2020 ANNUAL REPORT
We partner with independent fiduciary wealth
managers around the world who serve wealthy
clients and select institutions. We are permanent
capital investors who celebrate the power of
entrepreneurship. Our partner firms maintain
their operational independence while benefitting
from our scale, industry leadership, and extensive
resources. We provide the tools and solutions that
enable our firms’ advisors to deliver integrated,
highly-personalized client service.
A Leading Global Partnership of Fiduciary
Wealth Managers
1
Consortium
71
4
Partner Firms1
Countries
A High-Growth Business
$1.3+
Billion 2020
Total Revenues
33.3% 13.3% 200+
Revenue Growth
CAGR Since 2006
Average Quarterly
Organic Revenue Growth2
Since Q1 2017
M&A Transactions
Since 2006
A Highly Differentiated Value Proposition
Independence &
Entrepreneurship
Permanent
Capital
Value-added
Services & Expertise
1 As of December 31, 2020.
2 Organic revenue growth represents the period-over-period growth in revenue related to partner firms, including growth related to acquisitions of wealth management
practices and customer relationships by Focus’ partner firms, including Connectus, and partner firms that have merged, that for the entire periods presented are included
in Focus’ consolidated statements of operations for the entire periods presented. Focus believes these growth statistics are useful in that they present full-period revenue
growth of partner firms on a ‘‘same store’’ basis exclusive of the effect of the partial period results of partner firms that are acquired during the comparable periods.
2 Focus Financial Partners 2020 Annual Report
Our Business Model is Centered on the Needs of
Wealthy Individuals and Select Institutions
Focus Financial Partners 2020 Annual Report 3
We Delivered Record Financial Performance
in an Unprecedented Year...
Revenues
($ in millions)
CAGR:
28.9%
Adjusted EBITDA1
($ in millions)
CAGR:
33.7%
$382.3
in 2015
$910.9
in 2018
$1,361.3
in 2020
$75.4
in 2015
$203.4
in 2018
$321.8
in 2020
Adjusted Net Income
Excluding Tax
Adjustments
Per Share1
CAGR:
31.7%
Tax Adjustments
Per Share1
CAGR:
33.7%
$0.62
in 2015
$1.42
in 2018
$2.46
in 2020
$0.11
in 2015
$0.32
in 2018
$0.47
in 2020
Well Positioned
for Strong
Growth Over
the Long Term
Strong Secular
Industry
Growth Dynamics
Leading Partnership
of 70+ Independent
Fiduciary Firms2
1 Non-GAAP financial measure. Please see 2020 Annual Report on Form 10-K following this letter to investors for a discussion of non-GAAP measures, including related
reconciliations.
2 As of December 31, 2020.
4 Focus Financial Partners 2020 Annual Report
… Supported by a Well-Designed Financial Model
95%+ of Revenues
Fee-Based & Recurring; No Interest
Income Dependency
26% of Revenues Not Correlated to
the Financial Markets
Management Fees Tied to
Partner Firm Profitability
Low Cost of Debt Capital
Tax-Efficient M&A
Acquisition Structure
Highly Variable Cost Structure
and Cap-Ex Lite
High and Increasing Cash Flow
Available for Capital Allocation1
Preference Creates Downside
Earnings Protection
Resilient Business
Model Across
Market Cycles
Ample
Growth Capital
Strong Financial
and Operating
Fundamentals
Focus Financial Partners 2020 Annual Report 5
Letter to
Investors
My Fellow Stockholders,
The coronavirus (Covid-19) pandemic and the disruption it caused to
lives, communities and markets around the world made 2020 a truly
unprecedented year. Against this macro backdrop, I am extremely
proud of what our business accomplished. Despite a year with many
uncertainties, our business demonstrated remarkable resiliency.
We delivered record financial performance, our M&A momentum
was excellent, and we remained at the forefront of our industry in
providing innovative business and client solutions. Our partner
firms around the world did an outstanding job of managing their
businesses, pivoting seamlessly to remote working arrangements
and remaining nimble in adapting to evolving market conditions.
They demonstrated the value of prudent fiduciary advice and an
unwavering commitment to exceptional client service. The Focus
team lent critical support to our partners in all aspects of their
response to the pandemic with unparalleled commitment and
resolve.
6 Focus Financial Partners 2020 Annual Report
In a highly
uncertain
year we
demonstrated
remarkable
resiliency and
continued on
our path of
growth.
