Advisor Stories - Buying and merging with Andrew Rosen
Transcript: I am Shauna Mace, head of Advisor Services at SEI. Our mission at SEI is simple. It's to help you and your clients build your version of Brave Futures together through the power of connection. That means connecting you to actionable practice management tools, insights, and experts. And we have an expert joining us today who is a financial advisor, Andrew Rose. So Andrew is the president and partner at Diversified LLC, which is an RIA a with multiple locations in Delaware, Pennsylvania, Alabama, and Massachusetts. Andrew joined Diversified in 2010 as the firm's internal successor. He and his partners have quickly scaled the firm to over a billion dollars in assets under management, through both organic and inorganic growth, which is where we're going to focus our conversation today specifically around how they've grown through acquisition or purchasing other firms.
So Andrew, could you start by telling us your buyer story? How did you get to the point where you decided to really make growth through acquisition, one of the key drivers of your firm's growth? Sure, and thanks for having me on Shauna. So we in 2019 brought on A CEO. We were three individuals who had a practice together, me and my partners, and we were growing at a nice clip and we got to the point where we started doing the math and I had some experience because we acquired the practice from the founder in 2013 slash 2014. But we got to this injunction point or inflection point in our business where we looked at and said, the bigger we get, the harder it becomes. You need more support to grow, you need to sustain it. A 10% growth rate on a hundred million dollars book is doable, much more doable than a 10% growth rate on a $500 million book, which is where we were growing at a nice clip organically. And so with the advent of our CEO and looking at ways to keep the formula moving and keep delivering what we thought was a great product to our clients, a great value, we decided to take a foray and test out the acquisition world.
So can you tell us about that first acquisition when you decided, let's see how this can help really, it sounds like sustain the growth rate that you guys were looking to sustain? Yeah, so it was interesting. So there's two stories to be told. One is you learn more from your failures and your successes. So we were testing this water, it was covid, it was all almost done, almost exclusively remote. We had got to the one yard line with attorneys and everything with buyer A and needless to say that didn't go through. And then serendipitously we found our first actual buyer, which was in Pennsylvania. It checked all the boxes, had a good practice, a nice base, a lot of clients that had a lot of synergies with us. It came with junior individuals, which most of them are still here with us today and staff. So it really checked all the boxes and we went through the process, acquired it and started drinking the Kool-Aid. We saw it as a great success, whether it was lucky or good that it was so wonderful that we decided that this is, we're done AB testing it. This is going to be a part of our strategy moving forward to grow organically and to grow inorganically. And since then we've made a handful of other acquisitions and are actively out there talking to sellers on a constant basis to see if we can buy or merge together to make one plus one equal three.
Okay. You've done this multiple times. The hardest part is I'm assuming the first or the hardest acquisitions, probably the first, maybe I'm wrong, you tell me. You said checking all the boxes. What are those boxes that were really important if someone's considering purchasing a firm acquisition, whether it's for talent, whether it's for a succession, whether it's for growth, maybe all the above, maybe something else. When you say check all those boxes, what are those boxes that buyers, potential buyers should be checking? Yeah, so I think some are going to be similar throughout anyone that's watching this and some will be unique to your specific practice. So I think first and foremost that you can't waiver from is fit in culture. There's the old book culture eats strategy for breakfast and it's as true as the day is long. If you don't think you have the right partner, you don't think they will jive with you. This is a marriage of sorts. It really is whether you buy 'em or you merge whatever you have it. If there are pain or you butt heads day one, it's not going to get better when there's money on the table and there's lawyers involved and you don't have the same vision or outcome. So I think fit good culture and I would definitely look for a similar outcome and understanding what it is on both sides.
The unique piece then becomes what I highly recommend is you really take a hard look and say, what are the non-negotiables in a deal? What do we know we want in a seller is that they do financial planner or they don't? Are they with a broker dealer or not? I mean there's a laundry list of things that are, and the more synergies you have, the easier it's going to be. But you really have to dissect and diagnose and do that internal sort of vetting to figure out what is going to be the mission of why you're doing this and what are the firms look like and what are the, there will be plenty of things that you're going to have to give up on along the way and by at least listing your hit few five or so, if you can get those synergies and on the same lines there, then you have the good framework to continually acquire and be successful at it.
