Magazine article The CPA Journal

Expanding into Financial Services

Magazine article The CPA Journal

Expanding into Financial Services

Article excerpt

With baby boomers set to retire in increasing droves, there will be a growing need for financial advisors. In a research report, "A Synopsis of the CPA Industry and Highlights of Their Models for Entering the Investments Business," Tiburon Strategic Advisors (www. tiburonadvisors.com) notes that CPAs predict that over the next 10 years financial services will be one of the hottest fields for accounting firms looking to enhance their revenues. Studies have shown that regardless of size, accounting firms that offer financial services consistently generate more revenues than those that do not. Nonetheless, as of June 2000 less than 50% of CPA firms were delivering financial services.

Firms interested in expanding into financial services must consider all the potential options and expect to spend at least six to nine months planning before offering financial services. The biggest consideration and often the biggest hurdle for firms expanding into financial services is choosing a business model. Choices include building a financial services firm from scratch, acquiring an existing financial services firm, or joint-venturing with an existing financial services firm. Each model has advantages and disadvantages (see Exhibit 1).

Starting from scratch. Although this can be viable for larger companies, it is usually not the best option for small to mid-sized accounting firms. Starting from scratch is by far the most difficult and expensive approach. At least one partner will be consumed full-time in building the financial services side "of the practice.

Firms should expect to spend at least $65,000 annually for things such as compliance, personnel, technology, and investment research (Exhibit 2). A business plan and realistic budget are essential.

Acquisition strategy. One of the most effective methods for getting into financial services quickly is to acquire an existing firm. An acquisition strategy may be more costly upfront but it can be attractive if the acquired entity's existing cash flow can finance the cost over the term of the buyout.

The single most important consideration when acquiring another practice is its culture: How does it conduct business? Is it fee-based or transaction-oriented? What is its philosophy? The success of the acquisition depends on retaining acquired clients. If the culture of the targeted firm clashes with the acquirer's culture, then the union cannot work.

Additional considerations when acquiring a practice are the different organizations' brands, target markets, and client bases. For example, if the acquirer specializes in helping small business owners, it won't want a financial services firm whose clients are predominantly teachers.

Once a good fit is found, financial matters can be considered. A practice that is mostly commission-based will generally command a lower valuation than a firm that is mostly fee-based. Generally, feebased practices trade for approximately two times revenues, whereas commissionbased practices trade for around 1 to 1.5 times revenues. The amount of expected client servicing can also affect the purchase price.

Financing can be accomplished in a number of ways, but "eam-outs," which structure the acquisition so purchase payments are directly tied to client retention and future net revenues, generally work best.

Because acquiring a practice-and gaining potentially hundreds of clients overnight-is popular, patience is key. Finding the right practice at the right price may take years. The acquisition route should not exclude the pursuit of other strategies at the same time. …

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