"Accelerating the growth of your practice through acquisition can enable you to reach your next level of success."

Fueling Growth

By John Bowen

As conditions in the equity markets make it increasingly difficult for firms to rely solely on organic growth to maintain their previous accelerated growth rates, elite financial advisory firms are considering other sources of growth. Should your own firm look into these opportunities for growth? Before we address that question, let's step back and recall from our business classes that there are three primary strategies for increasing growth in a business:

Reprinted from:

1. Build. You continue to develop your own financial services practice and build from scratch all the mechanisms required to deliver your services to your target market.

2. Joint venture. You partner with other firms by creating a formal equity- or revenue-sharing joint venture. Because these firms have trusted relationships with your targeted clients, you can effectively differentiate yourself from your competition.

3. Buy. You buy another financial advisory firm to leverage your growth.

Each of the three business strategies has distinct advantages and disadvantages, and you and your partners should evaluate each for its potential for fueling growth within your firm. In addition, keep in mind that while these strategies are not mutually exclusive, many financial advisory firms often choose to focus on one particular or dominant strategy.

Let's take a look at the advantages and disadvantages of each. The build approach:

• Allows you to systematically design your firm while maintaining overall direction.
• Enables you to retain control over client relationships.
• Involves little or no dilution of ownership. However, it also requires:
• Substantial commitment to resources, often including additional expertise and expanded infrastructure.
• The firm to assume all inherent risk. The joint venture approach:
• Requires minimal commitment of additional resources.
• Allows leveraging of partner firm's existing clientele.
• Enables you to retain control over client relationships and level of service.
• Shares the risk inherent in a new service offering. The potential downside of a joint venture is that it:
• Requires a close match between the firm and the partner in terms of culture and expertise.
• Requires significant time commitment to ensure success.

The buy method allows:

• Proven talent to be acquired immediately.
• Leveraging of existing clientele of both organizations.
• Scale to be obtained quickly.

Potential disadvantages include:

• Capital requirements make this option suitable only for larger firms.
• Firm assumes all risk associated with the acquisition and new service offering.

To decide which approach is best suited to your practice, ask yourself these key questions:

• Which model will provide our clients with the highest quality and most consistent experience?
• Which model will leverage our core competencies while compensating for our weaknesses?
• Which model best fills the gap between our existing skills and infrastructure, and the type of expertise and infrastructure required to deliver additional financial services to our target market?
• Which model will provide the best environment for attracting new clients and retaining current ones?

The model that is right for you depends on how you manage your advisory firm today, the type of clients you have, your particular strengths and weaknesses, and the nature of your competition. There is no one correct answer. In this article, I'll focus on decisions you should make and processes you should employ in determining whether to acquire another advisory firm. In future articles, I'll explore the build and joint venture strategies.

Recent world and market events have caused many financial advisors to reconsider their desire to stay within the industry. In a recent CEG Worldwide study, 15 percent of advisors acknowledged that they were considering leaving the investment advisory business. Combining the respondents' pessimistic expectations with normal attrition within the industry, it would be very reasonable to expect that a higher- than-usual number of practices will become available for acquisition.

As you consider making acquisitions an important part of your growth strategy, consider both the challenges and obstacles you currently face as well as the opportunities that may arise from the deployment of this strategy.

Once you've determined the approach that's right for you, here are the steps to take to complete a successful acquisition.

Step one: analysis. Start by developing a complete analysis of your firm. Cover your existing clientele, competitive pressures and both internal and external capabilities and challenges. Prioritize the opportunities you wish to pursue. This analysis will ensure that you and your partners are clear about your firm's vision and long-term goals, and that you have the needed systems in place for moving ahead.

Step two: identification. Produce detailed criteria that will allow you to identify potential firms for acquisition and that evaluate their suitability for integration. Describe your ideal partner firm in terms of price, size, type of clientele, service offering, geographic location and special expertise. Next, design a high-quality deal flow that enables you to consider a number of financial advisory firms that meet your initial evaluation criteria.

Step three: execution. Complete due diligence for each of the firms that meet your criteria. While the list of issues that must be reviewed during due diligence will be quite exhaustive, your primary focus should be on the value proposition of both the targeted advisory firm and the combined entity. Next, proceed through each stage of making the acquisition a reality: negotiating the structure of the new entity, finalizing details and closing the deal.

Step four: integration. Often many acquirers wait until the targeted firm is acquired before beginning integration, setting them up for failure. It is critical for the new entity to experience a number of early wins, so begin integration during your earliest discussions. This will prepare you to formally execute full integration upon the announcement of the acquisition.

For the integration to be successful, give particular consideration to these critical issues:

• Communication with stakeholders. Develop core messages that emphasize the business case for change for all stakeholders.
• Compensation. Carefully link compensation and roles to quantifiable business objectives.
• Resources. Perform a detailed gap analysis, identifying each resource required for success. Make the priority models for allocating limited resources clear to all involved.

Accelerating the growth of your practice through acquisition can enable you to reach your next level of success. If you've done it right, you will be in the envious position of residing in the ranks of elite advisors who are growing their firms dramatically despite today's challenging market. Both your future and current clients—and your net worth—will be glad you did.