While the benefits of M&A deals are well recognised, two directors unpack why “scale for scale’s sake” can lead to several complications for financial advice businesses.
The financial advice profession is no stranger to enacting mergers and acquisitions, as smaller practices often look to merge with other players to stay afloat.
Additional scale can provide cost-efficiencies for advice practices, enabling them to service more clients and offer greater work/life balance for directors compared to being a one-man band.
However, if they opt for scale via inorganic growth, then advice firms need to be aware of the challenges that may arise if they aren’t adequately prepared, industry experts have cautioned.
Earlier this year, Rob Jones, co-founder and owner of financial services consultancy Peloton Partners, said: “Too often acquisitions are done poorly in this country, the expectations are unrealised, the cost is high, integration is elongated and therefore it hasn’t gone particularly well for the firm that is an acquirer.”
Speaking with Money Management, Jurgen Schonafinger, director and financial adviser at Templeton Advice Group, reflected on a previous M&A deal completed by his business.
“In my experience, scale for scale’s sake comes with a lot of problems. We bought a business in 2018, and while it was cheap and a great buy, it didn’t really help us because it took our focus off what we were good at. It really mucked us up until we got it embedded into our main business,” he explained.
One of the key red flags that might appear when looking for a merger partner is lack of cultural alignment, both on the client and adviser side, the director acknowledged.
“I’d never buy another business if you have too many differences culturally, the clients have different expectations, and the advisers that come with it are different. It’s like herding cats.”
Callum Mitchener, managing director of Wealth Architects, reinforced Schonafinger’s viewpoint. Having completed 15 purchases, Mitchener emphasised the potential dangers of M&A and detailed potential red flags that may arise during the due diligence process.
“Scaling up does have plenty of risks, and for smaller firms could even be ‘the straw that breaks the camel’s back’ if you get the due diligence wrong. For us, M&A has been a successful experiment, however we have seen just about every scenario play out.
“One has cost us upwards of $600,000 in unexpected cash flow injection to keep the purchased business afloat,” he told Money Management.
Wealth Architects has been looking to expand via acquiring regional advice firms and is also targeting advisers looking to leave the large licensees and helping them run their own business.
Mitchener warned practices that are considering M&A to beware of advisers who are selling their business and want to stay on for several years post settlement. Combining high and low performing practices is the largest challenge, he argued.
“Remember if the adviser has a high performing business, they would not be selling in the first place. For the adviser to be selling the business, they have either ceased finding quality clients or their profit margins are below 20 per cent.
“If they weren’t a high performer before settlement, they will not be post settlement – especially if they are now sitting on a decent nest egg. Combining high and low performing cultures is the biggest challenge in M&A,” Mitchener said.
To prevent this issue from occurring, both directors highlighted the importance of taking several months in due diligence to assess whether the two businesses are strongly aligned, rather than rushing into a deal.
Schonafinger said: “We’ve only done [M&A] once and we probably won’t do it again. If we did do it again, it would be after a long period of due diligence. It wouldn’t be, ‘Let’s work out a price and get it done.’ It would be months and months of making sure we are aligned on so many different levels.”
Similarly, Mitchener encouraged potential buyers to have a detailed M&A checklist for the seller to complete before commencing a deal.
“You will work out very fast if things are in order or in shambles. If the entire M&A process is not taking you at least two months from due diligence to settlement, you are probably missing something in your fact-finding mission,” he concluded.
Last year, Mutual Paraplanning Services put forward five key considerations for advice practices looking to merge, such as understanding the firm’s long-term objectives and having close alignment of values.
