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© 2000 PCT PublishingPh 804-795-1642 Fax 804-795-7703

S E N I O R C O N S U L T A N T

John J. Bowen, Jr.

Practice Management

John is president and CEOof Assante CapitalManagement Inc., acompany created tosimplify and enhance thelives of their affluentclients. As their PersonalChief Financial OfficerTM,Assante provides ntegratedfinancial and life manage-ment services that aretailored to each client'sunique objectives.

Irecently had the opportunity to have one-on-onemeetings with over 80 very successful financial

advisors. What I heard indicated to me that ourindustry is going to change dramatically in thenext five years and that many of us are unprepared.Every advisor was concerned with tremendouslyincreased competition, both off-line and on-line,for the affluent private client and the implicationsthat competition is having on their practice.

Their concerns are surprising given the level ofsuccess that they are having. Generally, their prac-tices are still growing at a very good rate − onaverage over 25% annually; yet, they are unsurehow they will compete in the future. Many askedhow they could differentiate themselves fromfuture competition given the fact that more andmore of what we financial advisors offer is beingcommoditized; mutual funds and asset allocationare not much of a differentiation anymore.

On-line financial firms look capable of offeringmuch of what financial advisors do and at signifi-cantly lower cost. Over the next 12 months, on-line firms will spend $1.5 billion trying to get thismessage across. The major wirehouses are gettingfocused on what traditional independent fee advi-sors have done and letting the public know theynow do it. Their offering will be credible to thepublic, if for no other reason than the size of theiradvertising budget is often greater than the assetsunder management of the successful fee advisor.

While advisors clearly recognize that themarket is going to change over the next five years,they don't know what it is going to look like. Moreimportantly, they don't know what role they aregoing to play. Many of the advisors with whom Imet are anxious to be proactive in improving theircompetitive edge and securing the next level ofsuccess by joining forces − whether that involvessome form of strategic alliance, joint venture orbeing acquired to get the resources necessary tocompete.

Several advisors told me about a study writtenby Mark Hurley on the "Future of FinancialAdvice" (www.undiscoveredmanagers.com) thataddresses many of their concerns, specifically, theneed to institutionalize your business to succeed.They recognize that they are going to have to join

forces with other financial advisors or serviceproviders to accomplish this.

Major Concerns AboutStrategic Alliances

When it came to discussing strategic alliancesor an acquisition partner, there were four majorconcerns that they each shared with me, withoutexception:

1. They want to maintain their independence sothat they, acting as advisors, can continue toserve their clients well. They are concernedabout giving up control to firms that do notunderstand their business. In addition, they builttheir practice around their lifestyle and areconcerned about how a change in ownershipwill affect their "lifestyle boutique."

2. Today, with all the added competition, the No. 1goal is to figure out how to differentiate yourselfby serving your clients well. Many advisorsstated that they need to work from a larger plat-form, with the resources to deliver a familyoffice approach to their clients. Many of themajor players entering the affluent private clientmarketplace, such as banks and CPA firms, havesignificant resources and relationships in placeto assist in this area but instead, appear to be theadvisors' competitors. Several advisors haveheld discussions with both banks and CPA firmsand have found that there were significantdifferences in cultures that would make it diffi-cult to get together.

3. They want to build equity in their practice and ifpossible, share in the equity they help build fortheir service providers. Advisors are cautiouslymoving ahead because their firms do not yetcommand the value they believe they will havein the future. They want to make sure anypartner will allow them to capture much of thisincreased value as well as a portion of the syner-gies of their service providers.

Advisors recognize that they need an exitstrategy or succession plan. While most of theadvisors with whom I spoke could not imagine notbeing in the industry, they know it is prudent for

Is There A Strategic Partner In Your Future?

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© 2000 PCT PublishingPh 804-795-1642 Fax 804-795-7703

them to plan on succession for the benefit oftheir clients and employees.

Start Planning Now

Let's say you agree with many of thefinancial advisors with whom I made contactand want to be proactive. You want to find astrategic partner who shares your vision ofwhat this industry is going to be five yearsdown the road and how you're going to addvalue to the collective organization.

The key is: Get Prepared Today! Thesame ingredients that will be attractive to abuyer will make your business run smootherwhile you're building it.

Your vision of your business needs to beas clear as possible about what you are tryingto accomplish. Put together a three-to-fiveyear pro forma, recognizing the market isgoing to change. The clearer the path of yourvision, the better you will be positioned.

Establish repeatable systems. Most finan-cial advisors, if they do have systems, carrythem in their heads. To the extent that youhave documented procedures, your businesswill be much more valuable.

