After two decades of false starts, the great consolidation in Hollywood business management companies seems to be under way.
International financial services aggregator Focus Financial Partners, which is publicly traded and sports a $4 billion stock market capitalization, acquired two sizable Hollywood business management films. They are the giant NKSFB (formerly Nigro Karlin Segal Feldstein & Bolno) in April and Gelfand, Rennert and Feldman a year earlier. Further, NKSFB merged with GSO Business Management just before being acquired by Focus Financial.
Over the past several years, merger pressure has built up at Hollywood business management firms as founding partners have sought to sell their ownership stakes in an unprecedented wave of retirements. These founders established their firms in the boom of the 1980s and 1990s.
“I wouldn’t be surprised to see more of these types of transactions over the next six to 12 months,” says Mickey Segal, managing partner at NKSFB.
Not that there’s anything surprising about this. Business management firms merge all the time and for a variety of reasons, besides retirement-age partners wanting to sell their interests. David Schachter, who is senior VP, wealth management, at UBS Financial Services and works with business managers, sees acquirors “buying a stream of potentially rising cash flows while allowing member firms to control their practices. The firms being gobbled up are typically able to retain their autonomy. They can share overhead and intellectual capital.”
Other merger motives are desire of a buyer to fill a gap, such as bolting on a music practice, taxation expertise or geographic reach. In other cases, the seller may be in financial distress.
In these cases, size does matter. Bulked-up players can more easily borrow money to fund expansion and better afford overhead costs such as cyber security, which is a top concern as financial transactions by clients using their personal digital device are targeted by hackers.
Arty Erk, partner at Citrin Cooperman, a national accounting firm with a Hollywood business management practice, makes the case for consolidation because it brings a lot of expertise under one roof.
“We have many tax specialists in the firm who have the broad range of expertise from personal estate tax to international taxation to non-profits that many of our clients have,” he says. For those moving from small firms where they were jacks-of-all-trades, Erk jokes that they “don’t have to change the light bulbs anymore.”
Joe Rust, regional managing partner, California, at Prager Metis that has acquired to bolster its Hollywood business manager practice, says buyers already in the business have insider understanding “to figure out what the [selling] partner group needs” to make a deal. That’s because there often are elderly founding partners who want to ride off into the sunset while other middle-age partners within the same selling firm want to remain in the saddle.
Business managers, most of whom are accountants by training, handle talent and executive clients for their banking, tax matters, retirement planning, personal spending plans, and completion of big-ticket purchases such as houses and cars. They tend to have close, long-term relations with clients. They usually are not primarily responsible for picking more volatile investments such as stock portfolios.
Interestingly, new consolidator Focus Financial has historically targeted its efforts on acquiring stock-picking asset managers, though it diversified into Hollywood business managers after buying business management firms NKSFB and Gelfand Rennert. The New York-based Focus Financial, which went public in July 2018, is fast-growing with annualized revenue of around $800 million after rolling up dozens of financial-services firms.
“I think that business managers’ firms will sell if the price they can get is higher than by selling or merging with another business manager firm,” says Bill Tanner, president and founder of business management outfit Tanner Mainstain Glynn & Johnson.
Experts believe such acquisitions will persist. “We expect the business management community to continue this consolidation trend,” says Martha Henderson, head of entertainment for City National Bank, which works extensively with business managers. “And of course, I expect that there will arise from this [trend] partners that break off and start new firms. This is nothing new in the entertainment support industries.”
Focus Financial declined to comment, but its IPO prospectus says that it’s ready to use cash and its publicly traded stock to buy financial firms from aging partners. Its acquired companies maintain individual identities and names, so Focus Financial ownership is not obvious to the outside world. Thus, Focus Financial operates as a sort of holding company much the same way that financier Warren Buffett affords autonomy and separate names for the operating units of his Berkshire Hathaway conglomerate.
Focus Financial locks down key executives at acquired companies, with employment contracts usually running six years and earn-out compensation agreements based on financial performance to incentivize those executives. While its operating structure is decentralized, Focus Financial notes that there’s a centralized “common general ledger, payroll and cash management systems” by which Focus oversees its companies.
Hollywood business managers say that acquisitions only make sense if a next generation of management is in place to fill the shoes of retirees, and this is often a challenge. Business managers across Hollywood say recruiting new college grads is difficult. Other sectors in finance pay better and offer more regular hours, unlike business managers, who often have to swing into action at odd hours to handle clients’ personal matters.
Some business managers are skeptical that bigger will prove better. “Handling their money is the most intimate relationships that clients have,” says Evan R. Bell, managing partner at business management firm Bell & Co. “When you corporatize that, you lose intimacy.”
John McIlwee, partner at business manager Shephard McIlwee Tinglof, echoes that thought. He says the Hollywood business management service, which is concierge-like, “is extremely personal and best managed by smaller, discreet firms.”
Over the past decades, there have been other efforts at consolidation with outside-the-sector companies buying some Hollywood business management firms.
Those earlier outside consolidators include American Express, Assante/Loring Ward, former accounting giant Coopers & Lybrand, J. P. Morgan, Republic Bank and Wilmington Trust. An attraction was the synergy of getting bank deposits, morgtage loans and other financial activities of clients from their owned business management companies, but all or part of those firms later, for the most part, sold back.
Business management insiders wonder how the landscape might be radically reshaped, pointing to the general accounting sector shrinking to the Big Four, in a consolidation from the Big Eight. Today, most Hollywood business manager practices are 15-75 employees as either free-standing boutiques or specialist arms within larger diversified accounting firms.
Focus Financial turned heads because it pounced on Hollywood’s biggest: NKSFB has 375 employees.
David Coronel, partner in Tanner Mainstain Glynn & Johnson, expects a flurry of mergers will create some bulked up business managers, but he adds, “I think there will still be a place for the smaller independent firms.”