as there is a lack of guaranteed future revenue but fixed and predictable payments to the seller. The seller, on the other hand, assumes the credit risk of the buyer. To compensate for the assumed risk, buyers may look to have a promissory note adjusted after closing to consider the realized client retention.

This is currently the most common financing method for at least a portion of the payments. Here, the seller receives a percentage of future revenues for a set amount of time or up to a certain amount.

The average earn-out time frame is ~3.8 years but can go up to 5 years for commission business and 7 years for fee-based business. Percentages are often applied to net revenues (after broker/dealer payout and transaction fees) and can vary over the life of an agreement. Because payments are contingent upon future revenue, both parties have the motivation to retain clients successfully.

The dependence of payments on future revenue, however, places some risk on the seller. To manage the risk, the parties can set a ceiling or a floor for the payments.

Creative deal structure. Sometimes, you’ll need to get more creative and be flexible to find the terms that best suit the needs of both parties. For example, a 30 percent down payment, a portion of a revenue share, and then a promissory note (for up to 10 years) could benefit you, as the buyer, from a cash flow perspective and provide the seller with a consistent income stream while also benefiting on the tax side. (Asset sales are treated as long-term capital gains under current tax laws and allow the buyer to write off the purchase price over a 15-year period.)

Funding options. As you weigh your options for structuring the deal, you’ll also need to think about how to fund it. When it comes to the down payment, for example, you might consider a loan or equity financing. Here at Commonwealth, our advisors can tap into our Entrepreneurial Capital program and gain access to all of those funding options without the time and effort of working with an outside lender.

Making the Transition

If you decide to move forward with the seller, what can you expect? Depending on complexity, typical transactions can take anywhere from six to eight weeks. There are numerous logistical and operational pieces to consider. These include licensing (e.g., state registrations), an account review, compensation matters (e.g., advisory fees), data integrity, technology issues, and compliance (e.g., archiving of books and records).

Last but certainly not least, you’ll need to onboard new clients who are unsure about what this transition will mean for them. The onboarding process will include assessing the seller’s book of business and ensuring that the required paperwork (e.g., negative consent letters) is sent to existing clients. This helps create a seamless client experience, with little impact on the day-to-day of both the buyer and the seller.

Beyond that, as Commonwealth-affiliated advisors Mark Bossey, CFP®, AIF®, and Ryan Marini, CMFC®, AIF®, of BostonPremier Wealth learned while going through the buyer journey, client loyalty is a major factor in the deal—and it’s something the selling advisor can help you navigate. Here are Bossey and Marini in their own words:

Buying an Advisory Practice_Bossey Marini

Finding the Right Fit

The buyer journey can be a long and winding road, requiring attention to detail, a clear vision of what you’re hoping to achieve, and a seller that can ultimately complement the practice you worked so hard to build. But when you do find the right fit? You’ll likely realize that it becomes less about the revenue and more about the long-term client relationships that will enrich your practice for years to come.

This material is for educational purposes only and is not intended to provide specific advice.

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