It was 2009, and Matthew Charles Collins was close to selling his practice. In the wake of the global financial crisis, the 17-year MDRT member from Mona Vale, New South Wales, Australia, spent each day talking to four to five clients about how much money they had lost while trying to steer them toward a positive attitude about the future. Not only was the process wearing him down, but as the only revenue-generating advisor in the practice, he also hadn’t written any new business for an entire year.
“I got to the point where I thought, I can’t keep doing this,” he said. “It was just too hard.”
Before he could pursue a possible sale, though, he was approached by two leaders of a nearby practice that was about the same size — but with a handful of advisors who had time to tackle more clients and more revenue. So they reached a deal in which some of Collins’ staff would join the new business and some wouldn’t, while Collins, at the time 40 with no plans to retire, would remain an owner in the business with 20% of the larger entity.
More than a decade later, the holistic planning firm has 33 staff members and several advisors with equity in the business, with Collins remaining the second-biggest shareholder.
This gets at two of the biggest and best reasons advisors pursue a merger: scaling a business and balancing your own priorities, said Ray Miles, founder and chairman of Fortnum Private Wealth, Australia’s third-largest licensee (known elsewhere as a broker-dealer) and Collins’ former boss.
“The goal of most mergers is to stabilize the business to keep it going if you go on a long holiday,” said Miles, who has had a high-level view of nearly 300 mergers and direct involvement with dozens. “The biggest roadblock of the merger is who will be in charge.”
The leadership conversation
To avoid conflicts between strong personalities, Miles recommends utilizing external mediation throughout the merger process to help determine the deal and, if necessary, resolve any disagreements that come up afterward.
“There will be issues along the way, but they can be resolved if you have the right cultural fit and the right attitude,” he said. “It’s like a marriage; there are pretty rocky times in some marriages, but if there’s a desire in both parties to make it work, it’ll work.”
Collins experienced this firsthand five years after the aforementioned merger when his business partner, Damian, wanted to execute another merger with a larger business nearby whose owner, John, was considerably older and closer to retirement. Over lunch one day, Damian and John agreed to the merger, with the two businesses joining into a new entity after undergoing separate valuations and an exchange of cash so that the merger was 50-50. Simple, right?
Hardly. “The guy we merged with had always worked for himself and been the boss, and there was no way on earth he was going to play second fiddle,” Collins said. “We had this clash of two people who had always controlled their own destiny. Issues that should have been worked out before we merged the businesses together were not resolved.”
The arguments ranged from broad issues (who would be managing director, what each person’s role would be) to smaller, everyday disagreements, until the two formerly good friends struggled to be in a room together.
Even though John was 70 and progress toward succession should have been possible, the owners determined it would be better to demerge the business before things degenerated any further. As you might expect, this cost “a lot of money, a lot of time and a lot of heartache,” Collins said.
Obviously, you don’t want to be in a position where you experience any of that, including moving back to your old office and demerging the clients you’ve just merged. To avoid this, Collins said, it’s essential to have all necessary agreements in place beforehand regarding what role everyone will play in the merged entity. “In my experience, pure 50-50 mergers very rarely work,” he said. “There has to be somebody who is going to be in charge and have the final say. To be fair and equal would be very difficult to achieve.”
According to Miles, that equalization can be achieved through a cash payment to balance the scales. But even a 50-50 split won’t matter if personalities clash. At least one person needs to be good at operations to watch over all relevant systems and processes, he said, and a “purpose person” who focuses on helping others will struggle to work with a “scorekeeper” who focuses more on their own financial benefit.
To merge or not to merge
Of course, when considering a combination of practices, there are alternatives to a complete merger. And rather than focusing too much on the definitions of what is or isn’t a merger, advisors are wise to instead zero in on the decisions that will lead any blending of businesses — whether it can be labeled a merger, an acquisition or somewhere in between — toward prosperity or problems.
Mathew Paul Gale, CFP, FChFP, who has four advisors and five admin staff in his practice handling financial planning for high-net-worth clients and retirees, has bought five client books in the last seven years. The closest to a merger took place in 2017, when an area advisor who was retiring offered to sell Gale, a 19-year MDRT member from Sutherland, New South Wales, Australia, his business. Gale thought the business was too big for him to fully acquire. What sounded better was when one of the business’ advisors, Andrew, offered to bring his top clients over to Gale’s practice.
What was proposed as a buyout, Gale said, became a selective acquisition, and arguably counts as a merger because Andrew stayed on and still works for Gale, doing a lot of work with high-net-worth retirees.
Gale utilized this approach in another situation, bringing along one advisor as well as carefully selected clients. In a few other circumstances, he merely selected the clients he wanted, opting not to buy entire books or hire additional staff. It all happened in the wake of his first purchase, in which he acquired all of his soon-to-be-retiring father’s clients and wound up with a long tail of less-desirable clients.
“After the fourth or fifth time, I became wiser about these things and, if it works out, where the business is going in the future,” he said. “I’ve seen advisors buy books of business and end up with a huge administrative burden. You need staff to look after them.”
Another part of what informed these decisions, he said, was knowing the people from whom he was purchasing clients and being able to be personally introduced to the top clients, ensuring a cultural fit and consistency in terms of the way clients were and would be served.
Of course, being selective and strategic comes with the territory with any purchase or sale. It takes time to understand another practice and how it relates to how you operate, quantitatively and qualitatively. Recently, with many practices struggling with the compliance challenges presented by new regulations, Collins has communicated that smaller operations interested in merging into his business may take 18 months to move over their clients, and anyone moved during that time would be converted into equity in the larger firm.
“Rather than having to be out on their own, they can merge with us and develop equity with a larger operation,” he said, noting that he has done this successfully with four advisors.
Again, though, it’s all about the right people both in and out of the office. Miles said the most successful mergers he has seen sometimes involve joining three businesses together. It all depends on the motivation, and chasing profit can’t be the key driver in the short term. Rather, identify the details, the fair value for all involved, and of course, who will do what. Because it’s not about the definition, but the outcome.
“It may be an unequal merger,” he said, “but it’s still a merger.”
Contact
Matthew Collins matthew.collins@financialdecisions.com.au
Mathew Gale m.gale@gjpw.com.au
Ray Miles fortnum.com.au