In the first day of July 2017, I was excited to announce that McGill Advisors Inc. had become a division of our Atlanta-based firm Brightworth. McGill Advisors was a well-known Charlotte, N.C.-based independent registered investment advisory, one primarily serving the dental industry nationally. The transaction nearly doubled Brightworth’s number of clients to more than 1,200 and doubled assets under management to more than $3 billion while further expanding our footprint in the Southeastern United States.

The process leading up to this announcement was complex, testing both parties’ resolve, but it also helped us grow stronger as an organization. As merger and acquisition activity increases, I believe our experience offers lessons to other wealth management firms, including those advising their small and medium-size business clients considering similar steps.

Deciding We Were Ready

When I first announced to staff we were pursuing a significant acquisition, I was asked a direct question: “What makes us [meaning you!] think we are ready to do this?”

It was a fair question. But I have been involved in two mergers over my career and led a few small acquisitions, so I felt our leadership team was ready for the commitment the deal would require. Brightworth had recently purchased a retiring practitioner’s book and rolled in a team of advisors from another RIA.

But it was also true that these experiences, while valuable, paled in comparison to this new challenge.

Our strategic financial partner, the Fiduciary Network, provides us with the necessary capital for mergers and acquisitions. We are also 10 years into a formal succession plan, and our next-generation partners now own more than 50% of our firm. We have been dedicated to building our firm through both organic and inorganic growth, and our M&A strategy means seeking firms with the following qualities:

1. Strategic location: We want to move into areas with advantageous demographics, the right distance from our Atlanta location, with the right population growth rates, per capita millionaires and advisor density.

2. Strategic talent: The firms we look at should not only have good leaders in place but leaders in place to succeed them, because our professional staff is not large enough that we can ask individuals to relocate after an acquisition.

3. Strategic market segments: We want the firms we look at to be able to add new business segments not yet served by Brightworth. That immediately gives us expertise in more than one office.

4. Succession needs: The firms we consider acquiring require capital to address their own succession needs, something time alone would be unable to solve.

The acquisition of McGill met all four of these criteria.

Managing Expectations of the Future

In a complex business transaction, more must be managed than just the process. Most important is managing expectations: yours, your staff’s, your partners’ and those of the team you acquire. The Fiduciary Network’s experience was as important as its capital. In some ways, it was easy to create the critical deal structure and align the partners’ economic interests. Perhaps more challenging was managing the psychology of top-level stakeholders who would be signing the closing documents. These included:

• All Brightworth partners, both those in the first and second generations;

• Our funding source, the Fiduciary Network;

• All the McGill partners, including the first-generation partners leaving the firm, as well as the first- and second-generation partners who chose to stay.

It was critical to understand the interests of these parties in the negotiations—their emotions, career goals, relationships and economic interests. Most important was understanding their expectations for the future, since their future was about to change. Helping them prepare for a new one with new partners was our responsibility as acquirers. During this process, we knew that if we were not clear, some assumptions could be perceived as promises, while real promises could be misunderstood.

Managing the expectations of individual stakeholders also meant understanding their self-interest. In an acquisition, people are first concerned about how it affects them personally—at least until they are confident they are going to be properly rewarded for their contributions and importance. We also understood that all the stakeholders had some leverage (particularly in the client relationships they enjoyed) that they wanted recognized.

Because we allocated stakes in the organization in a way that reflected the contribution and importance of individuals (not just basing it on their “legal” ownership), it was easier for us to ask these individuals to not only accept but ultimately enthusiastically support the acquisition. Certainly, not everyone’s interest was identical. However, several of my partners gradually shifted from asking “How are we going to do this?” to saying, “Wow, what a future!”

As trust was being built, we watched for the very human tendency to see “ghosts” where none existed. We paid close attention to how individuals responded to different requests. We also watched closely to see what was driving compromises. Was it the desire to get the deal done or the spirit of developing a more equitable transaction? Taking the time to understand the reasons behind compromises was important, as was remembering that initial compromises can be changed at a future date.

At times, people showed great self-interest. But at other times they showed a willingness to sacrifice for the betterment of the future firm. It was important for us to observe and understand these behaviors to move a complex process forward and help identify future high-capacity leaders on both sides of the deal.

Additionally, Brightworth built trust by including second-generation partners on our management and other key decision-making committees. First-generation partners made some concessions in their own financial interest to second-generation partners to better reflect the upcoming leaders’ contribution and importance to the firm and the future growth of their divisions.

The Dealings

Part of the challenge in acquiring a large and growing firm is understanding our boundaries and knowing they would be tested. We had to know the difference between what we must have and what we would like to have. This included the way we addressed the investment philosophy—something every firm holds dear. Fortunately, both firms not only found common ground, but we will have a more robust set of solutions for clients going forward. Doing an acquisition is a great opportunity to re-evaluate that philosophy and reaffirm what you truly do for clients.

We also invested a great deal of time and effort in drafting our letter of intent. An acquirer must detail certain issues up front, while others can be addressed in the transaction documents. However, any issues with the letter of intent must be dealt with first, and that will often lead to multiple discussions up until the finalization of the purchase agreement. Identifying the issues that have to be addressed early (as opposed to those that can be spelled out after the transaction is closed) is critical to an expeditious process. Likewise, ensuring that people will have a future voice in those post-close decisions is helpful.

Other Takeaways

On the day we announced McGill had become part of Brightworth, most of the staff in both cities immediately pivoted into the process of integration. While I was also preparing for these challenges, I drew strength from knowing we’d already successfully developed and implemented an acquisition strategy, one that positioned us for strategic growth.

But there are some additional thoughts for potential acquirers:

• Don’t fall in love with numbers. It is important to remind your partners that an acquisition model is just that—a model—and to think in terms of the long-term value and risks of the acquisition.

• If the only thing you get initially from the transaction is additional great talent, you’re ahead of the game. Our industry is in a talent race, and it’s easy to underestimate the future value of acquired talent.

• The time and expense of acquisitions require that smaller deals are more standardized in their terms, economics and structure. Larger deals will always require customization.

• If the process of managing expectations is done well, there will be a dramatic and positive change in the aspirations of the acquired talent on the day after you close.

• If your firm’s next-generation leadership is up to the task of learning and committing to the process up front, they will step up the day after you close, enthusiastically getting started with the transition. 

Ray Padrón is managing partner at Brightworth.