In many ways,
the story of
2020 was that
scale matters.
In many ways, the story of 2020 was that scale matters – it was instrumental
in helping us not just weather the storm, but move past it and thrive. The
scale and profitability we have today enables us to see evolving opportunities
and invest in our future growth, and 2020 further reinforced the value created
by our scale advantages. Our partnership of 71 firms1 positions us at the
forefront of the industry and creates numerous opportunities to grow. Our
partners are high-quality firms that are leaders in their local markets and
have the characteristics and leadership talent to become substantial platforms
in the future. The breadth of their geographies, investment styles, business
models and clients served is an invaluable source of intellectual expertise and
best practices that benefits our entire partnership.
A Resilient Business Model. We have successfully navigated market
dislocations throughout our 16-year history, and 2020 was no different. The
diversification embedded in our business model is central to its resiliency
during periods of market dislocation and positions us for future growth as
markets recover. Our partners were well equipped to face the challenges
posed by the pandemic.
Our financial model was designed around the concept of diverse sources
of fee-based and recurring revenues that are generally not dependent on
interest rates. These attributes lend tremendous stability and resiliency across
market cycles. Our revenues are also well diversified, with approximately 74%
correlated to the financial markets and approximately 26% to non-market
sources in 2020.
Our business model is centered on the complex and hyper-personalized
needs of wealthy individuals, families and select institutions. I often say that
we are in the “peace of mind” business. Our partners’ clients generally tend to
be conservative investors, with portfolios typically balanced between equities
and other asset classes. Our market-correlated revenues are further diversified
among asset classes because our partners each have their own fiduciary-based
investment philosophies. Our non-market correlated revenues are generated
from family-office type services, which further limits the impact of market
volatility on our revenues.
Our business model is also based on a highly variable, cap-ex light cost
structure and our earnings are protected by the preference we have on our
partner firms’ earnings. We are closely aligned with our partners. They are
incented to manage the profitability of their businesses, which enabled them
to not only weather the uncertainty of 2020, but position themselves for
future growth.
Focus Financial Partners 2020 Annual Report 7
Wealth
management
is a growth
industry and
RIAs are
the winning
segment.
Wealth management is a growth industry and registered investment advisors
(“RIAs”) are the winning segment. We believe this sector is especially well
positioned to grow on the heels of the Covid-19 pandemic, potentially at a
greater pace than we saw post the 2008 financial crisis. We also believe that
RIAs, who were already outperforming other wealth management channels
prior to the crisis in terms of advisor-managed asset growth, will continue
to grow and gain an even stronger foothold in the industry as more advisors
favor flexible and unconflicted advice models.
Additionally, given the highly fragmented nature of the industry, current
advisor demographics, evolving business models and client needs, coupled
with an acceleration of these trends due to Covid-19, we believe there remains
a significant opportunity for consolidation. Focus, as a leading acquiror in
the industry, is at the forefront of this opportunity. We have the size, M&A
expertise, investment process and approximately $1 billion of capital to deploy.
We believe that the firms in our partnership who are pursuing scale, including
prioritizing M&A as a part of their growth strategies, will emerge as winners.
Record Financial and Operating Results. We delivered excellent
results for our shareholders in 2020 despite the pandemic-related challenges,
generating more than $1.3 billion in revenues, the highest in our history, and
Adjusted Net Income Excluding Tax Adjustments Per Share2 of $2.46 and
Tax Adjustments Per Share2 of $0.47, while simultaneously reducing our net
leverage ratio.3 Our 2020 Cash Flow Available for Capital Allocation2 was
approximately $200 million and is growing rapidly, and our tax shield stood
at approximately $1.7 billion4 at year-end. These are both important features
of our financial model that we believe are still substantially undervalued.
In 2020, we completed 25 transactions, adding seven new partners and
completing 18 mergers on behalf of our partner firms in one of the best
years in our history for M&A volume. We expanded our presence in key
wealth markets across the U.S. and internationally, and extended our track
record of acquiring excellent firms that are value accretive. We remained
at the forefront of the industry by providing innovative business and client
solutions, enabling our partner firms to deliver ever-increasing value to their
clients. This continues to be an important catalyst for organic growth.
