Looking into the business model of FOCUS Financial Partners

Published Date: 2019/09/07

FOCUS Financial Partners has a unique business model where growth is largely driven by M&A. Looking into the recent earnings call transcript using Earnings Intelligence offered some understanding.

The Model

“On average and over time, growth via mergers has more than doubled our partners'revenue growth rates, compared to what they could achieve without mergers.”

“Firms when they join us, not for all of them, but for many broad probably most of them, doing mergers is one reason to join Focus that is where we are highly differentiated in the marketplace. And most firms when they join us do not have the ability to do mergers yet. Their infrastructure is not scalable enough their process fees are not quite where they need to be incentive systems need to get adjusted. So there is a lot of work where our new partners and us roll up our sleeves and kind of get them in a position to be ready to do this transaction.”

“And once firms are qualified that's when we basically with our partners develop an M&A strategy for them and then create an outreach program to ultimately your help with the execution of the strategy. Usually -- probably my guess is two-thirds or so of firms who join us here we generated through the execution of this M&A program and one-third are just existing relationships that partners have and they are ready to consummate once they join us.”

“So we expect not all, but most of our partner firms ultimately will be in the M&A game and that is simply a function of this tremendous consolidating forces in this industry 17,000 RIAs managing $5 trillion in assets, and you're founding owners 60 years plus. So there is just an enormous level of transition into generational transferring their ownership and control of this companies and our partners in Focus is just tremendously well positioned to take advantage of these forces.”

The EBITDA Margin

“While we are in this period of rapid growth our adjusted EBITDA margin will continue to be influenced by the percentage of EBITDA we acquire.”

“Accordingly, we cannot provide full year guidance, but we estimate that our EBITDA margin will be approximately 21% in Q3. Management fees, which is one of our largest operating expenses, increased sequentially by $22.2 million and also as a percentage of revenues due to the growth of the business and the associated impact on the contractual management fee calculations.”

This article draws references from Earnings Intelligence, a service provided by SiteFocus