Growing Pains

Deciding whether to grow your business through hires and expansions—or through mergers and acquisitions—requires much consideration. Is it best to do so organically, by hiring and opening new branches, or through purchasing existing businesses? Each has its advantages and disadvantages, sources agree, and each requires thoughtful strategies to prevent growing pains.

Considering Your Strategy  

Now may be a particularly optimal time for companies to acquire businesses because Baby Boomers are retiring with hopes of selling their companies. “There [are] definitely more [business] owners looking for exit strategies,” says Jim O’Shaughnessy, managing partner of Sheridan Road Financial in Northbrook, Illinois.

Vincent Morris, president of Bukaty Companies Retirement Plan Services in Leawood, Kansas, agrees. His company has acquired three others in the past few years, all from owners in their 60s or older who had businesses they were ready to sell.

“You have to get scale in order to keep up with the competition,” Morris says of acquisitions. “I think a company needs to evaluate what [its] business plan is into the future and decide whether or not [it’s] … that growth shop,” he says.

Morris says his company has used both growth strategies: hiring and acquiring. But because Bukaty is in an area with a small adviser pool, he says growing the business through hires has been more difficult. The company opened a Denver office and has considered branching into additional markets to solve the limited adviser pool in the Kansas City area, he says.

Steven Wylam, a partner at the 401(k) team at Capital Analysts of the Midwest Inc. (@CAMI), says organic growth is probably a better strategy. Older businesses being handed down may lack a “modern service model,” which means you are merely buying the relationships.

“If you know what you’re doing now, now’s a growth time,” he says. “Any firms that do significant amounts of retirement plan business see the potential growth in their business due to all of the new regulations—and to purchase those types of firms would be at a premium.

“The individuals who only have one or two plans—even five or six—in their book of business, you will be able to pick off those plans in the normal course of prospecting because they are not being serviced correctly today,” Wylam explains. “I would only purchase the retirement plan business as a carve-out, and I would be very careful on the valuation.”

Research  

References, due diligence and research are all needed to make the best decision about acquisitions or strategic partnerships, says Jake Winegrad, adviser at Moneta Group in Clayton, Missouri.

When forming a partnership, it is best to think about the client rather than just what is best for you. “[Look] at it through the clients’ eyes,” Winegrad says.

Partnerships and acquisitions are commonly formed through references, although, Wylam says, that is not always the case. “It certainly doesn’t hurt to know the type of firm and individual’s practice you are buying. However, with good research and analysis, you can purchase an unknown, but you have to be very careful and it will take a little longer.”

Wylam recommends that acquiring firms conduct financial, practice and service model research. Financial research about the other company includes finding out the number of client plans, the amount of assets under advisement, service pricing and the amount of revenue generated, as well as whether it uses fees or commissions.

Practice research involves learning the types of clients the company serves, the providers and platforms utilized, and what existing service agreements exist.

Service model research includes determining the company’s existing service matrix to clients—e.g., meetings, phone calls and reports. Understanding these financial, practice and service model deliverables will help establish whether the company will mesh with the acquiring company.

But it is a two-way street between the buyer and seller, Morris notes. The buying company must understand its own culture and goals before making an acquisition.

Winegrad suggests meeting with the potential partners and asking a thorough round of questions to discover any potential risks.

Make sure you feel comfortable with the business owner and staff, O’Shaughnessy adds. 

Downsides and Risks  

Beyond the proper due diligence, acquisitions involve many risks that should be seriously considered before taking action. Firms may overlook the emotional risk factor, for one. O’Shaughnessy says his company was close to acquiring a practice a year ago, but the deal fell through because the other company was emotionally unprepared to make the change.

Another risk involves acquiring companies that lack a proper business plan. If the seller is unclear on what the business is and what its goals are, it may be difficult to agree on the fair value of the business, O’Shaughnessy says.

A more obvious consideration is financial risk. The acquiring firms must ask whether it makes financial sense to purchase a business. Managing financial risk begins with a thorough analysis of the selling business such as its providers, pricing and revenue, Wylam says.

A difference in company culture can also cause problems. “A change in culture and how clients are serviced can lead to confusion [about] what they have been receiving in the past and what they expect to receive in the future,” Wylam says. “You have to get the selling firm to help set the expectations so that clients are not dissatisfied with their new client experience.”

Once an acquisition occurs, new employees must be aware that the acquiring firm sets the agenda and service model going forward, Wylam says. “The clients are now the new firm’s clients and [will be] handled according to their existing service matrix—which may be different from the type of service they were receiving in the past,” he says. “The clients also have to [be] informed that the new firm is in charge and is the main point of contact, not the selling individual or firm.” 

Hiring and Expanding

Growing your business through hiring and expanding current services is another option that requires strategy and proactive thinking.

O’Shaughnessy says his business partner continuously spends time in potential markets where their firm can expand and performs extensive due diligence before making a decision.

Sheridan Road Financial also interviews candidates on an ongoing basis, even if no job openings exist. His company has an internship program, as well, and works with alumni associations, colleges, recruiting agencies and referrals to find appropriate candidates. Businesses should search for candidates before they get to the point of “complete pain” and are so desperate that they make the wrong hiring choice, he says. When deciding on the best candidate, O’Shaughnessy says it all comes back to having a business plan and conveying it to candidates to see whether they are a good fit. “The top recommendation I can make … would be: You have to have a business plan,” he says.

Having staff members who focus on both the short-term and long-term goals of the company is crucial for executing the business plan and strategic vision. Thinking only in the short term makes it difficult to grow a business, he says.

“When you’re running a practice, you get kind of lost in the weeds,” focusing on the here and now and neglecting the long term, he says. The retirement business, in particular, is cyclical with peaks and valleys of busyness during the calendar year.

A company’s hiring strategy must align with its business plan. “You can’t hire people just because they are a good fit,” O’Shaughnessy says. “[They have] to fit into your budget, your business plan.” However, O’Shaughnessy says he thinks a job description can be stretched for an elite candidate.

Morris says his company seeks candidates who understand that building a block of business takes time and requires cultivating long-term relationships.

Winegrad agrees that the willingness to help people is just as important as technical skills. “It has to do with what’s inside of them, what motivates them,” he says. Winegrad’s company offers educational courses to its employees for continuing education credits, which, he says, is a great tool for attracting and retaining superior employees. “I think one of the keys to attracting talented people is having a staff full of talented people,” Winegrad adds. “That’s a momentum thing.”

Personality is also important, Wylam says. His company conducts personality tests to ensure the candidates match the available positions. A highly analytical candidate, for example, is probably a poor fit for a sales role.