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The Perfect Match

Ask any experienced deal maker and they will tell you the same thing. The secret to successful M&A deals is twofold, price and fit. Price is obvious; if you overpay for something, you are making it more difficult to achieve a desired return on your investment. Fit is just as important but less straightforward. If the two businesses don’t come together well, then it’s also going to be difficult to achieve your return. But worse still, a poor fit could result in a failure, where teams, business units or entire acquisitions are written off. If you own a financial planning business, you are playing with your own money, so you can’t afford to get this wrong.

How can you tell if the firm you’re buying is a good fit with yours? The conversation often focusses on the type of client, the proposition, pricing and the investment management solution. These characteristics are all both important and hopefully obvious. And if they are all being discussed, why do some deals still fail? There are several factors that can contribute to your downfall, and they are all bound up in communication.

When two people talk to each other about a subject they both feel they understand, the use of common language can mask their respective understanding. We all use phrases like ‘client-centric’ and ‘financial planning’ and we think we know what we mean. When we are keen to get on with each other, both hoping that a good deal can be done, we are even more open to misinterpret each other.

To help reach a shared understanding, it’s important to go beyond well-worn phrases and investigate what is actually meant. If you both offer financial planning, are your propositions actually the same? Some financial planners deliver great advice that’s focussed on the client’s current issue. Others investigate the client’s entire life, producing a comprehensive financial planning report and cashflow model, before any suitability is provided. Nothing wrong with either approach but if the former requires an adviser and administrator to look after two hundred clients and the latter requires an adviser, paraplanner and administrator for seventy five clients, you can start to see how these two businesses are very different.

In many situations, buyer and seller have a whole series of meetings over several months, before they realise that they might not be on the same page. If this realisation hasn’t occurred through initial discussions, it should become self-evident in the due diligence process. But that’s not always the case. The buyer will often use experts to undertake the due diligence exercises and read their reports. This means the buyer might not have seen a client file before the deal concludes. By then it’s too late.

To successfully assess fit there are several actions that, if taken by the buyer, should increase the chances of success: –

1.    Have a plan. If you are going to negotiate over a series of meetings, set the agenda for each meeting and understand what you are hoping to achieve and when. Communicate this with the seller and explain why you’re working this way.

2.    Consider getting help if you are inexperienced. If the seller doesn’t have any help, suggest they consider it too. You can save a lot of time and money doing this.

3.    Put a two-way confidentiality agreement or non-disclosure agreement in place, so you can share information with confidence.

4.    Produce a buyers Confidential Information Memorandum (CIM). While it’s common for the seller to produce a CIM (particularly on larger deals where they are represented by an adviser), it’s a good idea for the buyer to do one too. Clearly explain your firm, why you’re acquiring and how you plan to integrate. Sharing this information early on, is a professional approach, shows you’ve thought it all through and could save you significant time.

5.    Write down your definitions for key phrases, so you can reach a shared understanding as soon as possible.

6.    Show each other a sample of redacted client files as soon as possible in the process.

7.    Share your proposition delivery processes and how they are adhered to.

8.    If you use third party firms to help with due diligence, give them some direction in terms of what you are trying to prove. The more guidance you can give these people, the more likely they are to produce reports that actually help you make critical decisions.

9.    Clarify and keep clarifying all the way through. Ask as many questions as you can, go over old ground if you have questions.

By now you will no doubt appreciate that ‘fit’ isn’t something you assess once. It’s something you are focussing on throughout the acquisition process. From the first meeting to the final signatures, you will be trying to increase the probability that assumptions you made that informed the price you agreed to paying, are likely to be borne out over time, to create the return you are aiming for.