‘Less alignment, more implications’: What to consider prior to M&A

Business Health has outlined the major considerations for buyers and sellers to be aware of to prevent unintended misalignment in M&A.

As M&A activity ramps up in Australian wealth management, the firm emphasised why strategic alignment across a number of factors is essential to a successful transaction.

Firstly, Business Health principal Tony Stephens said both the buyer and the seller must have clarity around the purpose of the transaction – whether it is to achieve greater scale, leverage infrastructure, access market niches, or acquire new capabilities.

“Depending on what the purpose of the transaction is, the seller or the merging entity will have something in mind as to why they want to do this. As a seller, it’s important to understand what the objective is,” he said on a recent webinar.

Echoing this, Terry Bell, principal at Business Health, said it is critical for both sides of the transaction to understand these objectives prior to entering into the deal.

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“I think the important thing is that in any situation – buying, selling, merging – there’s got to be some clearly defined objectives and it’s best that all parties know what they are before the deal progresses too far. That’s the bottom line – clearly defined, measurable goals,” he said.

When considering the similarities between the two parties, both principals warned that a lack of alignment could lead to potentially unwanted outcomes, especially in relation to client demographics.

“The less alignment in the client base between the buyer and the seller means that there’s more implications. An example might be around demographics,” Stephens said.

For example, issues could arise if a buyer with a younger client base were to acquire a business with older clients, as both businesses may provide different services based on their respective niches.

Fee structures are another major point of difference, Business Health said. Namely, an advice practice charging asset-based fees compared to a practice with fixed or flat fees would need to consider aligning.

“When you’ve got one side of the business – buying or selling or merging – that have a particular way that they go about doing things, and then there’s the other side of the business that have a different way of doing things, how do you go about managing that change?” Stephens said.

“If there isn’t an immediate alignment, what is the plan to align those things over a period of time? It’s not going to happen straightaway – there has to be a plan put in place to make sure that things work.”

Speaking with Money Management last year, Jurgen Schonafinger, director and financial adviser at Templeton Advice Group, said 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.

“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,” he said last August.

To prevent misalignment from occurring, the director encouraged both parties to take several months in due diligence to assess whether the two businesses are strongly aligned, rather than rushing into a deal.