Blog - The Modern Financial Advisor

Are You a Qualified Buyer?

Written by Carla McCabe | Nov 25, 2019

Many of us have heard the statistic that for every seller, there are 50-100 buyers. While we’re sure there are lots of firms or advisors who want to complete an acquisition, when it comes to qualified buyers, the statistic is more accurately 4 buyers to each seller.

But what does it mean to be a qualified buyer and how do you become one? It’s certainly much more than just wanting to be a buyer. We encourage firms to make sure they’re completely ready to make an acquisition before they even think about identifying opportunities or talking with potential sellers. The following items will help prepare you for an acquisition and may even indicate you have more work to do on your own firm first.

Know your current valuation

Just as you are going to perform a thorough due diligence process on any seller, they are going to take that same hard look at you and your firm. After all, they’re exchanging their risk for yours and will want to make sure that selling to you is the best decision. Remember too that a valuation does more than just provide a dollar amount value… when done correctly, a valuation provides a complete health check-up of a business. It will identify strengths, weaknesses, opportunities, and threats in your business. It’s going to be critical to understand how someone else will view your firm when you need to sell that person on why you’re the best buyer. And if equity is going to be a component of your deal structure, you need to have an accurate understanding of what exactly that equity is worth.

Get Your Valuation Now: Login if you are a current Truelytics user or try our free PreEVAL tool to get a high-level valuation in 60 seconds.

Define your story

Speaking of being the best buyer, thoughtfully defining your story will help you better articulate to a seller what you’re bringing to the table. We recommend drafting an Executive Summary that tells the story of the who, what, where, when, how, and why behind your firm. What makes your firm unique? How did you get into the industry? A compelling story will reveal more about your culture – the most important aspect of M&A conversations.

Define your vision and objectives

In tandem with defining your story, you should also be able to clearly articulate your vision and strategy. Why are you doing acquisitions? What do you hope to accomplish? What are the overall objectives for your firm and the legacy you wish to leave behind? Again, a seller must get excited about your firm and selling their clients to you - make sure your vision and objectives help sell your story.

Develop a plan and strategy

As mentioned, it isn’t enough to simply want to pursue buying financial advisory businesses. Vetting acquisition opportunities is a full-time job in and of itself…. and you already have a full-time job! That’s why carefully planning a strategy for who does what within your firm becomes important to not only maintain deal momentum, but also continue the day-to-day operations of your existing firm. Make certain you have a process in place for every step of your strategy and every touch with the potential seller. And remember that every contact with a seller serves to move the ball further down the field – ensure that your process accomplishes this.

Need Help? Click here to talk to our team of mergers and acquisitions professionals.

Define your target profile

Another component of getting crystal clear on your strategy is to define the target profile. Where should an acquisition candidate be located? What is the ideal business model or investment philosophy? Are you looking for a new or complementary business/revenue line? What size firm or book are you looking for? Are you looking for a seller to sell and exit or are you looking for someone to stay on? Do you wish to acquire younger talent as part of the acquisition? Defining the ideal profile will help you more deliberately vet candidates – you won’t be wasting your time on conversations with folks who don’t fit into what you’re looking for.

Understand emotional issues

Selling their firm is one of the most emotional decisions a business owner will make, so get ready to potentially play therapist with your seller! You’ll be best served to put yourself in the shoes of your seller and try to relate to what he or she is feeling. When you can understand the internal struggles they’re facing, you’ll be better equipped to handle the emotional aspects that will inevitably arise. We’ve found that many sellers tend to look for a reason (or excuse) to not sell their firm. Knowing this, and being prepared for it, will help you better navigate any tricky conversations. Tap into your empathetic side and make sure your seller feels heard and understood throughout the process.

Secure capital

You wouldn’t plan on putting an offer in on a house without first having secured a mortgage pre-qualification. Don’t make the same mistake when considering an acquisition. Talk to lenders in the space and get your own firm’s financials in order. Learn what the financing options and requirements are.

Create financial models

Part of the capital conversation is creating financial models, not just for the firm you’re considering acquiring, but also for your own firm. Make sure you understand how different financing (and deal structure) options may affect the cash flow of your business. We also recommend creating models that will show when the acquired firm will be cash flow positive – run under best case and worst case scenarios.

Develop an integration plan

The work isn’t finished once a deal closes. In reality, this is when the hard work really begins. The seamless integration of the new firm will be critical to your success. As such, your integration plan should be designed before you even begin talking with potential sellers. Similar to your acquisition strategy, take the time to thoughtfully decide the who, what, when, where, and how of integrating an acquisition. This will make it much easier to bring both firms together in a process-driven and goal-oriented manner.

 

Sophisticated buyers understand that acquisitions are business decisions that serve a purpose, not emotional ones that benefit the ego. Thoughtful and careful planning is necessary to make sure that any acquisition accomplishes the goals and objectives of all parties. Take the proper time to consider the points mentioned above and better align your firm for success.