When does one plus one equal three? With more and more frequency, that unlikely equation is holding true in the world of financial firm mergers and acquisitions. As many financial advisors are discovering, there’s tremendous opportunity for a firm to become more efficient, more valuable, and more profitable by merging or being acquired by another practice.
Not all mergers are destined for success, though. There’s also very real possibility for one plus one to equal zero, or maybe even something negative. For the equation to hold up, each firm needs to do its due diligence in a number of critical areas.
The first is that each party needs to have its own streamlined and efficient processes in place. If one partner is still working off of spreadsheets, or even handwritten notes, then the effort to implement efficiencies may not even be worth the benefits. It’s important that each side is bringing something beneficial to the table.
Often, one partner can offer efficient backend support in the form of automated systems and streamlined administrative processes. The other party may bring a unique knowledge set or a new product offering that can enhance the services of the acquiring firm. For the sum to be greater than the parts, each side needs to offer value.
Additionally, the firms have to be a good practical fit for each other. A firm that relies nearly completely on commissions may not fit in well with a pure fee-based practice. A classic stock-and-bond trader likely will have a hard time adjusting to a passive-only investing world. These are real considerations that shouldn’t be ignored.
What is too often ignored in merger negotiations is cultural fit. How does each firm view client service? What about recruitment and retention? Are new advisors mentored to success? Or are they left on their own to sink or swim?
Compensation and firm direction are also big pieces of culture. You’ll want to make sure that your new partner compensates you and your team in a way that you feel is appropriate. That goes beyond money. For instance, are you comfortable with any ways in which compensation may be tied to specific products or campaigns at the new firm? What happens if the firm wants you to make recommendations that you don’t agree with?
Finally, for the sum to be greater than the parts, both sides will need to bring a committed group of staff members. It’s natural for employees to fear for their jobs during a merger. This is especially true for administrative staff. After all, creating efficiency on the administrative side may be one of the driving forces for the merger.
Keep your employees committed and working hard by making a commitment to them. Telling them that you’ll “find a place for them” isn’t really a commitment. During the negotiation process, nail down exact roles for your workers so you can give them specifics on what they will be doing in the new firm. That will help them stay positive about the transition.
Firm efficiencies. Cultural fit. Committed employees. These are the ingredients that have to be in place for one plus one to equal three in a financial services firm merger or acquisition. Take your time during the diligence process and make sure these components are present. If they’re not, the proposed merger or acquisition may not be the best option for your practice.