Earlier this year we raised an additional $500 million under our First Lien
Term Loan at LIBOR + 200 basis points. This was a heavily oversubscribed
transaction, reflecting the strong demand for our credit. The oversubscription
was a further reinforcement of our industry-leading position, and the
additional debt capital enhances our financial flexibility in a highly cost-
effective manner. As of December 31, 2020, our weighted average cost of debt
capital was approximately 2.4% on funded borrowings, which is a substantial
competitive advantage.
8 Focus Financial Partners 2020 Annual Report
2 Focus Financial Partners 2020 Annual Report
Enhancing Partner Firm Growth Through
Value-Added Services
BUSINESS SOLUTIONS
CLIENT SOLUTIONS
Strategy
Operations & Technology
Talent Management & Leadership
Mergers & Acquisitions
Finance, Legal & Regulatory
Best Practices & Knowledge Sharing
Cash Solutions
Credit Solutions
Portfolio Analytics
Insurance Solutions
Family Office Services
Valuation Services
We also continued to enhance our environmental, social and governance
(“ESG”) policies in a number of areas, and we released our second
Sustainability Highlights Report in 2021. We remain committed to
continually improving our approach and response to ESG issues. We believe
that a comprehensive approach to ESG is an increasing priority not only for
investors considering an investment in Focus, but also to our partner firms,
their clients, our employees and our other stakeholders.
A Culture of Innovation. Our partnership also benefits from our culture
of innovation. Being at the forefront of industry trends and identifying
opportunities for our partner firms to grow and better serve their clients are
also compelling elements of our value proposition. Our scale and the diversity
of our partnership enables us to see opportunities where others cannot. We
are leveraging our scale and the insights that come from it to help our partners
provide their clients with the comprehensive services they are increasingly
demanding.
Our Connectus model is an outstanding example of this. Connectus
complements our growing partnership and addresses an important strategic
need in the independent wealth management market. It adds to our existing
value proposition by enabling founders and teams who want to continue
managing their client relationships and boutique cultures while gaining the
operational efficiencies of shared services. We anticipate that Connectus will
continue to expand globally and believe that it could quickly become one of
our largest partner firms.
Focus Financial Partners 2020 Annual Report 9
Focus Financial Partners 2020 Annual Report 3
As another example, we announced the launch of Excelerate earlier this year,
an innovative new program that is unique to Connectus but will benefit
our overall business. Excelerate is highly curated, leveraging long-standing
relationships with premier service providers already used extensively by
our partner firms. Through its emphasis on shared resources, Excelerate will
create significant efficiencies and scale benefits for Connectus advisers and
clients alike.
Compelling Growth. We are operating at an industry-leading scale and
have substantial momentum, which is amplified by Connectus. We believe
these dynamics will enable us to deliver full year Revenue and Adjusted Net
Income Excluding Tax Adjustments Per Share2 growth in excess of 20% in
2021, and return to double-digit organic revenue growth, while maintaining
our targeted net leverage ratio3 of 3.5x to 4.5x.
3
We are also reaffirming our strategic vision for the growth and scale that we
believe Focus can achieve by 2025: revenues of approximately $3.5 billion
and approximately 100 partner firms. We plan to revisit our initial target
for Adjusted EBITDA of approximately $840 million, which was based on
a margin of 24%, as the pandemic subsides. We believe our partners have
become more efficient during the pandemic and, while still in its early days,
we believe that as Connectus scales it will further enhance our long term
Adjusted EBITDA margins.
5
2
We are operating
at an industry-
leading scale
and have
substantial
momentum,
which is
amplified by
Connectus.
The Year Ahead. We are looking with great optimism towards 2021 and
beyond as we are confident in the forward potential of our business. Our
business rose to the test of the pandemic in 2020, demonstrating its stability,
resiliency and strength during a long period of uncertainty, and 2020 further
reinforced the value created by our scale advantages. The diversity of our
partner portfolio creates numerous opportunities to grow, and we believe
that our business model will continue to make us the partner of choice.
Connectus provides us with an additional avenue for growth, both in the U.S.
and internationally.
We believe the pandemic has further accelerated the trend towards quality
fiduciary advice and industry consolidation. We also believe that the quality
of our partner firms, the resiliency of our business and well-designed financial
model, our value-added services and culture of innovation will drive our
continued strong growth going forward, and in turn deliver superior value to
our shareholders.