You should also put the backgrounds andduties of key personnel in writing. Shareyour team building approaches. Make sureyour compensation plans are in writing andthat there are no promised compensationbenefits that are not disclosed.

Any lawsuits where you're the defendantshould be settled, if possible. No partner orbuyer wants to be exposed to any additionalrisk beyond the normal course of business.Contingent liabilities will substantiallyreduce the purchase price. Worse yet, theycould kill the deal. If you're a plaintive in anylegal actions, it's not as much of an issue,though you must also disclose these.

Image is critical. When a buyer walksinto your office, how does the place feel? Isit a showplace? Think of selling a home.Most people fix up their houses, making allthe improvements their spouses alwayswanted, just prior to sale. Why? It increasesvalue dramatically by showing a sense ofpride. You need to do that same dressing upto your business environment.

Steps to aSuccessful Merger or Sale

Okay, you now are prepared. You've doneyour homework, corrected any problems andhave been approached by a strategic buyer.What are the steps to a successful merger orsale?

Step 1. Exploration

During the first meeting, you shouldshare your vision − and encourage the poten-tial buyer to do the same − to determinewhether there is a basis for going forward.Be prepared to get specific. Check them outbefore the meeting. The internet is a greatplace to start. Read their press releases, andif they are a public firm, pull up their quar-terly filings. Is their vision aligned withyours? If it's not, there's no basis for contin-uing the conversation.

Tiburon Strategic Advisors has prepared adefinitive study that will save you a lot oftime on many of these major issues,including with whom you should considerpartnering. You can obtain "InvestmentManagers and Financial AdvisorsSuccession Planning, Firm Valuations & theGrowing Acquisition Market" for $500 bycalling (415) 789-2541.

Step 2.The Confidentiality Agreement

If the first meeting goes well, set up asecond meeting. Prior to the meeting, bothparties should sign a confidentiality agree-ment before sharing any non-public financialor sensitive material. Make sure the agree-ment works both ways. Review it with yourattorney to make sure that it doesn't overstepreasonableness, that it's primarily focused onthe deal itself and that it doesn't affect any ofyour business operations.

Step 3. The Formal Proposal

The potential partner should present aformal proposal of how they could purchaseyour business. As an example, we use a five-year "going it alone" model and then forcomparison, a five-year model of the effectsof strategically partnering. This facilitates anopen discussion about whether enoughsynergy exists to make the deal work forboth parties.

Step 4. The Letter of Intent

A letter of intent is a binding documentthat will specifically identify all the majorterms of the definitive purchase agreement.This typically includes the initial purchaseprice, any earn-out provision, non-competi-tion agreements, employment agreements,etc.

Step 5. The Due Diligence Meeting

This is the opportunity for each side tolook behind the curtain and see if what wasrepresented is true. Expect to have all yourfilings with regulatory agencies, financial

records and procedures reviewed. Youshould have already voluntarily disclosedanything that could come up to make yourdeal less desirable. For example, this mightinclude litigation or a problem with a partneror somebody who's about to file somethingabout you, or an administrative mistake. Itwould be best if you disclosed all problemsat the beginning. You don't want a potentialbuyer to uncover something material to thedeal that you haven't shared with them. Theywill assume the worst − there must be morethat you are not telling them − and trust willbe destroyed.

You will be given the opportunity to dodue diligence on the potential buying firm −which you should do. Hire a CPA or businessconsultant to help you through this process.This is one of the most important transac-tions of your life.

Step 6. Definitive Agreement

This is the process of documenting theletter of intent. This process always takeslonger than everyone expects because of thenecessary attention to detail. You need tohave a professional representing your sidewho is experienced in mergers and acquisi-tions but do not give them completeauthority. Stay involved and push to movethe agreement along. Professionals can oftenget caught up in items that are not importantto you and spend inordinate amounts of timenegotiating minutiae. This will add substan-tial costs and delay to the transactions orpossibly kill a deal that you wanted tocomplete.

Conclusion

The selling process makes it difficult foryou to run your business and consummate atransaction at the same time. Your practice, ifignored for the duration of negotiations, mayno longer be as attractive. Qualify potentialpartners quickly. If you believe there is ashared vision, establish a reasonable time-table that will not distract you from growingone of your most valuable financial assets.

Finding the right strategic partner in orderto reach your next level of success will maketremendous sense for many financial advi-sors. Start the processes today: clarify yourvision, get your systems in place and correctany obstacles. If you've done it right, youwill be in the envious position of being ableto pick your partners. Your clients and yournet worth will be glad you did.