growing through acquisition_eighty20_advisors

Growing a Financial Planning Business through acquisitions.

Experience and Theory.

Consulting, Business Development, Practice Efficiency and Succession Plan preparation.www.eighty20advisors.com

Listing and Brokerage services for Buyers and Sellers of financial services practices. Platform for recruiters and applicants providing exposure and access to positions within growing firms.www.eighty20exchange.com

http://www.eighty20advisors.com/

http://www.eighty20exchange.com/

Do not reproduce without prior consent. Copyright © 2000-2012 Eighty20 Advisors, LLC. All rights reserved

Introduction

For an acquisition to be possible a buyer and a seller must agree on terms.

Is your counter party one of the four ?

Most deals have a deferred component and require a longer relationship with the buyer/seller.


For a buyer the Primary decisions are. • Why am I considering to buy a firm• When would be a good time to take on the risk• What can I afford to pay and how• Who should I target to buy

For a seller the primary decisions are: • When should I retire• Who can I sell to• What is the business worth• Why am I retiring

Food for thought.


Buyers Vision

• Do you have one• What is it?

– Merge with another local company and stop.– Buy a company that adds skills to my current

practice.– Buy assets and consolidate in one location.– Acquire multiple practices and create a multi

$100M AUM business operating in the financial services industry.


Why Buy ?

• Faster growth• Leverage operational resources• Acquire skills and or knowledge• Broaden demographics of aggregate book

– Average client age etc…

• Capitalize on economies of scale – payouts• Consider your own exit strategy and expectations.


Criteria & Considerations

• How big a book do you want to buy?• What geography are you comfortable with?

• Technology is a consideration.

• Are you comfortable with added employees?• Good planners are not always good managers.

• What is your current practice good at? • Are you looking for more of the same client types?• Are you trying to add a particular skill set?• What is your current operational capacity?• What is your funding capability?


Process Steps


Seek and Search

It is unlikely the first opportunity will meet your criteria so having a pipeline is a key success factor.

• Existing BD/GA/IMO.• Business brokers.• Specialist brokers.• CPA, Lawyers etc.• Other Industry participants.


Introductions

• Initial Introductions and statement of interest.• Important to establish a rapport. • This is a sales pitch to a point of the seller

making a commitment to disclose.• Philosophical match in YOUR mind??


CDA

• Confidential Disclosure Agreement.• Mutual – you want protection as much as they do.• If Possible get a 3 way, seller-buyer-BD.• Experience has shown the seller will NOT submit data

for pre-registration until deals are signed making the transition process more complicated.


Fact Find

• High level review of Sellers Book of Business.– Asset types– Client ages– Asset structures [VA, surrenders etc]– Income history– Income streams– Income projections


Valuation

• Factors affecting Valuation.– Markets served and Practice structure– Sole Proprietor, Partnership or Inc.– Customers and demographics – Income structure and streams– Technology adoption and data integrity– Measurement of profitability– Firms financial history– Systemized operations or Ad hoc – Suitability of buyer [Are they similar to you?]


Firm V Founder

Revenue

Time

Valu

e = X

* Revenue

/Income

• Value is derived from a measure of revenues/income and a factor [X].

• Understand the associated risk in using “X” is crucial to both buyer and seller


Firm V Founder

Founder

Firm Sta

ble

Un-

sta

ble

• Is your firm “Institutionalized” ?• If you as the founder/seller were to leave

tomorrow would the revenues be immediately and irreparably impacted?


Factors affecting valuation

-VE 2x 1x 0 1x 2x +VE

Recurring revenue

Non recurring revenue

Assets and structure

Average age of clients

Staff

Other business assets

Technology and data integrity

Each facet of a firm can add value or it can detract. It is key to understand that the overall firm value is a constituent of many parts and each should be measured in a valuation process.


Provisional Offer

• Valuation and Terms.– Valuation models are many– Terms and Structure, be fair, be realistic.– Include a “Claw Back” for assets lost and incentive

for asset growth.

• If accepted – draft Letter of Intent.– Offer confirmed “subject to….”


Due Diligence

• Reg S&P – understand and beware.• Firms performance v market.• Technology adoption and data integrity.• Business management in general.• Demographics.• Operational expenses.• Consistency of financials.• Client count and revenue distribution [Pareto]• Meet and greet key staff.


Confirmed Offer

Assuming all is well after due Diligence.•Confirm offer and initiate APA contract drafting.•Expect 3-5 iterations of docs.•Close.•Now the work begins….


Execution• Expect the unexpected. Don’t Panic.• Allocate resources internally.• Setting client expectations is essential.• COBD, NAF, AIM +++ for every account.

– No Bulk transfers.

• Timely client responses are essential.– Cash flow depends on them.

• Plan, Prepare and Pursue. • Bring in short term resources.• Meet and greet key clients.


Execution

• Letter from seller to clients– Calls and meetings with top 20%– Transition paperwork packet

• Letter of introduction from buyer• Calls, calls, calls.• Thank you letter• 4-6 months out – follow up and questionaire.


Value progression

200 400 600 800 1000 1

5

Mul

tiple

Exp

ansi

on

Total Book ($M)


Profit Scales with Size

Time/AUM aggregted

Revenue Growth

Expenses projected

Income

Gains in Efficiency

$


Risks/Mitigation

Risk Mitigation

Expansion complexities cause loss of customer base

Partition the on-going customer care and the integration team

Acquired customer base is lost through the transfer process (industry average 91% retained)

Retain the existing manager through financial incentives for a measured period. 4-12 months.

Integration costs squeeze cash flows

Budget for and regularly review with investors.

Market Collapse No investment immune


Conclusion

• The financial services industry is consolidating.• Growth by acquisition is a viable growth

strategy. • Significant challenges exist but diligence and

execution planning can mitigate the risks.• Returns can be substantial.

Founded in 2012 by Allen Duck and David Cunningham.

•Allen has a 25+ year career in business most recently acting COO for an RIA in PA – headed the acquisition strategy. •Founding board member for CPG, the succession engine within CIR.•Author and speaker on industry trends and dynamics in the succession space.•David has a long career in business 40+ years, creating 6 separate companies and multiple successful exits. •Experienced in fund raising and business development.•Eighty20 Advisors genesis was a quantified recognition that the financial services industry has a significant age bias, fragmented service models and is lacking a natural regenerative dynamic. •The firms objective is to bridge the void between the retiring advisors, those qualified to buy, and lastly, out reach to the next generation.

Introduction

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