Advisory Firm Acquisition Considerations

While there are numerous ways for firms, operating in the financial services industry, to grow their business, recently the trend has been to focus more on acquisition versus other means to accomplish growth. It is unclear exactly why this is occurring. Perhaps it’s due to a prolonged strong market, or the ever-increasing amount of regulatory scrutiny surrounding marketing initiatives normally needed to find new clientele. Whatever the cause(s), acquisitions are becoming more prevalent than ever before.

However, as with any industry – and perhaps more so given the regulatory oversight involved, firms seeking to acquire another firm, or an individual adviser, must consider an array of matters prior to an acquisition. This month’s Legal Tip will examine some topics to be considered if/when deciding to acquire outside assets to grow your advisory business.

1. Overview

Every acquisition starts somewhere. If your firm is looking to acquire an outside target for which you do not have a great deal of familiarity, sifting through the amount of information that might be available can be daunting. However, much like the Securities and Exchange Commission (“SEC”) and/or independent state regulatory authorities who perform examinations on parties of interest, acquiring firms should start by obtaining records that will provide a certain level of initial familiarity with a target. Some of these documents could include:

  • Business and/or marketing plans;
  • Organizational chart;
  • Registration history;
  • General financial information; and/or
  • Client information.

Once such information is obtained, it can serve as a guidepost in determining whether it is worth the acquiring firm’s time and effort in further exploring a potential acquisition.

2. Financial Information/Customer Lists

As is the case with any acquisition, the acquiring firm will want to ensure the target can display strong financial metrics. Due to operating in a services-oriented industry, the strength of an advisory firm’s financial metrics relies heavily on its customers – specifically the number and type of customers, as well as the amount of assets under management attributable to such customers.

The composition, tenure and average age of an acquired firm’s book of business is also critical in determining its overall value. For example, if the majority of a firm’s assets

are tied up in only a few clients, or if the average age of clients is at or beyond retirement, the value of that firm might be decreased. Without running afoul of privacy considerations (that apply at both the state and federal level), acquiring firms should make every effort to become familiar with the target firm’s client lists and its projectability as this will largely drive its financial metrics both now and in the foreseeable future.

However, other financial-related factors of a potential target should also be considered, such as (i) if there are performance fees (and if so, how often do they pay out and how are these weighted compared to asset-based fees); (ii) growth rates over 1, 5 and 10 year periods; (iii) geography of the target and its clients in relation to the acquiring firm; (iv) the investment profile of the target’s client base (i.e., the more compatible with the acquiring firm the more likely clients will remain following an acquisition); etc.

3. Regulatory Information

As with most service-oriented professions, much of the value of any advisory book of business is tied to the associated goodwill. Having regulatory infractions could not only lessen the value of the firm to be acquired, but also affect the acquiring firm dependent upon how assets are to be transferred; as well as the nature of the infractions. For this reason, acquiring firms will want to gather as much information concerning the target- firm and its representatives as possible. At a minimum, such reviews should focus on the following:

  • Reviewing the firm’s Form ADV with particular focus on Item 11 of the Part 1 and Item 9 of the Part 2A respectively;
  • Reviewing previously filed Form U-4s for advisory representatives via public sites;
  • Review status of all securities and business licenses as may be applicable (i.e., brokerage registrations, insurance licenses, etc.);
  • Customary complaints; and
  • Review all applicable business licenses/registrations (i.e., registration of the acquiring firm’s entity in its home state and other states where registration applies).

4. Mechanics of Acquiring a Target

Once your firm decides that it makes financial and business sense to acquire a target, it must begin the work of figuring out the mechanics involved. There are several considerations that must be examined not only to bring the transaction to a close, but also in facilitating the transfer of the target’s business/clients. Some of these considerations include:

a. Negotiating Matters

In order to acquire a target, both sides need to feel as though the move is beneficial. This often requires a great deal of negotiation to determine matters, such as timing, liabilities, and perhaps most importantly, valuation.

