Warren Buffett says we should only invest in wonderful companies that match our values.
That sounds easy but there is no magic formula, whatever the industry, writes Kingswood’s Patrick Goulding.
Wealth management is highly fragmented and a key first question firms must ask is: why are we doing this?
Follow a process
Before proceeding, ensure the deal has clear strategic logic.
Successful acquisitions start with specific, well-articulated value creation ideas – pursuing business scale, filling network gaps, enhancing product offerings etc.
A vague rationale invariably leads to confusion, poor execution and disappointing performance.
Deal logic and objectives should be clearly and continually communicated across both organisations, underpinning the path to a successful acquisition.
Financial and related analysis follows a well worn path, aided by the availability of a comprehensive data room.
Know what you want and provide a clear list of information requirements – what are your key drivers and what do you need to assess them?
Only invest in companies you can understand.
If clear, consistent data cannot be easily provided then it is probably not worth pursuing.
Know what you’re getting into
A successful acquisition is driven from within by a due diligence team that fully understands the buyer’s strategic and operational requirements.
Appoint the best people to manage these work-streams, supported by their counterpart from target company.
This initial partnership builds trust and breaks down barriers. It also enables a buyer to get to know the winners, and identify the key people who can drive future success.
From a regulatory viewpoint, apart from the usual FCA and client file checks, directly observe the compliance process in action.
A compliant culture is a key element when conducting initial due diligence – is compliance a key element of client on-boarding and day-to-day wealth management?
Does compliance have a seat at the executive table, with input on key business decisions and direction?
Relationships are paramount to success
The more difficult and subjective element is determining whether the target is a good fit and matches your values. Wealth management is a people business and the staff/client relationship is paramount to success.
Assess the quality of people and their relationships: early engagement with employees is critical.
Get to know them, their relationships with clients, how they work with each other. Does a collaborative culture exist within the company? What drives and motivates employees? They and their clients are the key to future success.
Determine if people fit in to your culture: do employees share your values and aspirations?
An acquisition must work for both sides and endure good times and bad. Make sure it is a good fit within your organisation and doesn’t upset your current dynamic.
Treat target staff as if they are already part of your organisation: clear and regular communication through due diligence is critical.
Let them know what is going on and include them as much as possible in the process. Build trust and loyalty.
Understand the risks
A full understanding of risk – both business and target specific – is a critical due diligence output, accompanied by a robust analysis of how those risks can be mitigated.
Key business risks requiring assessment include:
How to ensure advisers and AUM are retained? A robust retention plan for advisers and key staff is paramount to mitigate this. A deferred consideration structure also ensures ownership is only paid after a proper transition period – they still need to earn it.
Is there a clear operational integration plan? A detailed plan and timeline needs to be determined and agreed with target – central to this is usually a plan to migrate client data and/or systems quickly post completion. Time is of the essence.
How to protect against legacy mis-selling? Due diligence can give you some comfort, but this is principally mitigated by requiring target ownership to take out minimum three-year professional indemnity run-off insurance.
Are there specific revenue concentration concerns? Issues can arise in many areas not least transactional versus recurring revenue splits, client age and cohort concentrations. This is where a strong data room is crucial – asking for the right information and assessing ease of delivery by target. That will quickly highlight if the company understands its business and clients.
Are there large legacy trail commissions and how to manage post completion? It is important to understand the extent of small client concentration and how to service post integration – an annual review by telephone is a simple method of managing such clients.
Focus on integration
Finally, developing and implementing an integration plan is a critical part of any acquisition.
The best time to integrate is on completion, with a clear timeline to conclusion.
It is most important to understand the limitations of the target’s systems and do as much preparatory work as possible in advance of completion.
This will include, but not be limited to, cleansing client data to a format that is easy to migrate and having agency novation letters prepared in advance.
This article was written for International Adviser by Patrick Goulding, chief executive operating platform and group chief financial officer at wealth planning and investment management provider Kingswood.