Making M&A Part of Your Growth Strategy for 2022

For many advisors, the end of the year is a time to focus on setting goals and defining your strategy for the coming year. There are many priorities for a practice, and many options for growing an advisory practice. Often advisors focus on organic client acquisition, driving referrals, and expanding service offerings as methods for achieving growth. One strategy that many small and medium sized firms may be overlooking is mergers and acquisitions.

Why M&A Should Be Part Of Your Growth Strategy In 2022

Now more than ever there is tremendous opportunity for advisory practices of all sizes to leverage M&A to achieve inorganic growth. According to David Grau, President and CEO of Succession Resource Group (SRG), “the graying of the financial services industry, combined with the general lack of proactive succession planning by advisors today creates a tremendous opportunity for the next generation of advisors to grow inorganically by consolidating lifestyle practices into a thriving business.”

In the past, acquisitions were only achievable by large firms and private equity investors. As Grau points out, smaller firms have opportunities they never had before. “We are seeing historically low interest rates and lenders like PPC LOAN being willing to work with buyers to find ways to make deals happen.” As a result, Grau says that“Despite valuation multiples being at all-time highs for advisors, advisors are able to leverage the available capital from lenders to get deals done that are cash flow positive years 1-10, even when financing most or all of the transaction.” In short, advisors not only have opportunities to merge or acquire practices led by greying advisors, but they also have greater access to capital, allowing them to do deals without comprising personal assets or practice cash flow.

How To Implement a Successful M&A Strategy

To be successful at M&A, Grau says advisors must start by educating themselves about the market and M&A. Specifically he says “buyers must remain current on M&A trends, deal structuring alternatives, tax strategies, and financing alternatives. This knowledge lets them quickly provide solutions to help the seller achieve their goals and know when a seller is asking for something out of the ordinary.” Grau also says it’s important to remain flexible and to not dismiss an opportunity off hand if it doesn’t immediately fit your vision of the perfect acquisition.

Grau says it’s also important to have the infrastructure in place to quickly scale and absorb the new practice. On average, an acquisition results in 162 new households to the practice. As Grau explains, “That means that a successful buyer was operating and growing their practice and onboarding 162 new relationships over approximately 90 days, while coordinating schedules with the seller.” This transition must happen without disrupting the existing practice. It is achieved by having defined workflows, well-trained staff, and the right systems in place to absorb the new workload quickly and seamlessly.

Lastly, advisors need to make sure that they dedicate the adequate time to M&A activities including seeking out deals, negotiating terms, and working with the seller to transition the practice. Says Grau, “Inorganic growth is a powerful growth engine, but it will take all the time you can give it. Yes, it will generally be worth the investment, but only if you can consistently make the time.”

Looking Ahead: Challenges and Opportunities on the Horizon

Despite the pandemic, 2021 turned out to be a record year for advisor M&A. Grau notes that 2022 looks to be another strong year for advisor mergers and acquisitions. Says Grau, “There are numerous elements that are likely to contribute to this sustained flurry of activity, including the increased reliance on technology, more compliance to navigate with Reg BI, the cost of capital (interest rates) remaining attractive, and many advisors that are rethinking their exit strategy and looking to sell in 2022 but remain employed part-time with their buyer for 2-5 years.”

As mentioned earlier, increased access to capital coupled with a growing number of solo advisors reaching retirement age is creating a market ripe for well-positioned buyers. As Grau explains, “There are on average 75 buyers for every seller, but very few of the 75 buyers have taken the time to prepare for inorganic growth and would be an attractive successor to retiring advisors. With a little bit of consistent time and effort, it is possible to quickly elevate oneself from the group.” The buyers who take the time to learn the market, understand the seller’s goals, come to the table with financing, and have a written plan for transitioning the practice are the ones who will be asked to submit a written offer. From there, it comes down to fit and personality. Still, advisors who consciously make M&A part of their strategy will be the ones best positioned to take advantage of opportunities as they arise.

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