There’s no doubt the advisory industry is consolidating, but it’s not a process of splashy acquisitions. Instead, many top firms are joining forces with like-minded smaller firms, and at times with each other, to form bigger organizations with larger market footprints. Big acquisitions with high valuations garner all the publicity, but a quiet current of mergers is powerfully transforming the industry, and such combinations may become one of the primary succession mechanisms for midsize firms.

An investment banker told me once that “there is no such thing as a merger—someone is always being acquired.” While this may be true—and the vast majority of mergers in the industry are between larger firms and smaller ones—there must be a reason that firms prefer to call them “mergers.” I believe it indicates a sincere desire to collaborate.

The interplay can be amusing: It is clearly a market where everyone wants to buy, but no one is selling. In our 2016 survey of the industry, we found that 83% of all the firms in the industry had actively sought to buy a firm, but only 19% of the firms had sought to sell their own shares to external buyers. It’s more conspicuous among larger firms: The percentage of sellers drops to 5% if we only include firms with more than $250 million in AUM.

Yet 46% of all the firms in the survey had actively negotiated a merger. This means that while no one is selling, half the industry is considering merging. Somehow, no one is on but a lot of people are getting married!

What Is A Merger?
I believe the choice of mergers over acquisitions goes beyond semantics, and there are reasons both sides prefer the former:

• First of all, in most mergers, the founders and key executives of the smaller firm are not retiring or exiting but becoming very active in the new organization. In fact, this is usually a requirement of the other firm. Most firms would not want to merge with another if the founders are running out the door. Expectations are likely high for the new organization’s growth and development.

• There is little if any cash changing hands in many of the deals. Very often the two organizations exchange “paper for paper” and are both heavily invested in the future success or lack thereof. No one is putting money in the bank. In a way, both sides are doubling down on their investment.

• The client service history for both firms will be respected, and their compatibility is one of the vital criteria. The resulting combination should very rarely drastically depart from service methods that had worked before at both firms.

• The leaders of the smaller organization are not replaced or marginalized but asked to continue leading, only now in the context of the bigger firm. This is especially true in geographic expansions.

• A merger suggests a genuine desire to create a combination that represents the best of both worlds rather than a process of assimilation.
• Of course, no one wants to be acquired. It’s not something owners want to tell their clients or employees. “We are merging,” sounds better than “We are being acquired.”

The origin and history of the mergers are also different from those of acquisitions. Mergers tend to begin with conversations in a study group, drinks at the bar during a custodian conference, or from years of the principals knowing each other from common non-profits or industry boards. Mergers usually don’t begin with cold calls or the involvement of investment bankers—they tend to have more organic sources and follow a slower and more careful pattern of exploration.

Why Mergers Appeal To Many Firms
Founders often don’t want to simply sell because often they are either not “done” yet or they worry what will happen to their clients and staff if they give control to another entity.

We in the industry are keenly aware that founders are aging, but many of them outright reject the notion they are near retirement. Many are not in their 60s yet; in fact, more than half of the founders we work with are not yet 60. Even those who are often do not feel as if they are done. They still have the energy and the drive to do more and achieve more.

But they also realize that if they want to build a successful and competitive firm, they don’t have to do it on their own. One of the key things motivating advisors in the mergers we have observed is their desire to achieve more, not just “fund” their succession plan. Much like we see many experienced basketball players joining a contending team for their last one or two seasons, many founders involved in mergers want “one more run for a title.”

In an industry where attracting good advisors is becoming more difficult and more expensive, where technology is changing and evolving, where practice methodologies are progressing quickly and when serving high-net-worth individuals is getting more complex, many firms are asking a very important question: “Is the best way of achieving our vision working entirely on our own or should we join forces with someone else who has the same vision?”

Of course, many mergers are also rooted in concerns about the future of the profession. Almost every advisor worries about the next recession. Many also worry that fees may need to come down and that their profitability will not remain at its current enviable levels. Valuations have been high, but there is also a concern that when the entire generation of founders retires, they may flood the market and damage valuations. The logic is that it is easier to weather the storm on a larger ship.

Types of Mergers
The mergers in the industry can be classified in three categories:

• True mergers of equals. We have already seen several deals where large and very successful firms join forces and combine their respective people and strategies to create formidable competitors who are regional and will perhaps soon be national. Such deals are less common, but when they happen they transform the industry and many markets.

• The merger of large and small firms. These are combinations between midsize firms that are well established in one market and large firms with national or regional ambitions that seek a presence in that market. While one firm is larger and the other smaller, the combination is organic and driven by a desire to collaborate.

• The merger with a practice. Often, the owners of a successful solo practice choose to merge into a larger firm and join the existing partners. Such “tuck-in” mergers often go unnoticed from the outside, but the addition of one more owner and a great group of clients makes a real difference for the resulting firm.

Whatever the type of acquisition, they all tend to succeed or fail in the same way.

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