Is Acquisition – or Merger – Worth It?
Practice Management & Strategic Issues

Is Acquisition - or Merger - Worth It?

November 6, 2017
by Tony Vidler  CFP logo   CLU logo  ChFC logo 

Many firms facing increased overheads and infrastructure costs in the next few years are considering acquisition or merger strategies as a survival or growth strategy.

 

Generally there appears to be  5 main reasons that advisers suggest as their reasons for acquisition of another business.  They are:

 

 1.  Get new clients

2.  Increase business turnover

3.  Increased cost efficiency

4.  Diversify business lines

5.  Enhance market position

 

ALL of these reasons offered CAN be perfectly valid and logical moves for a smart business owner….

 

BUT….there are many occasions where some simple questions can head off a purchasing (and/or financing!) disaster too as growing through acquisition or merger may well compound problems, rather than lead to a better business.

 

Some of the issues or questions to consider prior to deciding that this is the right strategy for growth would be:

 

Get New Clients

 

The one question that I ask immediately when encountering this idea for acquisition is “what’s wrong with the business – or the clients – that you have?”

 

It may be that there’s nothing actually wrong with your existing client base, though it is usually suggested that there are just not enough of them.  Usually that suggests a problem with the business model of the firm: too focussed upon transactions and insufficiently focussed upon delivering valuable service and ongoing advice.

 

Even if the business is fundamentally delivering value to existing clients though, generally the desire to simply add more of them rapidly through acquisition suggests that there are some likely problem areas already within the practice, such as:

1.  Poor or inadequate marketing (which may be a wide range of things such as branding, positioning, value proposition, etc)

2.  Poor engagement (you’re generating leads and business opportunities, but not engaging or converting enough of them)

3.  Inadequate sales skills (people in your business are blowing the good work done by your marketing perhaps)

4.  Poor business systems (inadequate information and data management; poor advice processes; etc)

5.  Providing the wrong thing (amazing but true!  often advisers with a business problem are simply not giving their natural – or target – market what it is they actually want and are willing to pay for)

 

Often there is a belief amongst advisers that simply having more people to see, or “fresh” clients to wheel out the same story or service offering to, will somehow transform their business.  What is that old line about “doing the same thing but expecting different results….“?

 

Increase Business Turnover

No doubt, adding more paying clients will increase turnover, or gross revenue.

 

But does that actually help?

 

Two simple questions are a logical starting point:

1. How much extra turnover, or gross revenue, will the new clients bring in?

2. How much of that gets to your bottom line?

 

The financial focus for acquisition should be on profitability for the business, rather than merely turnover.  While this may sound like ” business 101″ it is an often forgotten point.  This rationale of simply pursuing increased turnover quite often suggests an existing business that has little internal financial knowledge or systems…in other words, a business where just adding bulk may well compound any existing problems.

 

 

Improve Cost Efficiency

 

This is potentially an excellent reason for acquisition, particularly in businesses that have relatively high proportions of fixed overheads and relatively low service delivery costs per client.

 

Once again there are two simple questions to begin with if this is the motivation for acquisition:

1.  How does it improve your cost efficiency?

2.  So, how much do the anticipated cost savings add to the bottom line?

 

The first is a really big question that reveals very rapidly the level of understanding that the existing business owner has of their own business fundamentals.  Asking them to think through the areas where costs may be saved, and then identify the details of those theoretical cost savings, is illuminating.   It is also an area which is usually seriously over-estimated.  Rarely do the synergies and efficiencies from acquisition or merger flow through quite as well in practice as they did in theory.

 

Most financial advisers (despite their personal financial literacy) have poor data and therefore poor internal intelligence on their own client profitability – how the different types of costs are allocated across different types of clients within the firm; what the marginal cost of each additional client will be in servicing or efficiency within their business; how the fixed costs will be affected by additional capacity requirements and so forth.  If that is the case, then it becomes very difficult to assess the efficiencies that can be gained from acquisition with any real accuracy.

 

 

Diversify business lines

 

The argument here is that the new business introduces additional opportunities to the practice through the acquisition of intellectual property, people or systems.

 

When this is provided as a reason for acquisition one of two things is occurring:  either it is a clear sign that there is a complete lack of strategic clarity and planning ability; or; at the opposite extreme, there is very good strategic thinking at work.  Business owners looking to acquire for this reason are either thinking “I need more stuff to sell”, or, they have a clear idea of where their business wants to be positioned in the future and have decided logically that it is cheaper to purchase the next piece that moves them closer to the goal, rather than to spend the time and money in development themselves.

 

It is just a matter of working out which of those two conditions are prevailing….and once again a fairly simple question gets to the heart of it:

how do the new business lines lead you more quickly to achieving your vision?”

 

If it is the later reason for acquisition, then generally it can work out very well indeed.  If the former, there is a tendency once again for an acquisition to be less successful than anticipated.

 

Enhance market position

 

Bigger is not always better, and if the rationale for increasing in size is merely to cater to an egotistical drive or need it is probably a waste of time.  However, bigger can certainly be more valuable.

 

One of the best examples I have heard of was a financial adviser whose business had grown fairly large organically over many years, and after some sound strategic thinking they decided that “get big quickly” was the right way forward.  The reason?  To sell the business at a premium price and retire.  A series of rapid fire small acquisitions, a re-branding exercise across all new purchases, implementation of some standardized systems…and 6 months after all of that sell the lot at a vastly higher price then they could otherwise have done.

 

As an exit strategy it can be risky – but very worthwhile.  Whether it is worthwhile really does come down to that clarity of vision once again though.

Buying another business to grow your own can be a great move without doubt.  But, one should really question the motivation, the rationale and understand thoroughly and logically what the benefits from acquisition are.

If you do so, then there is a very good chance that the pieces will fit together well for you.

 

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