There is no one correct way to value a business. The value of any given business ultimately comes down to what the buyer is willing to pay, and the seller is willing to accept. Methodologies such as multiple of revenues, comparing to relevant market data and third-party vendors are all commonplace in the industry.

Other negotiable items may include, but are not limited to:

  • Closing date/timing;
  • Down payment;
  • Earn-out period/methodology;
  • Financing (if any);
  • Insurance matters (i.e., “key-person” insurance, “trail” insurance, etc.); and
  • Restrictive covenants (i.e., Non-Compete and Non-Solicitation provisions, see below for more).

b. Restrictions on Transferability of Business

When looking to acquire other firm’s and/or individual advisers, acquiring firms must navigate through transferability limitations. These often take the form of “Non-Compete” or “Non-Solicitation” provisions that can be included at the entity level as part of the firm’s governing documents, or to individuals as part of an Employment or Independent Contractor Agreement. The validity and strength of these clauses, and their ability to be enforced, will vary by state. It is not uncommon for advisory firms to be litigious in the protection of assets, so acquiring firms will want to be sure they are aware of limitations, and if possible, how such restrictions may be safely navigated.

Other restrictions that may apply to target firms include: (i) outstanding loans; (ii) existing joint ventures or partnerships; (iii) exclusivity agreements; (iv) other encumbrances on assets; and (v) threatened or pending litigation.

c. Assignments and Client Consents

Unlike many other industries, transferring the assets of an advisory firm is not something that can be purely determined by the transacting parties. The reason is due to the fact that the majority of an advisory firm’s “assets” are tied to its clients. These clients have certain rights that must be considered prior to any transaction. Specifically, under Section 205(a) of the Investment Advisers Act of 1940 (the “Act”), every investment advisory contract must “provide, in substance, that no assignment of such contract shall be made by the investment adviser without the consent of the other party to the contract.” Further, under Section 202(a)(1) of the Act, an “assignment” includes any direct or indirect transfer of an investment advisory contract “or of a controlling block of the assignor’s outstanding voting securities by a security holder of the assignor.”

Typically, the acquisition of another advisory firm will include the transfer of a “controlling block” of the targeted firm. Even if the acquisition only includes a purchase of assets, and not the surrounding advisory firm entity itself, an “assignment” as defined by the Act occurs. As such, firms must be sure to obtain client consent to the assignment prior to performing services or accepting fees.

Alternatively, acquiring firms can have all transferred clients sign and agree to its own advisory contract instead of assigning the contract from the acquired firm.

d. Ownership Restructuring, Employment and/or Labor Matters

It frequently behooves an acquiring firm to retain some or all of the personnel of the acquired firm in order to facilitate a smooth transition and help ensure the likelihood of client retention. This typically requires the acquiring firm to add such persons as either owners, employees or contractors of the firm. While each option has its own pros and cons, determining which classification is best for a given situation can be difficult. This decision occasionally comes down to the negotiation power of the persons of the acquired firm, and their willingness/desire to continue performing services following the acquisition.

5. Conclusion

There is no one right way to grow a business and will depend on the firm’s business model and people. However, for those firms seeking to acquire other businesses, understanding the process and performing thorough due diligence is paramount to ensure the success of a given transaction. While the items listed above provide a foundation in which to start this process, each transaction is unique, and a template approach will not always apply. As such, working with an attorney and other professionals familiar with these matters can greatly assist in this process.

For more information on these and other considerations, please contact us at, or (619) 298-2880. Also, please visit our website at for additional Legal Risk Management Tips.

Jacko Law Group, PC. JLG works extensively with investment advisers, broker-dealers, investment companies, hedge funds, banks and corporate clients on securities and corporate counsel matters.

This communication is not intended for transmission to, or receipt by, any unauthorized persons. Inadvertent disclosure of the contents of this article to unintended recipients is not intended. The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG.

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