While mergers and acquisitions represent an efficient way for firms to achieve growth, finding a ready partner in 2015 will be challenging. Activity in the M&A market heated up in 2014, with no signs of slowing down over the next 12 months. With economic uncertainty dissipating and access to capital increasing, firms can anticipate the market to favor sellers as valuations continue to rise. As sellers prepare for another strong year, positioning your firm as a buyer of choice and winning the business you seek will require these five steps.
1. Get Your House In Order
Whether you’re a buyer or seller, there’s a distinct difference between making a decision to court a merger or acquisition partner and actually being in a position to act when the right deal comes along. Assessing whether or not a firm is ready to acquire a business is a critical step. This assessment should involve looking at a potential buyer’s P&L, revenue, expenses and net cash flow to determine if they have the excess cash flow required to make a purchase. We also want to see if they have a cushion in case there are additional or unexpected expenses the firm has to cover in the business integration process.
Capacity is also key. Can the firm take on a block of 100 clients or $50 million in additional assets? Potential buyers must determine what’s right for them, so they’re not biting off more than they can chew.
2. Create Awareness
Networking is critical to establishing yourself as a buyer. Over the next few months, talk to advisors in your local market, wholesalers and industry recruiters. The more people that know you’re looking, the higher the likelihood that someone will think of you when a deal surfaces.
A quarter of the deals we worked on in 2014 came from our business development staff talking to advisors who wanted to sell, and then taking them to one of our buyers. Finding sellers or merger partners can prove elusive for buyers going it alone. Experienced M&A consultants can save buyers significant time in the search phase by matching buyers with ready sellers. Consultants working with advisors on business development and succession planning can also provide insight into who is actively seeking to buy and who is ready to sell.
3. Find The Right Fit
Sellers want to make sure a potential buyer is a good fit for them, their clients and their staff, especially if they’re planning to stay on for a period of time. As a result, buyers need to position themselves as flexible businesses with clear processes and procedures in place. A buyer’s ability to demonstrate efficiency as well as the ability to attract and retain strong client relationships and provide exceptional client service can be a significant differentiator from a seller’s perspective.
4. Consider Creative Solutions
Increasingly, advisors are finding ways to sell their businesses but remain working by easing out of the business. Many are dipping a toe into retirement by selling their business but remaining on for three or more years to work for the acquirer. When they’re ready to fully exit the business, the remainder of the purchase price is paid out of seller financing.
In 2015, this type of deal structure will also work well for advisors looking to get in front of the market. Many advisors want to monetize their businesses and create liquidity now because industry demographics suggest that a glut of sellers in the next five to ten years may drive valuations down. Another factor driving this trend is the tendency for advisors nearing retirement age to work fewer hours, focusing on existing relationships instead of acquiring new business. If business is static or in a decline, they’re losing value. Advisors who feel their business has peaked want to sell and monetize the business at the top.
5. Negotiate The Deal
Once you’ve positioned yourself as a buyer and are ready to negotiate a deal, there are a number of components to consider, including valuing the business, structuring and financing the deal, and transitioning the business. This is where an experienced consulting team can provide significant value and insight. A strong succession plan with a buy-sell agreement in place will also prove advantageous in facilitating deals.
With a strong buy-sell arrangement in place, they’ve already negotiated the deal structure and valuation of the business. It’s just waiting to be executed.
Part 2: How to Avoid Common M&A Marketplace Pitfalls in 2015 provides additional insight on how to best structure, finance and execute deals as the M&A market continues to pick up speed.
As senior vice president of Strategic Business Solutions at LPL Financial, Jeremy Holly oversees an experienced team of industry consultants with backgrounds in finance, business consulting and succession planning. His team has facilitated and consulted on over 50 closed transitions this year.