Add-On Acquisitions for Established Advisory Firms
For an established advisory firm with a proven service model, acquiring another practice can add clients, advisors and capabilities faster than organic growth alone. An advisory firm add-on acquisition is the purchase of an existing practice or book of business that will be integrated into the acquiring firm’s operations. Done well, it can strengthen the firm; done poorly, it can strain service, culture and cash flow.
This article is limited to established, operating advisory firms that are acquiring existing practices. It is not legal, regulatory, compliance or tax advice, and every acquisition should be reviewed with qualified professionals.
Why Established Firms Pursue Add-On Acquisitions
- Adding recurring revenue and clients
- Bringing on advisors or specialists
- Expanding into new geographic markets
- Gaining scale to support staff, systems and services
- Providing succession solutions for retiring advisors
What Makes an Add-On a Good Fit
The most successful add-ons tend to share key characteristics with the acquiring firm. Consider:
- Client fit: similar client types, needs and service expectations
- Service and fee fit: how much clients’ experience and fees will change
- Investment approach: whether the philosophies are compatible
- Culture and people: whether staff and advisors will work well together
- Operations: how systems, processes and platforms will be combined
The more change clients experience, the greater the retention risk.
Integration Is Where Value Is Won or Lost
An established firm has existing processes, which can make integration easier, but it also has existing clients whose service cannot slip. Integration planning should cover:
- Client communication and relationship assignments
- Required notices, consents or new agreements, as applicable
- Account transitions to the firm’s custodial or platform arrangements, where applicable
- Staff roles, compensation and retention
- Technology and data migration
- Regulatory filings and disclosures, as applicable
Clients do not automatically transfer with an acquisition. Requirements can depend on the firms’ registrations, client agreements, the transaction structure and applicable rules, and none of these steps should be assumed. Our article on advisory client retention covers transition planning in depth.
Due Diligence for Add-Ons
Even experienced acquirers should conduct thorough due diligence on revenue, clients, staff, agreements and operations. Our advisory practice due diligence guide outlines what to review, and our guide to financial advisory practice valuation explains how findings affect price.
Financing an Add-On Acquisition
Established firms have an advantage when seeking acquisition financing: lenders can review the firm’s existing financial history, management team and track record. Lenders will typically evaluate:
- The acquiring firm’s financial statements and existing debt
- The target’s revenue, clients and concentration
- Combined pro forma cash flow, including expected attrition and integration costs
- The purchase agreement, transition plan and seller involvement
- The owners’ experience and credit
Depending on size and structure, smaller add-ons may fit SBA programs, as explained in our guide to SBA loans for financial advisors. Larger firms making larger or multiple acquisitions may consider middle-market financing. Eligibility and terms vary by lender and transaction.
Pacing Multiple Acquisitions
Firms that pursue several add-ons should be careful not to outpace their ability to integrate. Each acquisition adds clients who need attention and debt that must be repaid. Many firms complete and stabilize one integration before beginning the next.
Growth Built on a Strong Foundation
An add-on acquisition is most likely to succeed when the acquiring firm is already stable, the target fits its model, and integration is planned carefully. No acquisition can guarantee client retention or growth, but disciplined selection and realistic financing improve the odds.
US Professional Funding works with established advisory firms financing acquisitions of existing practices. Learn more about our investment advisory acquisition financing.
