Five steps may help you avoid pitfalls and make your merger a success.
We have all seen the headlines. Major corporations are merging at a frantic pace. Everything from banks to cell phone companies are joining forces with their competitors to form larger, more powerful companies. The reasons may be diverse, but one stands out above others: profit. Larger companies command larger market share, are able to negotiate better deals with suppliers and have more leverage to face the remaining competition. So how does this relate to financial advisors? The simple truth is that mergers are not just for the rich and powerful. There may be solid reasons to consider a practice merger. There are also a host of pitfalls to avoid.
Step One
First and foremost is to determine why. Why do you
want to merge your financial practice with another financial advisor
(or multiple advisors)? The key to answering this question is to
determine the common ground. What item or set of items do you share in
common that would work better or simply be better in a merged practice
than by yourself?
Often the answer is profit, but not always. The
perception is that by joining forces, greater profits will
automatically ensue. As appealing as this sounds, it may not
necessarily be true. At best, if it is true, it will take time and
careful planning to ensure that the desired result is achieved. Common
ground, though, could be things other than profit. There could be a
perception of complementary skills or systems. One practice may be
proficient in securities trading or administration where another
struggles with those practice elements. Does this mean that by joining
forces, the two practices would truly complement each other and fill in
each other's weaknesses? Maybe not!
There are reasons why a practice is strong in one
area and weak in another, and it may be that by combining with another
practice you would end up compounding the problem rather than solving
it. This could be due to the resulting office culture created by two
divergent sets of systems, people and technology. Maybe the partners
can get along, but what about staff? People tend to resist change. A
merger undoubtedly would create enormous changes. You need to prepare
yourself for the resulting fallout from instituting such changes. You
also need to be prepared to make some tough decisions as you combine
practices.
Step Two
The next step is to put a value on each merging
practice and gain agreement on the methodology for determining that
value. There are all sorts of ways to value a practice. If you were
selling your practice, what would it be worth? It is one thing to put a
dollar amount on your book of business. It is quite another to value
intangibles such as potential growth, future income, furniture and
equipment, and to value of your employees. (Not that you are selling
your employees but; their training and experience bring an intrinsic
value to your practice.) As an example, let's say there are two
practices merging. One of them has three seasoned employees, with $30
million in assets under management, an office full of furniture and
brand new computers, and the financial advisor has 18 years of
experience in the profession. Compare this with the other merging
practice with a financial advisor who has three years of experience,
one new employee (part time), $4 million in assets under management and
two ancient computers that are way out of date. It is possible that
different methods would be used to determine value of each of these
practices. The key is to decide on what methods are used, gain
agreement on those methods and ensure that it is fair to all parties
involved.
Step Three
Consider the specific form of your merger. If you
know why you are merging, chances are you will also know how you will
be merging. Some examples of forms of mergers might be:
A full partnership: sharing of income, expenses, capital outlays, debt repayment, etc.
Income Sharing: The first assumption has to be that
all partners are working with and through the same broker/dealer.
Income sharing arrangements such as commission splits are common. Often
this may be an informal relationship based on a handful of client
situations. If, however, you and your potential partners wish to take
it to a more permanent level, developing a partnership agreement that
details the arrangement is advised. In this example, no expenses are
shared, just income.
Expense Sharing: There may be circumstances where
financial advisors choose to rent office space together, or hire
employees and split their time, and share such expenses without sharing
income. This is a very common type of partnership arrangement. It is
important to have a written agreement with all parties that obligates
each person to their respective share of the expenses. In the case of
long-term leases, consider the impact of what would happen if one of
the partners decides to leave the office, but is tied to a long-term
lease. In the case of shared employees, an agreement should be made on
who is managing the employee(s).
Step Four
The written agreement certainly is one of the most
important elements in a successful merger of financial practices. The
agreement should clearly spell out the terms of the merger,
compensation, expenses, responsibilities and initial ownership issues,
such as each partner's relative ownership value in the merged practice.
But the agreement also needs to spell out the consequences of violating
the terms of the agreement and/or dissolving the partnership.
It may seem odd to deal with the potential failure
of the partnership before you even get started, but it is a critical
component of protecting yourself and your potential partners. With such
issues out of the way, the partnership can focus on the more positive
aspects of working together with the knowledge that if it did not work
out, there is a plan of escape that protects everyone's interests. One
strong recommendation is that you seek legal advice on this agreement.
Don't try to draw it up by yourself. There are simply too many legal
pitfalls to avoid.
I spoke recently with a former member of a joint
practice who had originally put up the seed money for herself and two
other partners in the purchase of a building. Subsequently, the merger
went sour and, because the dissolution of the practice was not clearly
spelled out in the agreement, it finally took a lawsuit for her to get
her money back. Had the agreement been better constructed, such
additional legal remedies (and the costs associated with them) may have
been avoided.
Step Five
Planning and communication is the final step to
success in a merger. It is not enough to think of everything in advance
and put it into a written agreement. To make the merger succeed
requires ongoing strategic planning-regular partnership meetings where
everyone has the chance to discuss issues of importance and communicate
feelings about where the merged practice is going. Only by continuing
to foster open and honest communication can a merged practice reach its
goals and bring you the personal results you hoped for when you
embarked on this journey.
David Lawrence is a practice
efficiency consultant and is president of David Lawrence and
Associates, a practice consulting firm based in Lutz, Florida.
(www.efficientpractice.com)