What you need to consider before the deal.
If an institutional buyer came to you today, what
would be the first thing you'd want to know? Price? Terms? Fit? If you
don't know which question to focus on, perhaps you have not taken the
time to consider your personal definition of success and its impact on
how you might execute the transition of your business. If you haven't
done that type of planning, should you be reacting to the first person
to wave a check under your nose?
In these days of acquisitions and practice consolidation-or at least a lot of talk about acquisitions and consolidation-we get frequent calls from advisors who have been approached by a bank, roll-up firm or other strategic or financial acquirer. These calls are somewhat different than those from advisors who are considering an acquisition by (or merger with) an individual buyer.
While the latter is usually driven by personal relationships, the former is driven more by corporate initiative. The acquirer's approach is strategic or financial in this case-they are interested in acquiring a platform, capacity or financial returns. And these are typically not immediate exit opportunities for the seller, since the buyer wants the seller to remain with the business for some time or indefinitely.
Consequently, prospective sellers should look at such overtures as growth opportunities, not necessarily transition opportunities. When approached by institutional buyers, sometimes out of the blue, the potential seller tends to focus first on the financial aspects of the deal-their questions usually begin with ones of valuation-instead of on the strategic aspects of the deal, where they should begin their analysis.
As in any acquisition situation, an advisor who is approached by a bank, roll-up, national firm or other "corporate" acquirer needs to begin their considerations with their own business and personal goals and definitions of success. Before looking at the financial deal, look at how the acquisition would allow you to optimally pursue your personal and business goals. If you haven't yet defined those goals, then STOP!!! If you approach the analysis of a specific deal without the context of what you are trying to achieve long term as your filter, you are left with nothing but the economics to evaluate.
If the economics are your only filter, then you will be fine. But I have never met an advisor for whom the economics are truly the only filter, or even the highest priority filter. So what is? The filters an advisor should consider first include: What are your personal goals? What are your business goals? Will this sale to this acquirer allow you to achieve those goals more effectively, more quickly or more thoroughly than moving ahead without the sale?
When we look at the deals that work and the ones that do not, the difference is not in the deal put together or the price agreed upon. The difference is in the planning and evaluation the seller did before considering the deal, and how well the deal fulfills the seller's definition of success.
I recently had the chance to discuss these concepts, and practical advice for advisors considering a sale, with an advisor who herself recently decided upon such an opportunity. In October 2005, Elizabeth Jetton and her husband and business partner, Michael Smith, sold their business, Financial Vision Advisors Inc., to Mercer Advisors, a national financial planning firm. Elizabeth and Michael, who had considered other sales in the past, found this one to be a great fit for their business and for them personally. Though the transition is only a few months behind them, and the ultimate outcome is yet to be seen, the planning, evaluation and decision-making process they went through is a great example from which other advisors who are contemplating the sale of their business can learn.
Like good planners, Elizabeth and Michael embarked on personal and professional planning long before this sale opportunity came along. They spent a lot of time considering and refining their long-term goals, which they were ultimately able to use as their decision-making guide in evaluating the sale. "We did a lot of personal and professional soul searching first," Elizabeth explained. "We considered 'What do we want our business to look like?' 'What kind of life do we want?' 'What do we want our environment and our clients to look like?'"
Do that work first, Elizabeth urges, in as much detail as you can, because it is very easy to get seduced by an appealing deal. Evaluating any sale without this personal and business strategic context leaves you in a void, without the filter to evaluate the opportunity in light of what you are trying to accomplish personally and as a business. "We knew we wanted to expand our vision," Elizabeth explained. "We were aware of our strengths and weaknesses and knew what we couldn't overcome on our own. So we always kept our eyes open for compatible partners that could help get us to our vision."
The up-front planning they did was clearly what prepared them to embark on the right opportunity when it came along, and prevented them from not pursuing sales that, though appealing, would not have been in line with their long-term objectives. Start with this approach, Elizabeth suggests:
* What is the perfect environment for you to be your best and deliver the best to your clients?
* Do an honest assessment of your strengths and weaknesses.
* Think about what would round you out and make you flourish.
* Think about your priorities and what is nonnegotiable.
The opportunity with Mercer Advisors came about organically, after an introduction by a close friend and a chance to do some work with the organization on a corporate level. "We fell in love with the company," Elizabeth explained. "They do what we do the way we want to do it."