So as an experienced buyer, so I know FA culture, what are your other non-negotiables that are at the top of the list? Again, you mentioned really important point, it's got to be a win-win, you're going to have to give some things up, but what are those non-negotiables for you? So you named two of them. For us, we want to control the investment management side on our end. Not that they can't have a say and they always do and we help create models with them, but we want to take that off their plate. That's a big one for us. Financial planning focused. We don't just sell investments, we sell financial planning and create partnerships. We want that to either be something they are formally doing or something they're willing to do, which really forays into the last non-negotiable as I would call it, which is willingness to adapt and adjust. A lot of times you're buying someone who thinks that everything they do is the best and that's okay, but when you join a bigger, better organization, we got here for a reason and you have to be willing to compromise and adjust. And sometimes teaching an old dog new tricks isn't the easiest thing and if they're steadfast that they won't adjust or willing to work with you, you're going to butt heads on every corner. No way you're going to do things the exact same way these people have that you're acquiring. Especially most of them have probably been in business longer than you have. So they are pretty set in their ways, but they have to understand and you have to be willing to be frank and have that conversation and not be afraid of it.
Yeah, that's great advice. Again, I'm assuming that if someone's considering being purchased, there's reason, there's motivations there. I'm sure many motivations that are leading them there. That makes a lot of sense. Tell me a little bit about, you mentioned finding sellers and you're always talking to new sellers. What was the first time, how did you find that right fit seller and then how have you continued to find right fit sellers? Yeah, it's a great question. So first time we used a broker who was in the business of marrying people together and we've had some success through that route. The more interesting thing is I think is if you're going to make this a part of your practice, which is really, if you're thinking about doing it, that's what you're looking to do. I wouldn't do it. I don't think one-offs make much sense unless it's your buddy down the street who your mentor is retiring and it's just so easy and it's a one-off one time thing. But by and large I think people are going to get into this space and want to succeed and do it on a repetitive basis. So I liken it to what we do with clients, it's just upstream or a different is it's a bullpen, it's a database, it's a sales process, it's building cultivating relationships, it's going to conferences like scis and all other big broker dealers. And if you're with one or other wirehouse and it's making yourself available and out there and you're going to kiss out of frogs, you're going to date quite a bit, you're going to talk to a lot of people. I even was talking to one investment banker recently about it and his analogy was he likens it to baseball and says, if you hit 300 in baseball, which means you fail 70% of the time, you're a hall of famer. And something similar here, I don't know what the actual stats are, but be prepared to fail. I mean this is a much harder sale and a much more in depth and longer process than having someone roll over a 401k to you. But it's similar in the fact that you're going to have people you talk to now that aren't ready for two years and people that are ready tomorrow and people that are ready in a year and people that you're not the right fit and people that need to think about it. So you really need a big database and a big Rolodex, although I don't believe anyone has Rolodex anymore. You need that real Rolodex of individuals to cultivate and you're going to look under every rock and nook and every cranny.
Yeah, that makes sense. And I love that advice of, think about it as if you're prospecting and looking to win and bring on onboard clients, it's not that dissimilar. Correct. So managing that pipeline process is going to be important. Now what do you think, so as a buyer, obviously you're looking for certain things from sellers, but what do you think as a buyer you should be doing to position yourself well so you're attracting and getting those right fit sellers? So first is a hard look in the mirror as I sort of stated before, figure out what your non-negotiables are and what you want to acquire because generally speaking, you're going to attract people that have similar vision. So if you can identify you what's unique about your offering and why you're acquiring, you can share it with the prospective sellers and you can start to say, it becomes very obvious the more and more of these calls I have me, and I'll do a lot of 'em with my CEO, but I'll sit there and very quickly we'll say not a right fit, the great practice, nothing against their just not a great fit for us. And so you have to be really selective. So that's key. The other is staff. So I would envision a lot of people that are considering this are solo practitioners or they have one or two staff. I can't emphasize how much work goes into this. And if you're a full-time financial planner and do anything else at your company, it's a full-time job. It's a six month process, it's a lengthy process, it's nonstop. You'll hit bumps every turn. You'll be talking to accountants and banks and lawyers and investment bankers and your staff and their staff. It is nonstop. So I would caution that if you are not set up and prepared for that, you will not succeed. And that's not, then the deal's done and the real work begins now you have to migrate and integrate a whole nother business and clients who don't know you from Adam.
So tell us more about that because I think, so that being, what are the key things that you're going, so full-time job, this is not a side gig. What are those key things that you're going to need to make sure you have time and capacity to get your right fit seller, not just in the door but merged and moved in? So in the door as a team, so I can kind of check that one off pretty quickly. It's a team. You're going to need a team of bankers, a team of accountants, a team of lawyers, an internal team, your operations, your investment team, your all of that. So you're just going to need a team to handle this. I think to your point, Shauna, now the deal is inked. What do you need to do to integrate them? Assuming that's what you're looking to do in acquiring, because again, there's a lot of ways to acquire ours is to integrate and to have a joint success. So you're going to need buy-in from the seller to really, they're your biggest advocate in your biggest mouthpiece. Whether they're retiring six months later or they want to stay on for a year or five or 10, whatever the process may be, they're the ones who have the relationships, they're the clients.
