Five Keys to Getting More Deals Completed in 2021

As an active lender in the financial advisor space, we are always looking to leverage the expertise and insights of some of our key M&A partners. In this post, David Grau, CEO and Founder of Succession Resource Group has provided us with some key strategies and considerations for advisors looking to leverage acquisitions as a growth strategy.

Growing through acquisition is undoubtedly the fastest way to grow a financial services business, but it is also unpredictable, competitive, time-consuming, and not without its challenges.There is a tremendous opportunity for buyers well-positioned and committed to M&A as a growth strategy.

The average advisor is now in their mid-50s, and the average seller is now in their early to mid-60s. Many in this group, certainly those over the age of 60, lack a succession plan. While there has been increased consolidation in the industry in the last five years, and deal volume continues to increase,there are not as many advisors exiting as one would reasonably expect given the aforementioned issues. This is largely due to the way advisors make money and the reason lenders find this market attractive – recurring revenue. It is simply too easy for advisors to retire in place, hold on to their practice, and continue earning a recurring revenue stream. But, when you have a major market disruption like 2020, combined with the potential increase in long-term capital gains tax rates, increased reliance on technology, and RegBI, many of these advisors began to rethink their exit strategy and timeline.Advisors that are serious about growing through acquisition should consider these five recommendations in preparation for the expected spike in deal volume this year:

1. Decide if you are in or out:

Growing through acquisition is not for the faint of heart. It takes a tremendous amount of time and effort, as well as money, to be successful. It is imperative to decide early on how committed the firm is to growth. The deals are out there and more on the horizon.To be successful with M&A as a growth strategy, one must be committed (and have the time to make such a commitment). Signing up on a few deal-making websites or paying a recruiter to make calls is not enough. Some advisors get lucky and get a deal or two this way, but it is not sustainable. To become a “serial buyer” or the next industry aggregator doesn’t require private equity; it requires a plan and commitment to that plan.

If you can commit, your chances of success increase exponentially.

2. Make the time, not the excuses:

Finding, negotiating, and closing deals is an owner activity. The challenge for most advisors looking to grow through acquisition is, they donot have the time. Far too many buyers who otherwise would be very successful with M&A do not have the time and miss out on deals they should have closed. They find a potential deal and are slow to respond to the intermediary or seller. They are not able to set things aside and focus 110% of their time and effort for a few weeks to getting a deal completed andare disappointed and surprised when the seller goes with someone else.

If you can make the time, your chances of success increase exponentially.

3. Get your house in order:

“If you build it, they will come.”As a buyer, you want to create a business that canhandle an acquisition andattract potential sellers. This means creating a business with a strong brand, a well-trained team, and documented processes and workflows for managing investments and clients. Buying businesses means more revenue and more assets, but it also means more work. The typical deal involves 150-200 households. That means a successful buyer must have the ability to onboard 150-200 households in 60-90 days.

If you create something you would want to sell to, your chances of success increase exponentially.

4. Stop focusing on value. Start focusing on cash flow:

Sellers are unreasonable. All of them. However, what is “reasonable” or “unreasonable” is simply a matter of perspective. The value of a seller’s business is interesting academically, but if a seller has a number in mind, savvy buyers are good at finding a way to make that number work. There is more to a deal than the purchase price. One must consider the payment terms, tax strategy, post-closing compensation for the seller, and assumed overhead. Instead of negotiatingthe seller down on their price, get creative with the deal structure and timing. Focus on the net revenue each year using conservative but reasonable assumptions and be conscientious about when you discuss this.

If you focus on cash flow, your chances of success increase exponentially.

5. Get proper support and listen:

Do not be afraid to ask for help. Buying a business takes a team of professionals, each with their own body of expertise. Successful buyers craft and refine their M&A team over time, working to identify professionals who can help in each of the following disciplines:

• M&A Consultant: This individual or team should have experience guiding buyers through the entire process from the offer letter to closing, providing industry perspective, resources, contracts, common tax strategies, and managing the negotiations.
• CPA: While the M&A consultant should know and recommend an effective tax strategy for buyer and seller, the parties’ CPA will handle the tax filing and should therefore be involved to “sign off” on the strategy.
• Attorney: Donot leave the negotiations to the attorney if you have any hope of closing a deal, but do not cut them out of the process either. Attorneys are a great resource during due diligence and reviewing the final purchase agreements to ensure nothing was missed.
• Lender:Whether or not buyers think they need financing, it is always good to secure a consultation with a well-qualified, industry-specific lender before negotiating a deal. By doing so, buyers can verify before signing any agreements that they can actually finance the deal, as well as get guidance on any deal terms that may impact financing. Knowing your capital position ahead of time allows buyers to go into negotiations with a higher level of confidence and leverage compared to others who have not done that due diligence.
• Home office or field leadership: These folks are not a substitute for the M&A Consultant, CPA, attorney, or lender, even if they claim to have an internal team that can help. However, they are a tremendous resource for many other M&A issues, such as onboarding the practice, product portability, etc.

If you have a team, and you listen to them, your chances of success increase exponentially.

Finding and closing deals is as much an art as it is a science. But, with time and commitment, any advisor can add inorganic growth to their expansion strategy in 2021.

Looking to finance any acquisition? Schedule a free consultation with a loan specialist today.