The M&A wave is rising. Is your firm ready to dive in?

Among leaders of advisory firms there’s rising excitement about pursuing mergers and acquisitions as a means to achieve ambitious growth targets in the coming years. Right now, approaching half of all firms (43%) are looking to make an acquisition or merge with another firm, according to the new InvestmentNews 2016 Financial Performance Study of Advisory Firms. Yet, the study also notes a shortage of sellers: only one out of twenty (6%) firms has actually negotiated the sale of their firms in the last two years, and very few (5%) expect to pursue a sale in the two years ahead.

These findings confirm what many of us in the industry have been detecting: a small, but discernible increase in transactions – contrasted by a large interest in investigating potential acquisitions, mergers, tuck-ins or other deals. Many firms hope an acquisition will help to overcome slower growth ahead, as signaled by the 8% revenue growth rate that firms reported for 2015 (barely half the 15% rate in 2014). Additionally, firms anticipating approaching SEC regulatory changes – with stringent demands for succession and contingency planning, among other new rules – envision a merger as a way to weather the storm with the strength of two organizations.

Although revenue growth and organizational resiliency are certainly reasonable goals for an M&A transaction, my view is that firms are best served by taking a more introspective approach – one that starts with their vision for the firm and how it serves its clients. In my experience, your firm will be better prepared to take on the rigors of M&A and glean its long-term benefits when you focus on four key aspects:

• Self-Awareness – Your firm’s leaders must answer the question: Who do we want to be? At a high level, this means thinking about your firm’s current value proposition and how you provide a differentiating service to your clients. Then, envision what it would take to deliver on that proposition on a larger stage, perhaps in a different geography. Self-awareness is about personal reflection, as well. The task of integrating and running larger organizations demands different skills. You must make a personal commitment to learn new leadership skills and adopt new behaviors as part of a larger, more complex enterprise.

• Distinctive Culture – In this case, you’ll have to ask the question: What are we really like? Many firms have established a list of core values, but these are merely a starting point for an examination of your firm’s culture. Culture manifests in owners’ attitudes toward work hours and dealing with client issues; in how performance is measured and who gets promoted; in which behaviors are tolerated and which are not; and in a myriad of other ways. A clear-eyed assessment of your firm’s culture is imperative: so you recognize the value of what you’ve built, and can discern a potentially disastrous cultural mismatch in an M&A scenario.

• Engaged People – The strength of your firm rests in your human capital. That is, people’s knowledge, experience, relationships and engagement drive a firm’s value and distinctiveness. How much does your firm invest each year to help these individuals reach their full potential? Do they feel that they are integral to the firm’s success? Very often, rumors of mergers and acquisitions will unsettle even the most committed team members. As you’re crunching the numbers for various M&A scenarios, remember that your “firm” exits the building every evening, person by person. Communication and investment are key to keeping your people engaged – now and when the heavy lifting of M&A integration begins.

• Well-Defined Management Processes – In the advisory space, we succeed by delivering value that clients find compelling and that competitors can’t readily match. This value hinges on the skills and knowledge that people in your firm either possess or can quickly access. Many firms have achieved great things with informal management approaches. But, the pursuit of M&A calls for more defined, durable management processes. What is your governance model? Do you have a rigorous financial management process? How will you evolve your client service model? Your business development capabilities? What about ensuring compliance as new individuals are added to the team? How do you measure success? In many cases, the firm will have effective policies and processes that seem to be “understood” – but these must be identified, reviewed and codified so that they can serve the evolving organization going forward.

As the InvestmentNews study aptly points out, the allure of mergers and acquisitions among advisory firms is growing stronger. Yet, so far, few firms have actually put pen to paper. And I think that’s a good thing, because it gives firms a bit more time to set the deal-terms calculator aside and consider other factors – their aspirations, culture, talent and ability to manage through dramatic change and growth.

In the end, these vital factors could mean the difference between rough waters and smooth sailing in the years ahead.

Pershing provides a comprehensive array of practice management resources, programs and personalized support to help advisory firms manage and grow their business. You can engage with our consultants in multiple ways—receive guidance for implementing one of our advisor programs, attend a Pershing Advisor Solutions event or practice management forum, or online through our webcasts. You can learn more at pershing.com.

About the author
Gabriel Garcia is a Managing Director for Pershing Advisor Solutions, a BNY Mellon company, in the Relationship Management group. Mr. Garcia works with registered investment advisors (RIAs) interested in developing and growing their practices, helping them to manage business issues they face. He engages advisors to help them make informed decisions around maximizing Pershing’s resources and evolving their firms to become more scalable, profitable and productive. Mr. Garcia spent his previous 15 years with Charles Schwab & Co., where he held several leadership positions in sales, training and consulting. The last six years were spent working directly with RIAs. Mr. Garcia has consulted with more than 100 firms ranging in AUM from $50M to $3B. He also is a frequent speaker at industry and national conferences. Mr. Garcia has 20 years of experience in financial services. Mr. Garcia earned a Bachelor of Science degree in Finance and Business Administration from Radford University.