You Bought the Firm. Did You Get the Business?

By Mark Buck

Keeping the seller on after an acquisition looks cheap and safe, but psychological ownership explains why it can stop the business from transferring.

One evening, over a drink in a London pub, I told an adviser that his time with us would end a few weeks later. He had sold us his firm and stayed on to look after its clients. He knew the conversation was coming, and he knew why.

Keeping him had looked like the best decision in the deal. I needed an adviser for the clients from the first day. He offered to stay. There was no recruitment fee, he would accept a modest salary, and the clients would be content because the person they trusted was still there. On paper it was the cheapest hire I would ever make.

Ownership that does not transfer

Every acquirer knows the rule about not leaving the seller in charge of what they sold. Many of us break it anyway, because the arithmetic is so persuasive. What the arithmetic leaves out is that the seller’s feeling that the business belongs to them does not change hands on completion day. The pattern is not peculiar to financial advice. It turns up wherever the value of a firm sits with one person, in a tax practice, an engineering consultancy or a law firm.

Organisational researchers have a name for that feeling. Jon Pierce, Tatiana Kostova and Kurt Dirks describe psychological ownership as the state in which people feel that something is theirs. Such possessions can become extensions of the self.¹ It has nothing to do with title deeds. People feel it for desks, projects and client lists they have never legally owned, and they can go on feeling it for a business they have sold.

According to Pierce and his colleagues, the feeling grows through three routes. People come to feel they own what they control, what they know intimately and what they have invested themselves in. A founder who stays on after a sale has all three, in most cases undiminished. They still decide how clients are looked after. They still hold the knowledge of who needs what. And the firm is still, in large part, the product of their working life.

A retained seller is therefore not an employee who used to be an owner. In their own mind they are still an owner who now happens to be paid a salary. The sale moved legal ownership at completion, but nothing in the arrangement asked the seller to give up the other kind.

Graham Brown, Thomas Lawrence and Sandra Robinson extended the idea to show what people do when they feel ownership.² They call it territoriality, and divide it into marking a territory and defending it. Neither requires bad intent. Both are predictable.

What it looks like

Our adviser did nothing that would have appeared in a management report as obstruction. He marked and defended his territory. Client records stayed in his own files, out of our systems and out of sight. He worked with one person, a junior colleague who had come across with him in the deal, and our processes went on around the two of them.

That colleague paid for it. A large share of his time went on bringing the adviser’s work up to our standard before anyone else saw it, so that we would not react badly in the early days. Our quality checks were looking at corrected work, and the integration looked healthier than it was. The person carrying the cost of the arrangement was also the person hiding it. The seller had been paid for his business. The colleague whose work was holding it together had simply changed employer.

The clients told us first. Some said the two firms had merged. Others said we did the back-office work for his old firm.

It took me longer to see that ownership ran the other way as well. His clients did not treat him as a professional adviser so much as someone permanently on call. They phoned him on holiday and took up his evenings. They told him what they wanted, and the tone was rarely better than neutral. I do not think any of it was deliberate. It was simply the culture the relationship had grown up in, and over the years it had become the service. The clients felt they owned him, in exactly the sense the theory describes, and our way of working threatened that. Shared processes, a team behind every client and an adviser with protected time all meant less of him on demand. His territory was their territory too, and they had as little interest in it changing as he did.

Our client surveys and review requests showed it more clearly than anything else. From those clients we received no responses at all. There were no complaints and no praise, just silence. They had no relationship with us to rate.

This is one deal, and one deal proves nothing on its own. But the mechanism is not peculiar to the people involved. The theory gives us reason to expect similar behaviour where a seller retains control, knowledge and a working life invested in the firm, and where clients have grown used to owning their adviser.

Deal structure tends to reinforce all of this. Deferred consideration is usually tied to revenue or client retention, which rewards the seller for keeping everything as it is. Moving a major client relationship to a colleague carries a small short-term risk and removes a large long-term dependency. A buyer should want that trade. A seller whose remaining payments depend on this year’s numbers has every reason to avoid it. There is a second problem. An earn-out measures client retention while the seller is still there, which is when retention tells a buyer least. The real test comes when the seller leaves, and that may be after the last payment has gone.

An earn-out tied to revenue the seller personally holds is paying, in part, for something the buyer has not yet acquired.

What a buyer has to change

None of the steps that follow is new. What is uncommon is applying them deliberately and early, while the arrangement still appears to be working and the seller is still cooperative. If psychological ownership grows through control, knowledge and investment, a buyer who wants the business to transfer has to move all three, and the right time is when it feels least necessary.

Control means one way of giving advice, onboarding clients and reviewing their affairs, so that the client’s experience does not depend on whose client they happen to be. Advisers often resist it, because many came into the profession precisely to do things their own way.

Knowledge means a client record that belongs to the firm. If notes, correspondence and plans sit in one person’s files, the firm owns the client only on paper.

Investment is the hardest, because it has to be built on the client’s side as well. Clients need to meet the wider team, the other advisers, the technical specialists and the people who do the work they never see, until no one feels they are the client of a single person. We now invite around twenty-five clients at a time to an evening in a pub, in a different place each time. It is a long way from an integration plan, but a client who has shared a drink with five of us finds it harder to believe they belong to one.

Conclusion

None of this means a seller can never stay. Some do, and make a success of it, often, I suspect, because they were ready to stop feeling like the owner before the buyer asked them to. At completion, list what still depends on the seller, including whoever is doing the seller’s work for them, and give that person a reason of their own to stay. At twelve months the list should be shorter, and at twenty-four shorter again. Watch, too, whether the seller’s clients answer the firm. If the list has not shrunk and the clients are still silent, psychological ownership has stayed where it was, whatever the share register says.

The shares transfer at completion. The business transfers later.

AI acknowledgement

AI tools were used for research support and editing. The article’s thesis, examples and final editorial decisions are the author’s own.

About the Author

Mark Buck is CEO of GSI Group, COO of Mitchell & Mitchell Asset Management and author of Leadership Without Arrival. He writes on leadership and organisational capability, drawing on more than twenty years leading service businesses, including acquiring and integrating advisory firms. He holds an MBA, is a member of CFA Institute and a Fellow of the Chartered Management Institute.

Notes

1. Pierce, J.L., Kostova, T. and Dirks, K.T., “Toward a Theory of Psychological Ownership in Organizations,” Academy of Management Review, Vol. 26, No. 2, 2001, pp. 298–310. https://doi.org/10.5465/amr.2001.4378028

2. Brown, G., Lawrence, T.B. and Robinson, S.L., “Territoriality in Organizations,” Academy of Management Review, Vol. 30, No. 3, 2005, pp. 577–594. https://doi.org/10.5465/amr.2005.17293710