How Things Fall Apart: Why Some RIA Mergers & Acquisitions Fail

By The Lerner Group on February 4, 2021

How are you coping?

Who would have thought a year ago that this would become one of the most common ways we would start conversations? Today the art of networking seems to be all about trying to create genuine, meaningful connections in a “no contact” world.

In her book, When Things Fall Apart, best-selling spiritual author Pema Chodron shares how precious coping skills can be in times like these. Times when lives are turned upside down. When the abnormal becomes the new normal. When the familiar becomes unfamiliar. When events seem to put us on our back foot with no end in sight.

Storm Clouds On The Horizon? Meteorologist and economists are keen to point out the difference between “leading & lagging” indicators.  In meteorology, temperature, wind and barometric pressure are leading indicators used to predict weather. In economics, manufacturing activity, housing markets, and consumer confidence might give Financial Advisors some of the insights they need to see around corners in the stock market.

Diligent financial advisors attempt to understand these indicators and help their client’s plan accordingly. Not all leading indicators are causal factors, most are coincidental indicators. And, not all have the same weight or effect on desired outcomes. More importantly perhaps is that it is not uncommon to confuse “correlation with causation.”

Never a prophet in our own village?  Willing participants in a potential merger or acquisition may unwittingly have blind spots if they fail to identify the right causal factors. So, what if you pay too much attention to the wrong ones? Does it put the long-term viability of a strategic acquisition or merger in peril?

The risk of getting it wrong may be higher today that it has been in decades. Almost weekly you can read about the intense drive to acquire assets by gobbling up RIA practices. Whether by practice acquisition, mergers or “tuck-in’s”, players with deep pockets are scrambling to scale their platforms while in theory adding value to the client experience.

The planning blind spot may be in missing one of the primary casual drivers of tangible enterprise alpha. This leading factor of enterprise value is often in plain sight if you know how and where to look for it. It can be found by paying close attention to the softer elements of strategic combinations. But it is the one area most often overlooked since it is hard to capture in spreadsheet modeling exercises. Failure to start with these intangible factors first is often akin to not seeing storm clouds forming just over the horizon before taking flight.

Beware of “Serial Acquirers”

Building enterprise combinations that go the distance takes patience, forgiveness, vulnerability and more. It takes time, lots of time. Time away from your core business. Time to collaborate, to transfer the trust, to build new common experiences.

In the case of acquisitions, the buyer may have more influence in what stays and what goes. But, in a merger both parties may be better served by adopting a philosophy of co-creation. This is best achieved when both partners have a voice and can see their fingerprints on the standards that the new enterprise will live by going forward.

This approach takes organizational attributes that may be in short supply. It is fair to ask of the deals we read about today, will there be sufficient time and investment in leadership and coaching for the potentially messy job of knitting together two value systems, cultures, strategic visions, and role architectures?

Done right, this approach may take several years of intentional collaboration. The path most often associated with this approach is “trust but verify” or to enter into a protracted “dating before you get married” methodology. Failure to do so can often lead to an untimely business divorce or disappointing payback on the implied value of the theoretical combined enterprise.

To do this well requires buyers and sellers of RIA practices to enter waters they are typically not comfortable in. They must be willing to go far beyond the “quantitative” rationale for the strategic combination.  And rather prioritize causal “qualitative” synergies of the combined enterprise by focusing on an extended “new enterprise formation” process. This process is centered around Tuckman’s Four Stages of New Team Formation; namely, Forming, Storming, Norming and Performing.

Stage 1: Forming

In the first stage of new team building, the coming together of divergent visions, people and processes of the new enterprise takes place. Individual behavior may be motivated by a desire to be accepted by the others and avoid controversy or conflict. There may be turf markers being laid down as if one was marking their territory. Serious issues and feelings are usually tactfully avoided, and people focus on their established routines or habits, e.g. who does what, pre-existing patterns such as scheduling meetings, who’s included, who’s not, etc.

In this initial stage, people typically seek to gather information and make or create first impressions about each other. They may ponder on how to now approach assigned tasks or challenges. Generally, individuals are on good behavior in this stage and seek to avoid conflict. But, not much actually gets done as genuine attempts at collaboration may take time or resources away from individual priorities.

Eventually, the new team settles on the jointly defined focus opportunities, challenges, and goals and sets out to work on them. However, team members may still behave quite independently. Their spirit or intention may be in the right place however members may lack clarity or be uninformed on the new overarching objectives of the newly combined firm. Enlightened team members begin to demonstrate desirable team behaviors. Team members start to get to know one another, exchange some personal insights, and hopefully make some new friends. This is also a good opportunity to see how each member responds under pressure or through new challenges.

Stage 2: Storming

This is where the magic happens. The storming stage is necessary to the growth of the team. It can be contentious and even painful to members of the team who are averse to conflict. This is where individual coping skills are put to the test. Tolerance of each team member and their differences should be emphasized. Without tolerance and patience, the team will likely fail. Some teams never develop past this stage.

In the storming stage different ideas compete for superiority. This is where seasoned coaching and leadership earns it’s keep. Rather than avoid conflict or disagreement, transition leadership needs to make a safe place for it to occur.

All participants are expected as an obligation of membership in the new enterprise to bring forward all ideas, good or bad, respectfully and professionally but to foster “healthy conflict”. It is not about getting “my” ideas accepted it is about knowing it is safe and expected to bring forward ideas so that the new enterprise can adopt faster. The new enterprise loses if team members merely seek to re-heat the way it was always done in their own legacy practices.

For the Newco to thrive and for the synergistic value to blossom, the team members now must take a leap of faith and step into the arena of vulnerability. No judgement, no bad ideas. Just over-rewarding participants for seeking collaborative solutions.

Even if progress in this stage is more costly or time-consuming than the old way, the brave members of Newco are co-adopting new team harmonies that will likely surpass what could have ever been done alone.

The goal here is to let go of the old and adopt the new. Adoption is made all the easier when each team member feels that they have a true voice and are truly being heard. Then and only then will they embrace the new as their own.

(Source: Bruce Tuckman 1965)

Stage 3: Norming

The team manages to have one goal and come to a mutual plan for the team at this stage. Some may have to give up their own ideas and agree with others to make the team function. In this stage, all team members take the responsibility and have the ambition to work for the success of the team’s goals. The danger here is that members may be so focused on preventing conflict that they are reluctant to share controversial ideas.

Stage 4: Performing

It is possible that some teams will achieve this stage. Only when the new enterprise reaches this stage will horizon values be realized in strategic combinations. Or in other words, this is when 1+1 = 3.

These High-Performing Teams (HPT) can now function as one unit. They have now co-created the ways in which things get done effectively and without inappropriate conflict. By this time, team members demonstrate both motivation and knowledge. Often members are now able to handle the decision-making process without supervision. The team will make most of the necessary decisions.

Occasionally, even the most high-performing teams will revert to earlier stages in certain circumstances. Teams go through these cycles many times as they react to changing circumstances. For example, a change in leadership may cause the team to revert to storming as the new people challenge the existing norms and dynamics of the team.

To learn more about how to integrate qualitative team formation skills and create long-term enterprise value into your transition plan, feel free to contact Bill Kica at bkica@hightoweradvisors.com