In our work with acquisitions over the years we have identified a few consistent reasons why purchases or mergers fail:
Incompatible client base
Frequently, buyers and sellers talk conceptually about synergy, but do not adequately contemplate what makes them stronger as a combined entity.
For example, if one practice serves wealthy individuals and the other is geared toward “mums and dads,” there will probably be little compatibility in the processes used to serve both constituencies. Different expectations can often lead to different service standards and indeed variances in the range of services offered.
So, rather than benefiting from the combination, the parties may actually lose because of a dilution of focus and resources.
Things which constitute an incompatible client base may include:
- Client demography (age and income, for example)
- Substantial differences in client asset holdings which may require specialist skills (direct share portfolios, SMSFs, life insurance)
- Different remuneration styles (fee-for-service versus commission-based)
- Different servicing standards (e.g. different numbers or types of client review conducted for a similar fee)
- Different approaches to model portfolios
- Multiple platform business
- Different fee structures/levels
Lack of commitment
There must be full commitment to the combined business by all parties to the transaction.
For example, if two practices plan to merge, it’s important that they each ascertain the level of excitement and commitment the other has for this transaction. If they are merging because of burnout or boredom, it’s highly unlikely that a change of scenery is going to stimulate them enough to make the combined practice successful.
The lack of commitment can also be found in an existing partner’s lack of desire to grow. It is critical that all partners in the acquiring practice have bought into this process before they proceed with a merger or acquisition.
Failure to add capacity
Transforming a merged client base into profit requires hard work. The seller often has to take an active role and the buyer runs the risk of neglecting their existing client base.
As a seller, consider whether the buyer has sufficient internal capacity to handle both existing clients and new ones, and what their plan is to address these types of issues. Their ability to integrate your business is critical to both parties, especially if payments are structured over a longer time frame.
No transition plan
Perhaps because most practitioners do not have experience with mergers and acquisitions, there is some naiveté in how the business will work once the transaction is consummated.
The greatest reason for failure in all of these transactions is that nobody has planned how the transition should actually occur, and in what time frame. Incorporate a transition plan into the agreement so that there is due consideration given to the process.
The ultimate purchase price may depend on some performance test related to the transition itself.
Your road map for a successful merger or acquisition should include these key points:
- Ensure the interests of the clients (from both buyer and seller’s businesses) remain paramount. Don’t lose sight of them!
- Ensure the new owner is introduced to all “A” clients of the acquired business as soon as practicable.
- Determine the role of the outgoing owner and communicate it to all staff – quickly.
- Communicate frequently (and meaningfully) with staff as well as clients. Don’t let the grapevine do a job on you!
- What about the staff who are left behind? What are their expectations and/or legal entitlements?
- Establish a realistic timetable for the achievement of milestones in the transition process. What are your key objectives for the merger? In other words, how will the buyer assess success?
While the prospect of realising the value of your business can be an exciting one, it’s also very important for both parties to do their homework. The best succession deals are those that represent a win for both parties.
This means having a compatible client base where the new owner can leverage their existing skills to service the new client base, both parties are committed, there is sufficient capacity in both businesses and there is a well-documented plan in place.
Advisely Partner
