Do the deals NFP-acquired firms got still look good in retrospect?

    When National Financial Partners burst onto the scene as Jessica Bibliowicz's "roll-up" entity in 1998, advisors probably didn't get its full import. What it offered firms that opted to come under its umbrella was unique in all respects: financially, synergistically and career-wise.
    Financial advisory firm owners would sell their companies to NFP, continue running them indefinitely under the companies' individual names, and rake in some cool cash and stock (with the promise the stock would trade publicly later on). But has this vision jelled as expected?
    According to NFP Executive Vice President of Marketing and Firm Operations Elliot Holtz, it has. Holtz was the first executive team member Bibliowicz hired in the spring of 1999, so he helped conceive the NFP strategy and has watched the company grow according to plan. And that plan has entailed the purchase of not only financial advisors, but insurance and employee benefit companies, as well.
    Says Holtz, "Our present makeup is about 43% life insurance and estate planning companies, 43% corporate and executive benefit firms, and 14% financial planning and investment advisory firms. The financial advisory portion is relatively smaller, not because we haven't focused on that segment or because those companies haven't grown, but because we've purchased some very large employee benefit firms. Those and the insurance firms continue to outperform the market, so there's been more growth on their side."
    NFP doesn't advertise extensively to attract new firms to its fold. It simply goes after the ones its due diligence identifies. "We look for firms with a reputation for service and integrity, with owners interested in continuing to work and grow their business who can appreciate the scale and resources we offer as a larger company. Our due diligence is very thorough. We look at regulatory records and history, we do background checks on all the principals, and financial due diligence which includes the firms earnings history, opportunity for recurring revenues and growth patterns in both good and bad years," says Holtz.
    The average age of the principals running the firms NFP turns up in its searches is 47, so they're typically not a group of people looking for a way out. Every owner commits to stay and continue running his or her firm for five years. Thereafter, his management contract renews for one-year terms. As Holtz sees it, "No entrepreneur would walk away from a business with his name on the door that's continuing to perform. The management contract we give him entitles him to the earnings of his business in perpetuity."
    An NFP acquisition prospect stands to make good money if he plays his cards right. First, he understands that he is agreeing to continue indefinitely in his entrepreneurial and managerial role of operating and growing his financial advisory business. Second, he can expect to receive a multiple of a portion of his or his firm's earnings before owner's compensation, or what NFP calls target earnings, right from the start, with the opportunity to augment that at the end of the first three years. This lump-sum payment comes in the form of a combination of NFP stock and cash, and he has some flexibility in the amount of each he chooses. Third, he can expect to share in the earnings of the firm according to a fixed formula. Because his status after merger changes from salaried employee to independent contractor, he earns no salary.
    Here's how the terms of the deal actually work if we put some numbers to them. Suppose the advisory firm owner is realizing $3 million in revenue at the time of the merger, his company's expenses before owner's compensation are $1 million, and owner's compensation is therefore $2 million. NFP capitalizes half of that owner's comp, or $1 million, and pays the partner a five-times-multiple on that, so he receives combined NFP stock and cash with a total value of $5 million on Day One.
    If, over the first three years, the newly acquired firm manages the business so as to achieve an average rate of growth in target earnings of 20% or more per year, he gets an additional 2.5 times those earnings. So let's say target earnings of $2 million have grown 20% in each of the three years following the merger to $3,456,000 in Year Three, the merger partner would get 2.5 times the initial amount capitalized, or another $2,500,000.
    Now for the earnings sharing portion. Suppose we're at the end of Year One. In the first year, he's hit target earnings of $2,400,000, or $400,000 more than in the year just preceding the merger. NFP gets its "priority" amount of $1 million, the merger partner keeps $1 million, and they split 50-50 the remaining $400,000. All in all, not a bad deal if you can get it.
    Since inception, owners have taken, on average, 47% of their up-front payments in stock and 53% in cash. Ray Ferrara, owner of NFP-acquired ProVise Management Group LLC in Clearwater, Fla., says, "I wish I'd taken more stock and less cash, but I didn't want to have too much tied up in one company." A review of NFP stock's performance gives meaning to Ferrara's sentiment. Since the IPO opened about 18 months ago at $23 (closing the same day at $26.25), NFP stock has seen a low of $24.71 and a high of $37.37, trading as of this writing at $34.80.
    NFP appears to have succeeded in a game where other consolidation players have stumbled do far. Says Mark Tibergien, head of the financial services group at Seattle-based Moss Adams LLP, "NFP surprised many people with their success in rolling up firms and going public. The aftermarket has supported a premium price over the IPO, which is also intriguing. In our studies of roll-ups, they did the right things: They were well capitalized, they moved quickly on their acquisitions and they were fast to market."
    Of course, much of the NFP stock gain is off limits to NFP-acquired firm owners. "Owners were able to sell during the IPO and in a follow-on offering earlier this year, but can't sell any time they want," explains Holtz. "The next time they can sell is fall of 2005." NFP's stock restrictions lapse completely after five years, so an owner who sold to NFP in 2003 reaches the end of his management contract and is free to sell his stock at about the same time, in 2008.
