Jim Cahn: The 4 Pillars of Successful M&A

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Hello and welcome to Barron's The Way Forward. I'm Greg Bartalas, and my guest today is Jim Kahn, the Chief Investment Officer of Minneapolis-based Wealth Enhancement Group. Jim will discuss the 4 necessary ingredients to execute successful M&A. Welcome to the program, Jim.

Thanks for having me.

Well, let's get right into it. Let's start with point number 1.

Well, even before we start with point number 1, I think it's important to talk about why are we doing M&A in the first place? Successful M&A doesn't really end with closing the deal. Successful M&A ends when you actually improve client outcomes and you actually get the firms that join you to grow. If I was running a long-short equity fund, I'm putting on my investment management hat here, I'd probably short all the firms that were highly acquisitive and go long all the firms with organic growth. So if you can't get these businesses to grow after you acquire them, you really probably shouldn't be buying them. But that said, if we all even agree on the endpoint, just getting to the endpoint is pretty tough. So there are 4 things that I think that you need to have ready to go before we even begin to embark on M&A. And the first is you have to understand what makes you different. It's a very competitive environment out there. When we're involved in a banker-led process, they're telling me they're getting 15, 18, 20, 25 different bids. And so if you don't know what makes you stand out or your firm stand out, you're just wasting your time submitting into that process. So you have to have a very clear value proposition. The second thing is that you have to know yourself, right? So that's from Socrates. Know thyself. You have to understand your processes, your systems, because you're asking someone to bring their life's work, their business into your environment, into your operating environment. If you don't have clear, well-documented processes, then even if you convince that firm to join you, when they get there, they're going to be really unhappy. And the place you'll see that the most is in the client service staff. So actually, where the change manifests for most of these firms isn't with the advisors. Their life stays mainly the same. It manifests with the client service staff. That's really the lifeblood of the business. We saw this early in our practice as well, where when we started bringing firms in, we didn't have our processes documented well enough, and that created a lot of frustration with the field. And so we did a lot of soul searching, a lot of work documenting, learning our own processes so that we could teach it better to others.

What would be the third thing?

The third is you can't hobby in M&A. You have to have professionals. If you're doing M&A on the side, it's not going to be successful because you're competing against other firms that have dedicated teams. And it's not just dedicated M&A people. It's not just dedicated people finding minding businesses, but you also have to have a dedicated integration team that really understands how to take a firm from LOI, that letter of intent, all the way through to close, all the way through to making sure that their systems, process, and people are well integrated. You have to have dedicated legal people because a big part of a transaction is actually negotiating documents. That can take up a lot of time. And if you don't have dedicated people, legal people on your team, it's not going to work. You should also probably budget to have one additional person per department finance, operations, investment management, and on and on to sort of handle the additional friction that comes by adding new teams. And that's a really expensive proposition, especially if you haven't even done a deal yet.

Right.

And the final thing is that you have to change your culture. You have to accept that M&A is hard. It's hard because you're bringing people into the organization that have expectations, that have heightened emotions into an operating environment that's probably running pretty well. And so if you don't find that humility inside of your organization, especially in your senior leadership, to accept the fact that you might have to change as well as the firms that are joining you are changing, then you're not going to be successful. You're not going to end up having those firms integrate in a successful way and they're not going to grow. So that humility, that change to the culture is incredibly important in terms of being a successful acquirer of, of these wealth management practices.

And your firm has been an active acquirer. Amongst these things, do any in particular resonate, or do you give them more or less even equal billing in terms of relative importance?

Well, I think if you don't have all 4 of them, you're not going to be successful. They're sort of like pillars holding up the entrance to a house or to a bank. If you don't have all 4 pillars, then it's going to be unstable.

And are there any that do not do this well, that they tend to fall into? Do you see patterns that repeat themselves?