Focus was founded on the principle of never turning a successful entrepreneur
into an employee. We are permanent capital investors and our value proposition
10 Focus Financial Partners 2020 Annual Report
to the firms we acquire is based on three core principles: independence, access
to growth capital, and value-added services and expertise. This combination
is highly differentiated when compared to the alternatives, creating an
enduring source of competitive differentiation. We are convinced that this
value proposition makes us the partner of choice in our industry, enabling us
to continue attracting excellent entrepreneurs.
Thank you for your interest in our business. I, together with my co-founders
Rajini and Lenny, am extremely proud of what our company accomplished
in 2020. At its heart, the success of our business rests on the “client first”
mindset that our partners have in common. It is also a function of the
collective passion our holding company team shares in serving our partners
and continually enhancing their ability to provide exceptional advice and
guidance to their clients. I am confident that these attributes will create
sustainable value for our stockholders, partners and their clients, and our
employees.
Our business
model enables
us to attract
excellent
entrepreneurs.
Rudy Adolf
Founder, CEO and Chairman
April 15, 2021
Cautionary Note Concerning Forward-Looking Statements
This letter to investors contains certain forward-looking statements that reflect Focus’ current views with respect to certain current
and future events. These forward-looking statements are and will be subject to many risks, uncertainties and factors relating
to Focus’ operations and business environment, including, without limitation, uncertainty surrounding the current coronavirus
(Covid-19) pandemic, which may cause future events to be materially different from these forward-looking statements or
anything implied therein. Any forward-looking statements in this letter to investors are based upon information available to Focus
on the date of this letter to investors. Focus does not undertake to publicly update or revise its forward-looking statements even
if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional
information on risk factors that could affect Focus may be found in Focus’ 2020 Annual Report on Form 10-K following this letter
to investors.
1 As of December 31, 2020.
2 Non-GAAP financial measure. Please see Focus’ 2020 Annual Report on Form 10-K following this letter to investors for a
discussion of non-GAAP measures, including related reconciliations.
3 Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in Focus' Credit Facility), and means the ratio of
amounts outstanding under Focus' First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured
by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash
and cash equivalents to Consolidated EBITDA (as defined in Focus' Credit Facility).
4 Gross Unamortized Intangible Tax Asset Shield as of December 31, 2020. Assumes sufficient future taxable income.
5
Calculated as Adjusted EBITDA divided by revenues.
Focus Financial Partners 2020 Annual Report 11
Leadership
Ruediger (Rudy) Adolf
Founder
Chief Executive Officer
Chairman
Leonard (Lenny) Chang
Co-Founder
Senior Managing Director
Head of M&A
Rajini Sundar Kodialam
Co-Founder
Chief Operating Officer
James (Jim) Shanahan
Chief Financial Officer
J. Russell (Rusty) McGranahan
General Counsel
Corporate Secretary
Board of Directors
Ruediger (Rudy) Adolf
Founder
Chief Executive Officer
Chairman
James D. Carey
Senior Principal
Stone Point Capital LLC
Joseph Feliciani, Jr.
Former Chief Operating
Officer of Finance,
Chief Accounting Officer
BlackRock, Inc.
Christopher J. Harrington
Partner
Kohlberg Kravis Roberts
& Co. L.P.
Rajini Sundar Kodialam
Co-Founder
Chief Operating Officer
Kristine M. Mashinsky
Founder
Chief Executive Officer
usastrong.IO
Greg S. Morganroth, MD
Founder
Chief Executive Officer
California Skin Institute
Fayez S. Muhtadie
Senior Principal
Stone Point Capital LLC
12 Focus Financial Partners 2020 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 001-38604
Focus Financial Partners Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
875 Third Avenue, 28th Floor
New York, NY
(Address of Principal Executive Offices)
47 - 4780811
(I.R.S. Employer
Identification No.)
10022
(Zip Code)
(646) 519 - 2456
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Trading Symbol(s)
FOCS
Name of each exchange on which
registered
Nasdaq Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S -T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b -2 of the Exchange Act): ☐ Yes ☒ No
The aggregate market value of the Class A common stock held by non-affiliates was $1,037,877,082 on June 30, 2020, the last business day of the
registrant’s most recently completed second fiscal quarter.
As of February 15, 2021, the registrant had 51,184,782 shares of Class A common stock and 20,661,595 shares of Class B common stock outstanding.
Documents incorporated by reference:
The registrant’s definitive proxy statement relating to the annual meeting of shareholders (to be held May 26, 2021) will be filed with the Securities and
Exchange Commission within 120 days after the close of the registrant’s fiscal year ended December 31, 2020 and is incorporated by reference in Part III to
the extent described herein.