    But would the typical owner want to do that, or is he happy enough with his deal to want to stay with NFP beyond that juncture? It depends on each owner's personal circumstances, of course, but if all of its financial advisory firm owners are thinking along the lines of the three we talked with, NFP's future looks bright. Owners, and the successors they are grooming, are pleased.
    Christiane Delessert built her Waltham, Mass., firm, Delessert Financial Services Inc., from the ground up. In her mid-fifties, Delessert hired Tibergien to help her think through a succession plan. "With Mark's help, I had given away about 20% of my firm," says Delessert. "I was trying to figure out who would be my successor: Would it be one person, two, a committee? I had never heard of NFP when I was approached by them in June 2002. I listened to their story, and it sounded like the right way to get some equity. And I liked the fact they would leave me independent."
    As Delessert moved into the transaction with NFP-which proceeded rapidly to an October 2002 conclusion-one of her two key employees dropped out, leaving Christopher Dalto, now a principal with Delessert, to move into a key succession role. "I saw a way of getting value for my equity ... my succession plan became clearer," says Delessert. "NFP started looking at Chris from the beginning as my obvious successor, and treated him that way. So a lot of the goals and objectives I'd been working on with Tibergien suddenly were solving themselves."
    What did Tibergien think of the deal? "His words," says Delessert, "were, 'It's a fair deal.' Mark had independently valued our firm a bit more highly than NFP did, but Mark encouraged me to look at the growth potential and incentives being offered by NFP."
    Says Dalto, Delessert's successor, "The process for me was interesting because there were concerns about which direction the firm would be going. I knew Christiane would be liquidating some equity in the firm. Internally, we were having a lot of discussions to the effect of, 'Well, we built this firm with certain ideals and philosophies, we want to stick to those ideals if we partner with another firm,' and that's what made the NFP offer interesting. We believe in a fee-only philosophy and don't sell any products. 'How will we fit into your culture?' we asked NFP. They said, 'Christiane has built a great firm and her clients are obviously comfortable with her culture, so the last thing we want to do is change that.' That hit home with me, and that's why I'm still here."
    It's been two years since the NFP acquisition. Is Delessert satisfied? "Yes, but I've had a number of adjustments to make. That may sound negative, but it's really positive." Delessert had to adjust to NFP's being a public firm wanting to standardize its operations, a positive thing since this is where the synergies come from. "We've needed to accept that we're no longer writing our own checks or doing our own accounting, reporting or cash management. Sometimes I feel a little like, 'Gee, where's my baby going?' But these are the benefits of standardization," says Delessert.
    Adds Dalto, "The standardization of our financial controls has been a big adjustment, but it helped us with the random audit we just had with the SEC. Our controls are now so tight."
    The synergies and economies of scale offered by NFP affiliation isn't lost on its acquired firms. Says Ferrara, "I've got a team of brothers and sisters with the other NFP firms that carry expertise we didn't have before [i.e., employee benefits, insurance and wealth transfer], so we can offer those things to clients and feel confident that a high-quality service will be provided. In the areas of software, computer equipment, airborne services, accounting procedures and systems, all of those things we get from volume purchases by NFP."
    Gary Ambrose, owner of New York City's Personal Capital Management, another NFP-acquired firm, has come to appreciate NFP and its business model. "NFP had the highest level of integrity. Everything they said they'd do, they did," he says. "They said they wouldn't dampen our entrepreneurial spirit, that we wouldn't be working in a 'corporate mode.' They said if we're running successful practices, we should continue doing so. They said they'd provide new resources and higher levels of support and compliance, and they have. Their Web site provides lots of information on running a business, on marketing, management, financial information, things that have enabled us to provide a more streamlined service to our clients." Ambrose is satisfied that the synergies NFP promised have been delivered.
    As for her succession plan, Delessert now has the flexibility to remain involved or not beyond the end of her management contract in three years. "I will have passed the firm on to the next generation. As to my involvement, I may still be in charge of some clients, or might even do some things at the NFP level," says Delessert.
    What does the future hold for NFP, its acquired firms, and its stock? Says Ferrara, "NFP stock has done well because investors see the synergy NFP is creating. The other thing important [to NFP's stock gains] is the leveraging we've gotten from the quality of people in NFP's home offices and their willingness to perform. They don't say no, they just solve problems quickly."
    Adds Tibergien, "I think NFP's next challenge is to consolidate practices in markets where they have a presence. For them to create momentum, they need to achieve critical mass in each of their markets, so I would be looking at 'tuck-in' mergers as a key strategic initiative. Additional synergy will come from closer integration of practices in specific markets. Growth will be key to keeping the next generation of advisors interested in the business. Will these up-and-coming advisors in the individual businesses feel like owners and have the same opportunities [the original owners had] to achieve a substantial capital gain above their current income? I think NFP is looking at this question, and they've demonstrated an ability to be decisive on such nettlesome issues."

David J. Drucker, MBA, CFP ([email protected]), is editor of the Virtual Office News monthly newsletter ( and a principal in Practice Merger Consultants Ltd. (