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What Younger Advisors Need to Know to Succeed in the Acquisitions Market

Rather than rushing into acquisitions, it pays for younger advisors to be aware of these M&A best practices.

With news of major deals across the financial advice industry filling headlines on a weekly basis and a more robust range of financing options emerging to facilitate practice acquisitions, successful younger advisors have become increasingly focused on purchasing other practices as a path to further growth. 

Given the intricacies of acquiring other practices and the fact that many younger advisors may never have been through the process before, however, next-gen advisors would be well served to seek guidance as they navigate the M&A landscape.

As we discussed at length during Securities America’s NxG Conference for under-40 advisors earlier this month, even a successful transaction can become a net negative if the two practices end up being a bad fit, or if the acquiror’s business can’t seamlessly intake a large number of new clients. (To say nothing of the damage that can be done by unsuccessful transaction processes that take up large amounts of time and ultimately go nowhere.)

Rather than rushing into acquisitions, it pays for younger advisors to be aware of the M&A best practices that can be particularly helpful for under-40 professionals in this industry, many of whom are approaching such transactions for the first or possibly second time.

Here are a few tips that younger advisors should keep in mind as they prepare themselves to be successful buyers: 

  1. It’s a Competitive Market. Be Prepared to Tell Your Story in a Compelling Way

Sellers are looking for the best possible fit when they sell their practices. They want to ensure not only that they and their families are taken care of but also that the buyer can provide a suitable home for their clients.

The problem for buyers: In the current competitive practice acquisition market, there are sure to be multiple suitors that can make a strong case for themselves.

Younger advisors need to develop a cohesive, differentiated story that explains why their practice is the best fit for the seller. Prior to pursuing acquisitions, advisors should compose a “war book” that explains their unique value proposition and shows that they have the operational competencies, infrastructure, staff and other attributes sellers are looking for. Young advisors should be up front with sellers about their experience level and point out any strengths they possess that can further bolster their position. Earning the CFP designation, for example, can add several years of "effective experience" to a younger acquiror’s resume.

Under-40 advisors should also understand that no single trait or attribute (such as assets under management or years in the business) will guarantee success in the M&A market, but a cohesive, comprehensive narrative can differentiate their practice from the crowd and engender trust with sellers. 

  1. Invest in Building Relationships With Potential Transaction Partners

Digital as our world is, the art of trust-building is analog—it can take time and feel inefficient, but to be effective it can’t be rote or standardized. Younger advisors know that a high-touch approach builds trust with clients, but they may not know that the same applies to potential M&A partners.

Trust is crucial in pursuing practice acquisitions because sellers want assurance that they’re turning over their book of business to someone who will treat their clients well. Moreover, because post-deal transitions typically involve an earnout period during which the buyer and seller work together, personal fit is extremely important.

Repeated face-to-face interactions—through one-on-one meetings, networking events/organizations and mentoring opportunities, for example—are the best way to build this trust. Phone calls and emails, of course, can play an important role, as well. Texts, however—though easy, cheap and efficient—generally won’t cut it on their own. 

  1. Be Flexible With Deal Structure

Younger prospective acquirors should realize that money alone is rarely the deciding factor in a deal’s success, and that there are many approaches to structuring a transaction.

With earnout agreements, for example, sellers often worry they’ll be funding their own retirement if acquirers pay their earnouts with the incremental revenues from the sellers’ own clients. An alternative: Front-load payments to give the seller a more immediate payoff.

Just because a given deal structure worked for another transaction doesn’t mean it’s the right approach every time. Each transaction requires some amount of customization. 

  1. In Early Deals, Try to Stay Close to Home

If possible, younger advisors should seek to make their first or second acquisitions from within the same independent advisory and brokerage (IAB) firm or network of firms. The reason is that there’s a high administrative burden in moving clients from one IAB to another, which can require new documentation for hundreds of clients (also known as the "re-papering" process).

In contrast, transitioning clients within the same IAB simply involves changing the advisor of record from the seller to the buyer. 

In either case, there will be additional work to shepherd clients through the transition, but transacting with a practice within the same IAB significantly mitigates paperwork headaches, reduces the likelihood of service disruption and minimizes client attrition.

Through all this, younger advisors should keep the basics of negotiations in mind: Continually test your assumptions; avoid following the crowd in rushing to make deals; be willing to walk away.

Preparing to make acquisitions is a learning process that will help younger advisors focus on their strengths and weaknesses and identify what they want long term for their businesses. In that respect, the journey can be as valuable as the deal itself.


Jim Nagengast is chief executive officer and president of Securities America.

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