They've spent decades building and fostering these relationships and mostly this trust. So you really have to use them as your gatekeeper to some degree to help migrate to another advisor to share why things are adjusting. So you come up with that story together, they have to have the buy-in, they have to believe it to share it and then go slow, right? It's a scary thing. If I'm a client of yours for 30 years and you're now 65 years old and I see a whole new company and different colors and different messaging, you want to be careful. You do need to adjust and turn that dial, but it's not, you don't rip the bandaid off. You don't come in in day one. Say, okay, now you're invested in our investment model, see you later. Or I know you were so accustomed to SEI or Schwab platform day one, let's switch. Doesn't work like that. And the more unsteady the client feels, and let me tell you, the change is unsteadiness enough, the more antsy they get and the lower the retention can be. So you really want to make the deal, start communicating, have them start feeling the culture slowly, start having them be communicated through the seller and they'll get it. Eventually they'll get it. But also don't take them as morons. The clients that is, they're no dummies. If you're a 73-year-old advisor seller, they know you're not going to be around forever. Don't be afraid to have those conversations. So be frank, but don't shock and awe. I mean, this isn't spray gun approach. This is methodical, right? Yeah. So be transparent, be honest.
Yeah, that's great advice because it is, I mean, again, this is an investment. So you want to retain not only the clients but the staff and make that experience as seamless as possible. Do you have any, in your experience, retention rate, what is a reasonable expectation? Again, I'm sure it depends on the situation, but what in your experience is reasonable as far as retention rate? It's generally rather high. You're talking high. 90% by and large it's clients do stay. And that's again, I'm saying that both for the buyer that's listening today that I know it's scary. Clients do stay, but also the seller, we tend to overvalue ourselves quite a bit. I'm the greatest thing. No one can do financial planning as great as me, so on and so forth that my clients only like me or my clients, they won't pay a planning fee. That doesn't work here. It works here. It's going to work there. Humans are humans, whether you're in Alabama or Georgia or Mississippi or New York, humans are humans. You may have to adjust your tact a little, but by and large, that's the case.
So this is a question we get all the time, which is valuation and multiples. What are the multiples? What is the market willing to spend? How do you think about, as a buyer, how do you think about, so for all those sellers out there, this is for you too, not just the buyers. How do you think about that financial transaction and what a practice is worth? Yeah, okay, so everyone looks for the secret sauce, right? Just tell me what my practice is worth. And valuation can get pretty in depth. There's different ways to do it. There's really two ways to value at the end of the day. One is just a multiple in revenue, and that may be works if Mr and Mrs. Seller's retiring within a year. And then there's your EBITDA deal, which is and back step a second sort in that two and a half to three low, 3% top line revenue. It is a good gauge to where it's worth. And remember, if someone's going to pay you substantially more, be wary because that's not the multiples. And if so, they're going to make their money back other ways, which is charging a platform fee, increasing costs, moving your clients from here to here, stuff that you probably don't want to do. And if you got into this business, you generally care about your clients and their successes. So again, be wary. But that's from a top line revenue standpoint. Ibitda deals is really the way we like to do it, generally speaking. And you're looking at a smaller practice, use a six times roughly EBITDA deal. So another way to look at it, whether you're a buyer or seller, you have to be aligned is you're looking at free cash flow. You're looking at what the free cash flow will be when the deal closes. So if someone has a ton of expenses and wants to be paid handsomely for the next few years to work here and wants top of the multiple a valuation, something's got to give and there's no free cashflow, you can't afford to pay 'em, right? And almost everyone listening here is in a big investment bank or VC private equity type company that's going to come to the table with half a billion dollars and just write endless checks for small business owners by and large. And you really have to look at the free cash flow after or after paying staff or who needs to come over, going to remember, your staff knows bringing one client at a time. You're about to integrate hundreds with more workload for everyone. So be prepared for that. And when you value, you have to take that into consideration. And also growth rate affects that, right? A lot of advisors have 50, 60, a hundred, 150 million and they've had that for the past decade. That's not as valuable. That's not valuable. It is not as valuable as a firm that is growing 10, 15% a year. That's the reality of the valuation world.
