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. (