Planning an Acquisition? Avoid these Missteps

Forewarned is forearmed. Buyers can avoid potentially costly errors by asking five important questions.

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).
 

There is more to acquiring a firm than just figuring out how much money the chief executive is willing to accept to part ways with the business.

During a panel discussion at the National Association of Personal Financial Advisors (NAPFA) “Evolution Now” conference in Charlotte, N.C., Scott McLeod, president of Brown Financial Advisory in Fairhope, Ala., shared with financial advisors his own missteps in acquisition deals.

“There is an established culture in that business,” he said. “You’re buying a stand-alone company, and there is a culture inside that company, and it’s a very difficult thing to identify from the outside.”

In addition to a firm’s internal culture, many communities have come to know financial planners who work with a small number of clients. One advisor found out after an acquisition that not all clients want to receive the same type of planning.

“What I’m learning is that I’m going to have to pay a lot more attention to the actual practice of any of the firms that I would acquire,” said fellow panelist Todd Bauerle, ‎president and principal at Bauerle Financial in Deland, Fla.

After acquiring a firm in North Carolina, he noticed that his new clients not only didn’t want to see his 13-page annual report documenting their finances, but they didn’t even want to meet about it. “I have to behave one way in North Carolina, and I behave the way I always have with my group in Deland,” Bauerle said. “It’s harder work than I had thought about.”

Here are five questions to ask to avoid missteps when acquiring another firm:

1. What will your new clients expect? Much like Bauerle finding out that his new clients didn’t want to meet with him until after the deal had been inked, McLeod didn’t get into the specifics of how the planning was being done during his first acquisition. “I didn’t ask all of the detail questions to understand fully what the advisors really call their service model, so when I got there I had to learn the culture of what the clients expected,” he said. Coming from a small family office, McLeod said, “When I have clients that don’t want to come in, it’s new to me.”

2. What is the culture of the firm? “You have to work hard to get the deal done, but you have to work harder to integrate those new employees into your culture because they really didn’t have a voice in it, and there is almost a certain amount of resentment,” McLeod said.

3. How stable are your new clients’ families? “Children are killing my clients,” Baurele said. “I have grandparents raising grandkids and paying for college,” he said. “It’s the families that are sucking money out of these clients.”

4. Is client money on the way out? “As the advisor ages, so, too, does the client,” said McLeod, who regrets not asking about the new clients’ ages. “Another question I didn’t ask: How fast is the money leaving because the client base is over 70? I wasn’t asking what would happen in the next five years.”

5. Is the firm’s technology outdated? One of McLeod’s biggest regrets is not taking a walk through the office of the firm he was about to acquire to check on the physical technology. After closing a deal just six months prior, he had to have a server inspected because it was “making funny noises,” he said. “I was in for $3,000 to buy a new server and have it installed right off the bat,” McLeod said.

—By Andrew Pavia