Their biggest reservation? Like many business owners, Elizabeth and Michael had some hesitation about becoming employees of someone else. They had a lot of conversations with the team at Mercer about what their roles would look like, how their compensation would work, how much flexibility they would have to be involved in the things they love to do, how things would really work, and they spent a lot of time getting to know the people they would be working with.
Timing was also important to them in making this sale the right one. Like many advisors, Elizabeth and Michael had been approached by other acquirers previously. In one situation, they got pretty far into the discussions and really liked the individuals and the philosophy, but they realized that at that time they were not ready to let go of their own culture and what they were building.
They found, in the deal they ultimately put together with Mercer, that it was important they have protection in place that made it clear what would happen-financially and with their clients-if it did not work out. They were also realistic and clear about the time they would need to get up to speed in order to meet the expectations of everyone involved, themselves included. They also tried to strike a balance between protecting themselves and being "in" completely to ensure successful integration. "There are some things you can put in writing and some things you have to trust," Elizabeth explained.
So how has the transition been so far? "We definitely went through some grieving," Elizabeth explained. "We had put to bed our baby. We were fortunate to be able to work through that together." Seek out a coach or a colleague who has been through it before," she advises. Another key to their so-far-successful transition has been that two people were assigned to integrate them into the organization right from the beginning, which eased their transition and integration and immediately made them feel like part of the team.
Elizabeth shared some advice on putting the deal together, including:
* Get your own firm in the best possible shape. Have a spit-shiny business so you aren't in a position to have to say yes.
* Be patient and do your due diligence. Like a prenuptial agreement, you fear you will hurt the relationship if you dig in, but DO IT.
* Have someone solely on your team whose wisdom you trust.
* Be willing to walk away from the deal.
* Be prepared to grieve.
Every acquisition/sale discussion would go much more smoothly if both parties have done the sort of planning going into the process that Elizabeth and Michael did. Many deals would not happen, I suspect, and the success rate of firms that do come together would increase significantly. The economics of the deal are such a small part of the total consideration, and a relatively small factor in determining whether or not the deal is ultimately successful. Most advisors begin with the economics, because they do not have the strategic framework in place to evaluate the opportunity in light of their personal and business goals.
If you are entertaining an acquisition offer from a strategic or financial buyer, or even in the earliest stages of a discussion, think about:
* What are your long-term business and personal goals?
* Why are you considering this opportunity?
* What personal objectives would be achieved through selling your practice to this acquirer?
* What business objectives would be achieved?
* Is there real synergy in this deal?
Are you somehow better off "in" than "out"?
* Are you looking for an exit strategy or a growth strategy? Is that the same thing the acquirer is looking for in you?
* Do you want to stay with the practice after the sale? What is the acquirer's expectation?
* How do you feel about becoming an employee of the other organization if that would be the case?
What has been important to you about being a business owner?
What will your role look like after you become an employee?
How much flexibility would you have in defining that?
What would your compensation look like?
* What would this acquisition mean to your staff? Would their opportunities increase or decrease with the new organization compared to your current one? Is this a priority for you?
* What would it mean to your clients? Would their experience change? For the better?
* If you could sell to anyone, is this who you would choose? What are your alternatives?
* Is there a good cultural fit between the organizations?
* What would the deal look like after implementation-two years, five years, ten years down the road?
* What are your "deal killers" and "deal makers" if you were to move ahead in discussions with this acquirer?
* If you were to move ahead with this sale, what do you think would make this deal succeed or fail in implementation? Would the buyer answer the question the same way?
Only AFTER evaluating these strategic questions should you consider the financial considerations:
* Have you placed a realistic value on your practice? Can you and the other party come to terms?
* Do you need a specific cash amount or are you open to terms including financing over time?
* What is the currency of the deal? If it is stock, or stock in combination with cash:
How much is the stock portion of the deal worth?
What is the deal worth if the stock offering does not materialize?
Would you invest in the acquiring organization as part of your investment portfolio if you had cash available to invest?
* Who bears the risk and who gets the money in the deal?
The temptation to succumb to a strategic or financial buyer can be very great. The mechanics of the offer can distract many sellers from considering what is truly most important to them in considering the deal, though. Make sure that you have the complete strategic framework in place to evaluate whether the deal is the right one for you and your organization.
Rebecca Pomering is a principal in
Moss Adams LLP, and consults with financial advisory practices. Reach
her at email@example.com.