You mentioned earlier, working with the right partners, you're going to have a team around you. And any advice on, again, when it comes to actually the financial transaction of buying, any advice as far as who are those right partners you're going to want to have around you? Yeah, you're going to want a good bank and banking team. You can get to the finish line and bank can really ruin it. I mean, if you don't have that capital and it's not clean, sellers get antsy. The first sign of trouble in paradise, people will get very itchy very quick, like buying a house once the inspection comes back or you get denied the mortgage, people don't have a long wait time. Accountants, of course you're going to want some financial person in your corner to not only understand the tax impacts because again, the dollars aren't valued equally when you have to take in taxes and you have to run models and understand the cash flow, but then the legal team is really critical, there's going to be a point where they will make or break the deal for you candidly. And generally speaking, attorneys aren't paid to say, put together a document and just accept it and be done. Right? Attorneys, they're litigious, right? Attorneys are paid to say, great, you gave me a, I mean, I'll use the same document that to close it to. We keep revising our process. So I'll use a document that last deal, spent a hundred thousand dollars with their attorneys to vet and get it perfect. And then I'll bring it with top wall firms and I'll use that same template, same document for the next acquisition. And it's like, it hasn't been looked at by attorney ever, right? I mean, starting all over, it's painful. So you really want to get deal makers and take the emotion out of it because you will get frustrated. They'll put their heels in the sand about some crazy unrealistic situation, and now you have to have an all hands meeting to do damage control.
Yeah. Did you hear that deal maker, someone who wants both sides to get where they get to that win-win situation. That's really great advice. So we've talked about a bunch of different things related to buying, how to find those right fit sellers, how to get to the point where you can actually ink a deal. We talked about merging them in and really taking your time to retain clients. What else do buyers need to know if you're serious about growth through acquisition? Anything else? You want to leave us with key takeaways?
Oh, I got the best one for you. So acquiring our business is not a cure for growth. So what do I mean by that? You are a 50, 60, $70 million firm and you're having struggles. Finding the next client or growing the cure is not to acquire that is actually going to make things worse. You're going to be saddled with debt and headaches. And if you're not a grown advisor with your book and your clients that know you and your 50, 60, a hundred, whatever it is, it's adding another, buying my book or someone else's book is not going to solve it. It is additive. It is not a cure for organic growth. And you have to really think what the outcome is, and it's got to be a win for everyone, for deals to be successful. This isn't buying a home from someone or a real estate investment where you're hoping to get lucky and get something on the real cheap. The market is advanced now. It's sophisticated. Who you're buying from is going to have people in their ears. You're not going to run away and get a steal. You're not going to pull one over. So it's got to be a win for the buyer. It's got to be a win for the seller, and it's got to be a win for the clients in my mind, to be successful. So those are, I think the pieces that I, the sage wisdom, if you will, Shauna, that I've learned in the past handful of years of doing this is it's not a cure for growth and make sure it's a win for all.
Yeah, that's really great advice. And having talked to you and having heard you talk about your experience before and answer questions from advisors before, it sounds like to your point, it really takes intentional thought process commitment to do this. This is just a path to your case outcome as far as growth. But a purchase could be for a succession, it could be much smaller. Again, if it's for growth, then to your point, make sure your house is in order. This is a big commitment, financial commitment time, and it's not really worth necessarily doing unless you have your house in order and you're serious about it. So yeah, that's great advice.
Okay. Andrew, any other key takeaways for those buyers out there that you this from the conversation? What are the things that you think are really important, they should keep front of mind as they go about thinking, whether it's our growth or succession as they think about using acquisition? Yeah, I hate on a lot of the key ones. I think Shauna, the only other thing I would tell you besides make sure your house is in order as you stated, and you're doing it for the right reasons and you understand what the outcome is because you really do want to think why you're doing this, what is the end result? This is now not financial planning. It is now business acquisition, whether it's a laundry mat or financial planning. This is not, you're no longer doing financial plan when you acquire, this is business transactions, but date data, talk to sellers, talk to people who are buying, become a sponge. It's everyone. I do. I am amazed how knowledgeable I was on the previous one, and I'm pretty good at this today, and I'm still a neophyte, I think, in my eye. So talk to everyone. I have calls constantly with things that are just people doing me a favor or talking to this gentleman or this lady who heads this place that has done a lot of acquisitions or is in the business because you get a nugget here, you get a nugget there, and it starts to crystallize the reasons you're doing it and why and how you want to do it.
So talk to everyone. Yeah, that's great advice. Keep getting better at it. It's a marathon, not a sprint,
Yeah. Thank you so much, Andrew, for joining us and providing insight. I mean, certainly we want to help. We know at some point every advisory business goes through some sort of transition, even if it's just, maybe it's the sale, maybe it's the purchase, maybe it's some transition between firms. But every firm goes through a transition. And if you are considering acquisition, we do have a number of resources and experts, advisors who've gone through it like Andrew, so please talk to us. We have resources in the growth lab, but we also again, have a network of advisors who've gone through it. And there's so much to learn from those who've done it before. So Andrew, thank you so much for sharing. Really always helpful insight and appreciate the time.
Thanks for having me. And I'm a here as a resource if anyone needs it.