The Importance Of Liquidity At The Start And Down The Line

Private Advisor Group Exec Discusses Why Liquidity Is Important For Acquisitions Both In the Initial Phase And Post-Acquisition
Donald Stahl, Head of Sales and Solutions, Private Advisor Group
Donald Stahl, Head of Sales and Solutions, Private Advisor Group
James Miller, Contributing Editor & Research Analyst, Wealth Solutions Report
James Miller, Contributing Editor & Research Analyst, Wealth Solutions Report

Any small business in any industry has liquidity needs. Advisory businesses are no exception. While we often focus on financing the purchase price of an acquisition, there are more layers to the needs that advisors can face at the time of an acquisition, as well as additional needs that may require funding after a successful acquisition and integration.

To gain a more robust view of the liquidity needs that independent advisory firms face, we caught up with Donald Stahl, Head of Sales and Solutions at Private Advisor Group.

We asked him what advisors need to know about liquidity planning, the liquidity needs that often arise during an acquisition process, items that may need financing down the road after the acquisition and the pros and cons of receiving a minority investment to provide liquidity.

WSR: What are the basics that advisors should know about liquidity planning?

Stahl: Financial advisors should have a solid understanding of their short and long-term liquidity positioning. This gives them confidence in their ability to meet short-term expenditures – avoiding stress and potentially allowing them to fuel growth. Positioning for growth provides the confidence and flexibility to seize opportunities in terms of hiring, M&A, service expansion and more.

Positioning for growth provides the confidence and flexibility to seize opportunities.

Donald Stahl, Head of Sales and Solutions, Private Advisor Group

In an all too real scenario, last year, one of our financial advisors received a phone call that the unexpected happened. Just down the street from their office, an owner of a practice had suddenly passed away with no succession plan in place. The attorney calling asked if they’d be interested in acquiring the practice. That advisor maintains a solid balance sheet and was able to confidently finance the acquisition and focus their time and energy on easing investors’ minds, as well as merging operations and cultures.

WSR: If your advisory business is acquiring another one, what costs will you need to cover and how must you plan liquidity for that transaction? How early must you take these steps?

Stahl: Outside of the purchase price of the acquisition, major costs typically tend to include consulting or advisory fees for legal, compliance and due diligence; potential real estate; marketing costs for rebranding and client outreach; severance, retention or additional staffing expenses; and technology and other integration expenses.

Every acquisition is unique so putting a price estimate on costs is challenging. However, the earlier you initiate planning, the more advantage you have in managing these expenses.

WSR: After the acquisition, what additional costs may be incurred and how does the advisory firm plan for that?

Stahl: After an acquisition, it’s crucial to plan for expanded operations and increased overhead. In the independent space, for example, regulatory expenses are always increasing. Expenses like advanced technology and enhanced cybersecurity are often significant and can be overlooked.

Advisory firms may tap into partner firms that offer a curated technology stack and pre-vetted providers. Often the due diligence in the provider is already completed and the practice owner can take advantage of economies of scale for some of the services required to run a successful operation.

The firms that invest in culture and communication tend to see great value.

Donald Stahl, Head of Sales and Solutions, Private Advisor Group

Additionally, the firms that invest in or, at minimum, shift their planning focus to culture and communication tend to see great value. This might require an additional investment in talent or marketing.

WSR: How do minority investments aid in liquidity, and what are the pros and cons of receiving a minority investment?

Stahl: Minority investors tend to provide cash, equity or financing for an opportunity, and often contribute additional industry knowledge. Going the minority route often means there is still entrepreneurial autonomy.

It’s worth noting that you may be obligated to follow reporting requirements or meet specific milestones. That’s why cultural fit and conducting proper due diligence to identify the right partner with knowledge of your business is a huge consideration. Ultimately, you want to align with a partner that shares an interest in your collective growth and brings energy and fuel to your future.

James Miller, Contributing Editor and Research Analyst at Wealth Solutions Report, can be reached at ContributingEd@wealthsolutionsreport.com.

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