FOCUS FINANCIAL PARTNERS INC.
INDEX TO FORM 10 - K
FOR THE YEAR ENDED DECEMBER 31, 2020
Cautionary Statement Regarding Forward - Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
3
3
19
34
34
34
34
35
35
35
38
61
61
61
62
64
65
65
65
65
65
65
PART IV
Item 15. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index To Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
69
F-1
i
CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS
Some of the information in this Annual Report on Form 10 - K (this “Annual Report”) may contain
forward - looking statements. Forward - looking statements give our current expectations, contain projections of results of
operations or of financial condition, or forecasts of future events. Words such as “may,” “assume,” “forecast,”
“position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,”
“potential,” “continue,” “will” and similar expressions are used to identify forward - looking statements. They can be
affected by assumptions used or by known or unknown risks or uncertainties. Consequently, no forward - looking
statements can be guaranteed. When considering these forward - looking statements, you should keep in mind the risk
factors and other cautionary statements described under “Part I, Item 1A, Risk Factors.” Actual results may vary
materially. You are cautioned not to place undue reliance on any forward - looking statements. You should also
understand that it is not possible to predict or identify all such factors and should not consider the following list to be a
complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially
from the results contemplated by such forward - looking statements include:
•
•
•
•
•
•
•
•
•
•
•
fluctuations in wealth management fees;
our reliance on our partner firms and the principals who manage their businesses;
our ability to make successful acquisitions;
unknown liabilities of or poor performance by acquired businesses;
harm to our reputation;
our inability to facilitate smooth succession planning at our partner firms;
our inability to compete;
our reliance on key personnel and principals;
our inability to attract, develop and retain talented wealth management professionals;
our inability to retain clients following an acquisition;
our reliance on key vendors;
• write down of goodwill and other intangible assets;
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our failure to maintain and properly safeguard an adequate technology infrastructure;
cyber - attacks;
our inability to recover from business continuity problems;
inadequate insurance coverage;
impact of the novel coronavirus (“Covid-19”) outbreak on our business;
the termination of management agreements by management companies;
our inability to generate sufficient cash to service all of our indebtedness or our ability to access additional
capital;
the failure of our partner firms to comply with applicable U.S. and non - U.S. regulatory requirements and
the highly regulated nature of our business;
1
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legal proceedings, governmental inquiries; and
other factors discussed in this Annual Report.
All forward - looking statements are expressly qualified in their entirety by the foregoing cautionary statements.
Our forward - looking statements speak only as of the date of this Annual Report or as of the date as of which they are
made. Except as required by applicable law, including federal securities laws, we do not intend to update or revise any
forward - looking statements.
The following terms are used throughout this Annual Report:
GLOSSARY
Base Earnings. This is a percentage of the estimated operating cash flow earnings before partner compensation
(i.e. Target Earnings) upon which we apply a multiple to determine acquisition prices. We retain a cumulative preferred
position in Base Earnings.
Commission - based. Commission - based revenue is derived from commissions paid by clients or payments
from third parties for sales of investment or insurance products.
Fee - based. Fee - based services are those for which a partner firm primarily charges a fee directly to the client
for wealth management services, recordkeeping and administration services and other services rather than being
primarily compensated through commissions from clients or from third parties for recommending financial products.
Fiduciary Duty. A fiduciary duty is a legal duty to act in another party’s interests, with utmost good faith, to
make full and fair disclosure of all material facts and to exercise all reasonable care to avoid misleading clients.
GAAP. Accounting principles generally accepted in the United States of America.
High Net Worth. High net worth individuals are generally defined in the financial industry as those with liquid
financial assets, excluding primary residence, in excess of $1 million.
Lift Out. The circumstance when a group of wealth management professionals, already working as a team,
seeks to leave their current employer and join another employer or start their own registered investment advisor firm.
Open - architecture. An investment platform that grants clients access to a wide range of investment funds and
products offered by third parties. By contrast, a closed architecture is an investment platform that grants clients access
only to proprietary investment funds and products.
Partnership. The term we use to refer to our business and relationship with our partner firms. It is not intended
to describe a particular form of legal entity or a legal relationship.
Target Earnings. The estimated operating cash flow earnings before partner compensation.
Ultra - High Net Worth. Ultra - high net worth individuals are generally defined in the financial industry as
those with liquid financial assets, excluding primary residence, in excess of $30 million.
