"If making an acquisition is a strategic part of your growth strategy, then you will want to analyze both the challenges and obstacles you currently face, as well as the opportunities that may arise from an acquisition."

Purchasing Power

By John Bowen

When you are looking to grow your advisory business, doing it organically—building a great firm by serving your clients well—is certainly an appealing route to take. It has at least one important advantage over other growth alternatives: You get to maintain control of everything—the direction of the business, the way that it's managed and your relationships with your clients.

Reprinted from:

But focusing on organic growth also carries some substantial disadvantages—namely, the large commitment to additional resources it requires. To ramp up, you need to bring in additional expertise and also expand your infrastructure, while assuming all the risks this kind of expansion carries. And even when you have solved these challenges, your rate of organic growth may still proceed at a slower pace than you need to reach your business goals.

If this is the case, it's time for you to consider choosing an alternative option for growth. While either merging or creating a partnership with another firm can offer avenues for growth, there is another, even more direct way to grow your business substantially—acquiring another firm.

Acquisitions offer many advantages. They allow you to purchase the other firm's talent immediately and to achieve the scale that you want quickly—much quicker than through organic growth alone. They can achieve new efficiencies by creating both revenue and cost synergies. And by broadening product and service capabilities and leveraging the clientele of both organizations, they can open up a wide range of new business opportunities.

There are also several distinct disadvantages to acquisitions. Perhaps most significantly, the capital requirements make acquisitions an option only for the larger firms. You alone must assume all of the risks associated with the deal and the new service offerings. In addition, there are many potential problems with becoming too big, too fast, including disrupting or destroying your current company culture. And finally, these deals demand an enormous amount of planning, which can easily cause you to lose focus on your current business challenges.

If making an acquisition is a strategic part of your growth strategy, then you will want to analyze both the challenges and obstacles you currently face, as well as the opportunities that may arise from an acquisition. A successful acquisition typically involves eight key steps, although the details of each deal will vary, of course.

Step 1: Review the strategic rationale for a purchase. Start by performing a thorough analysis of your advisory practice. You should have a clear understanding of your business strengths, weaknesses, opportunities, and threats. Review your core competencies, service offerings, and current plan for growth. Examine competitive pressures and any internal challenges you face.

Next, revisit your vision for the business and the specific goals that you wish to accomplish. Perform a gap analysis, identifying what pieces you are missing that you need to achieve your business goals. Performing this type of analysis will ensure you are crystal clear about your firm's long-term vision and enable you to set goals for the acquisition that support that overall vision. If you can't nail down a compelling strategic rationale for an acquisition, then you're not ready to make one.

Step 2: Develop criteria for target profiling. At this point, you are ready to define the appropriate target for the acquisition. Ask yourself the following questions: What is the ideal type of firm that would help you to fulfill your growth goals? What industry is it in? Where is it? What is its level or position in the value chain? Which distribution channels does it use? Use the answers to these kinds of questions to formulate a picture of the space where your potential acquisition targets reside.

Next, put together a short list of criteria that will allow you to identify and score potential firms for acquisition. Complete the target profile by prioritizing each feature, deciding which ones you can't live without and which ones you would be willing to compromise on.

Step 3: Collect information and rank targets. Now collect information on potential targets so that you can score each one using the metrics you developed in Step 2 above. You must gather enough information about each target to rank it according to how well it would help you meet your strategic goals.

A range of information sources are available. They include local business journals, other financial advisors, investment bankers, various advisor associations, and online marketplaces such as FPTransitions.com.

Step 4: Approach chosen targets. It's extremely easy to make a misstep here, and the consequences of doing so are enormous. In fact, I've seen the prices of targets jump by 50 percent just from the mere act of an advisor knocking on the door.

You'll find that your targets will engage in all sorts of gamesmanship, making it very challenging for you to obtain the information you are looking for. To be successful, this initial contact requires outstanding sales skills and a thorough knowledge of the mergers and acquisitions space.

After you have identified which targets are appropriate and cooperative, select the best target. Keep in mind, however, that you should still continue to pursue as many suitable opportunities as possible.

Step 5: Investigate targets. Advisors can view due diligence on two levels:

1. High-level due diligence—a summary view that provides a general gauge of fit; and
2. Follow-up due diligence—deep, thorough and detailed. Because of the level of detail this type of due diligence requires, it is done only after both parties have signed a letter of intent.

In this step, you need to conduct a high, summary level of due diligence to determine the overall suitability of a target without wasting time. (Note that both parties should sign a confidentiality agreement before sharing any nonpublic financial or sensitive material.)

Step 6: Determine valuation, negotiate and set deal terms. To determine another company's value, look at what you know about creating value in your own financial advisory business. It's a good scorecard to use.

Also look at the value created when one firm successfully acquires another. To quantify that value, start with the target's stand-alone value, add the gains from synergy when the two companies are combined, and subtract the costs of the acquisition. The ideal range—where no value is destroyed for either the seller or the buyer—typically is somewhere between 100 percent and 140 percent of the target firm's stand-alone value.

Once you've determined valuation, you and the target will start to negotiate and agree on deal terms. You will also present a formal proposal outlining how you would execute the acquisition. This proposal will facilitate an open discussion about whether enough synergy exists to make the deal work for both parties involved.

Finally, you and the target will sign a letter of intent. This is a binding document that specifically identifies all of the major terms of the definitive purchase agreement. The letter of intent typically includes the purchase price, any earn-out provision, non-competition agreements and employment agreements.

Step 7: Perform confirmatory due diligence and close the transaction. In this step, you must document the letter of intent and close the deal. To ensure that the closing goes smoothly, clearly define every player's role in the negotiations. Be sure that your documentation is complete and accurate.

At this stage, you need to have a professional representing your side who is well versed in mergers and acquisitions, but try not to cede complete authority to that professional. Stay involved and push hard to move the agreement along to completion.

Step 8: Integrate the companies. Often purchasers wait until the targeted firm is acquired before beginning the integration, setting them up for sure failure. It is critical that the new entity experience early wins, so begin integration during your earliest discussions. This will prepare you to execute complete integration formally after the announcement of the acquisition.

Keep in mind that if there was ever a time for professional assistance, this is it. Given the short lead times, you only have one shot at getting it right. And of course, you still have to focus on your main responsibility—running your advisory business.

If you plan on making an acquisition, there are several compelling reasons to enlist a professional advisor, such as an investment banker or someone with significant merger and acquisition experience, to help you:

• Save valuable time and preserve focus. Without professional help, an acquisition can be quite time consuming and may cause you to lose focus on running the business, resulting in a decrease in its value.
• Leverage the professional's expertise and information. A professional advisor will have the information that is necessary to score various potential purchase targets.
• Leverage the professional's experience. These deals require the help of seasoned players who know the ins and outs of negotiations and who won't be fooled by anyone.
• Benefit from a sounding board. The uncertainty and risks of acquisitions certainly can whipsaw you emotionally. A professional advisor will act as a therapist throughout the process, making it less draining.

Accelerating the growth of your firm through acquisition can be the key to achieving your most important business goals. If it's done correctly, you'll be in the enviable position of being able to grow your income dramatically despite today's challenging market.