Yeah, I think there are a lot of firms out there that don't have a clear value proposition. So as we think about the universe of potential buyers, we really think about it as a spectrum. On one hand, you have financial-only buyers. They'll come in, write a check that will solve a lot of the issues related to maybe G1 to G2 transfer. We call it taking chips off the table. But those firms that take that check aren't going to be able to benefit from any of the scale of joining a larger firm. And we think long-term scale matters. On the far other end, they're really sort of distribution buyers. So they'll buy these businesses, they'll strip out all the operations, they'll put the advisors on salary and bonus, and that allows those advisors to sort of get the benefits of scale, but it kind of crushes that entrepreneurial energy that really drives our business. And so that to us isn't the best option as well. We sort of have positioned ourselves as having a partnership model where the parts of the business that need to be customized for the client, the relationship management, the planning, and sometimes the investment, we leave that with the advisor. But the areas where scale can actually be achieved, finance, accounting, portfolio accounting, compliance, sometimes investment management, right? We're gonna take that off the advisor, we're training them 20 to 40% of their time, and they can use that then to grow their business. The other thing that we see often is that firms don't have the humility to be acquirers, right? So the reason why they're acquiring is because they think they know best. And I think that if you aren't seeking to learn, if you're not seeking to figure out how to constantly innovate and improve your business, you're not gonna be successful bringing on entrepreneurial energy or bringing entrepreneurial energy into your business. If you think about it, you know, we're about $60 billion in AUM. We're still a speck compared to some of our large competitors. It's hard to even call them competitors. We're so much smaller than them. And so we're all in this together. We're building a new industry. We're creating a new way that money is being managed, our registered investment advisors. And that's really exciting to me and that's what keeps me going. But we have to be humble enough to know that along the way, there's a lot of learning to do, and we have to learn from the people who are joining us. And I would have to say that every transaction that we've done, and we've done over 60, there's been something that that firm has taught us, whether it's they read paper better, or they have a tax practice, or they have a special way of dealing with special needs trust, whatever it is, we've been able to take all those best ideas and spread them across the organization, and that's made us substantially better.

[Speaker] That's great. For the firms that lack humility, if you will, do they ever change, or do they tend to just stay that way and not really adapt and put themselves in peril?

It's hard to say. I know that we adapted. When we did our first transaction in 2013, we had a military-style plan of how we were gonna integrate and go in and bring this firm into all of our systems and processes, and it was a failure. There wasn't enough learning, there wasn't enough of a conversation about how that was gonna go. If I had to give any listener advice, don't be anyone's first transaction 'cause it will not go well. That said, I think that that experience really helped us get better, and the firm that joined us in Chicago taught us so much about ourselves So much about how we needed to change as an organization that over the pursuing, over the last 10 years, we've gotten really good. And that transaction's turned into a real success with that firm growing from $300 million in AUM in '13 to over $2 billion today. And so we were successful with that transaction, but it was tough and we had to learn a lot.

Yeah, so obviously to sell to a firm that has more experience would be better for many obvious reasons. You said don't be the first. What about the second or third? Where do you draw, what's the tipping point here?

Well, I would say that we got exponentially better with each transaction. That we brought on. And so, you know, today we have dedicated integration managers, dedicated legal people, dedicated transition assistants, specialized training for the client service staff, advisor services, which provides support to the advisors. So we have a team of specialists that the advisor and the advisor's team can really rely on. And that took a decade to build. I'm very proud of it. And so I would say look for those types of things that potential buyers of your firm and ask the question, are they actually prepared to take care of me? If I looked at them the way that a client looks at me, do they have the right people, processes, are the right investments in place to actually take care of my people and my clients? And that's how you should be evaluating firms that you're considering joining.

Okay, and we're almost out of time. Can you share an actionable idea for anyone listening about how they might be able to get closer to enacting some of what you're recommending?

So I think the first thing is if you're thinking about doing a transaction for the first time, hire the lawyer, hire a really good lawyer and talk to them about the types of protections and the types of deal structures that you need. And then I would also probably think about hiring a buy-side banker to have them lead you through that process. If you were thinking about selling, I would encourage you to really think about what is it that you want out of a transaction? Because if you just say the highest price, that's not going to get you to a very good place. Do you want to keep everything the same? Because if you figure it all out and you just want to take chips off the table, do you want to basically relinquish all control? Or do you really want to relinquish control just over the places where, where you don't think you add value and maintain control over the places that you do have value? And if you understand what it is you're looking for, you'll be much more successful in your search for a potential partner.

Excellent. That was very useful advice. Thank you so much.

Thank you for having me.

Well, my guest has been Jim Kahn. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartolis.

This podcast was brought to you by Wells Fargo Advisors. Looking for a firm your clients can't outgrow? Wells Fargo Advisors offers financial advisors full balance sheet solutions with wealth planning, investment products, banking, and lending that meet the needs of affluent to ultra-high net worth clients. Build your practice your way and on your schedule with independent and employee model options designed to meet your needs today and tomorrow. Learn more at joinwfadvisors.com.