M&A and PFP

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CPA firms of all sizes may consider the acquisition of a wealth management firm for many reasons. It could be to grow an already scaled and efficient business, to boost a lagging or flat private wealth group or to get in the game with some systems and processes from which to launch a growing wealth management business.

For all firms, regardless of size, culture matters. There will be many attributes of an acquisition prospect that may be appealing: a great client list, profitability, staff, location, etc. Make sure that their culture will merge well with yours. For CPA firms that have already acquired or been acquired, you know that this is easier said than done. The same may be true in the wealth management space, but it may be a bit easier to judge based on a few criteria. The source of revenue, client files, and client and staff retainment are all revealing when learning about the prospect. Remember, it isn’t what the target tells you they do for their clients, it’s what their clients would tell you that the target does for them that keeps them as delighted advocates of the firm.

Few CPA firms have a sizable wealth management business. For purposes of our discussion, let’s define sizable as big enough to have solid systems and processes and a minimum of $3 million in EBITDA (earnings before interest, tax depreciation, amortization). That firm probably has $15 million-plus in gross revenues, C-level executives running the firm, and dedicated, smart associates on a career track.

These firms can benefit from acquisitions on many levels. The firm that already has scalable systems and processes can digest an acquisition more easily than a smaller firm. They may also be able to acquire smaller targets at a lower valuation than the higher multiples typically enjoyed by larger firms. This may create the possibility of valuation growth because of a possible multiple expansion of the acquired part due to the scale after the acquisition settles.

PFP and M&A

If the wealth management division in your firm is flat or lagging growth compared to other practice areas, that doesn’t mean it’s a lousy business. It just means that it is flat. I commonly advocate that the wealth management division should be the easiest area to grow and then become a great source for ideal accounting firm clients.

In the category of slow growth, it may be wise to find out why. Is it that clients of the accounting firm do not wish to engage with you regarding these matters? Do all partners support this division as they do other practice areas? Are the PFP leaders simply satisfied? Has the firm been unable to grow wealth management to clients outside the CPA firm? You get the picture. There are many reasons why a wealth management business may be a slow grower, and in fact many of these may apply to your firm too.

An acquisition for those in this category could be great or problematic, depending on how the deal is structured and managed. For example, let’s say a firm has a wealth management division with $5 million in revenues and is set to acquire a fast-growing firm with $2 to 3 million in gross revenues. Will a rapid-growing smaller firm survive in a firm that isn’t growing? Will the acquiring management allow the faster-growing firm to share its talent at growing the practice with the other practice leaders?

To make a transaction like this work, match your needs based on the self-assessment of your slower growth pattern and the strengths of any target firms. There is no shortage of older financial advisors who want to sell their business, but finding the right one may take time. Incorporating an older practice into a stagnant CPA-owned wealth management business may not be wise if growth is the objective.

Finding a match in an acquisition target is a critical element of value in the transaction. A good fit to support a weakness of your firm may be worth a premium purchase price with the expectation that it will add most to the value of the combined entity.

Execution, execution, execution

Like many combinations, the execution and management of the collective vision correlates to the speed and scale of success. In some cases, there may be some sort of succession plan here. A common root cause of a slower-growing division is an older partner who’s on the cusp of retirement. In this case, the senior partner’s primary role should be that of helping the successor to completely understand the business, the clients and those delivering the services. If the succession process slows, your growth rate will suffer. You also may run the risk of having your formerly fast-growing smaller firm lose interest. If there isn’t a pending retirement, another type of succession may be needed — a leadership change.

The change of leadership within the combined wealth management firm may be a challenging course to navigate, as it commonly involves egos. Like any business, existing management needs to self-assess and understand that what got you here may not get you to your goal. The existing practice leader may be a brilliant wealth manager, marketer or mouthpiece for the firm, but not the ideal leader of a 21st century wealth management firm. To this end, the firm should ensure that compensation packages, daily roles, and job descriptions are all aligned with the outcomes that the firm hopes to achieve.

The last category of CPA firm that could realistically benefit from an acquisition is the firm that is fledgling. Fledgling doesn’t always equate to small — it could be one or two people very successful at profitably servicing a select clientele with a limited list of services. This firm may be a solicitor for another firm, licensed with a broker-dealer, or affiliated with a firm specializing in helping CPAs establish and grow a wealth management business. Firms of this variety typically spring up because a small-firm partner or sole proprietor CPA gets really fired up about the prospects of doing financial planning.

If this small firm has partners, the only ones who have prospered are those who had all partners wholly engaged in the wealth management division. This immediately excludes most firms and for some, this is where the divisions germinate. But for those destined to succeed, an acquisition may help engage everyone. If the firm acquires the systems and processes to scale this division and the tax department cranks out 1040s during tax season, the confidence and appreciation of your partners should grow.

An acquisition for this smaller, successful, fledgling wealth management practice can breathe life into the division, and make it as youthful as it was when it got started. You may benefit from an established and successful service model along with the scalable systems and processes. The one-man-band type of wealth management division is frequently serving many roles for many clients. The future of the wealth management business is more about deepening client services, and doing more for a select group of clients. So while you may build a scalable wealth management business, it will never be able to deliver wealth management services for as many clients as they serve for tax preparation, and that is OK.

Not everyone needs a wealth manager, and for those who do, your firm’s responsibility is to make sure that they know how your firm can help them in this area. For this reason, a fresh review of the firm’s existing financial clients and determining who you are in their eyes would be helpful. If they view your firm as their financial planner, then it would easily be construed by a regulator that you may be responsible for basic areas of advice often ignored by overburdened financial planners. This is an area of risk rarely considered by many when holding themselves out as their clients’ financial planner.

Acquiring a firm with a documented and in-practice service model may give your firm what you need to eliminate that risk. It’s easy when you talk to your clients and let them know that you are elevating their services. The makeup of your wealth management clients and the scope of services needed to elevate your deliverable model will guide the time needed for this. For some clients, you may be able to bill for some of the newer wealth management services; for others, you may already have fees from assets under management, or other sources of financial service income, that are substantial enough to absorb the cost of elevating your services.

Wealth management practices are generally valued more highly than accounting firms. That alone is enough to motivate certain CPA firm leaders to expand this division, but without the passion for client service and the systems and processes to do it well, that is a fool’s motive.

You’ll pay good money to acquire a wealth management practice in today’s marketplace. Properly managed, it can stay a profitably run enterprise. Add to that the synergy and growth possibility of the CPA firm’s brand, loyal clients and desire, and your investment is likely to grow.

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Practice management M&A Wealth management Financial planning