Wealth Management. Comprehensive professional services that combine investment advice, financial and tax
planning, consulting, tax return preparation, family office services and other services that help clients achieve their
objectives regarding accumulation, preservation and distribution of long - term wealth.
Wirehouse. Brokerage firm that provides a full range of investment, research, trading and wealth management
services to clients. The term originated prior to the advent of modern wireless communications, when brokerage firms
were connected to their branches primarily through telephone and telegraph wires.
2
PART I
Unless otherwise indicated or the context requires, all references to “we”, “us”, “our”, the “Company”,
“Focus Inc.” and similar terms for periods prior to our initial public offering (“IPO”) and related reorganization
transactions (the “Reorganization Transactions”) refer to Focus Financial Partners, LLC and its subsidiaries. For
periods subsequent to the IPO and Reorganization Transactions, these terms refer to Focus Financial Partners Inc. and
its consolidated subsidiaries. “Focus LLC” refers to Focus Financial Partners, LLC, a Delaware limited liability
company and a consolidated subsidiary of ours following the IPO and Reorganization Transactions.
The term “partner firms” refers to our consolidated subsidiaries engaged in wealth management and related
services, the businesses of which are typically managed by the principals. The term “principals” refers to the wealth
management professionals who manage the businesses of our partner firms pursuant to the relevant management
agreement. The term “our partnership” refers to our business and relationship with our partner firms and is not
intended to describe a particular form of legal entity or a legal relationship.
Item 1. Business
Corporate Structure
Focus Inc. was incorporated as a Delaware corporation on July 29, 2015 for the purpose of completing our IPO
and Reorganization Transactions. On July 30, 2018, we completed our IPO of 18,648,649 shares of Class A common
stock, par value $0.01 per share. The shares began trading on the NASDAQ Global Select Market on July 26, 2018
under the ticker symbol “FOCS.” We used the proceeds from the IPO to purchase certain outstanding Focus LLC units,
to reduce indebtedness and for acquisitions and general corporate business purposes.
In connection with the IPO and Reorganization Transactions, Focus Inc. became a holding company whose
most significant asset is a membership interest in Focus LLC. Focus LLC directly or indirectly owns all of the
outstanding equity interests in our partner firms. Focus Inc. is the sole managing member of Focus LLC and is
responsible for all operational, management and administrative decisions of Focus LLC. Subject to certain restrictions,
unitholders of Focus LLC (other than Focus Inc. and any of its subsidiaries) may receive shares of our Class A common
stock pursuant to the exercise of an exchange right or a call right.
Our Company
We are a leading partnership of independent, fiduciary wealth management firms operating in the highly
fragmented registered investment adviser (“RIA”) industry, with a footprint of over 70 partner firms primarily in the
United States. We have achieved this market leadership by positioning ourselves as the partner of choice for many firms
in an industry where a number of secular trends are driving consolidation. Our partner firms primarily service ultra - high
net worth and high net worth individuals and families by providing highly differentiated and comprehensive wealth
management services. Our partner firms benefit from our intellectual and financial resources, operating as part of a
scaled business model with aligned economic interests, while retaining their entrepreneurial culture and independence.
3
Our partnership is built on the following principles, which enable us to attract and retain high - quality wealth
management firms and accelerate their growth:
Entrepreneurship:
Maintain the entrepreneurial spirit, independence and unique culture of each partner firm.
Fiduciary Standard:
Partner with wealth management firms that are held to the fiduciary standard in serving
their clients.
Alignment of Interests:
Align principals’ interests with our interests through our differentiated partnership and
economic model.
Value - Add Services:
Empower our partner firms through collaboration on strategy, growth and acquisition
opportunities, marketing, technology and operational expertise, access to best practices
and cash and credit solutions. Provide access to world - class intellectual resources and
capital to fund expansion and acquisitions.
We were founded by entrepreneurs and began revenue - generating and acquisition activities in 2006. Since that
time, we have:
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•
•
created a partnership of over 70 partner firms, the substantial majority of which are RIAs registered with
the Securities and Exchange Commission (the “SEC”) pursuant to the Investment Advisers Act of 1940
(the “Advisers Act”);
built a business with revenues in excess of $1.3 billion for the year ended December 31, 2020;
increased revenues at a compound annual growth rate of 33.3% since 2006;
established an attractive revenue model whereby in excess of 95% of our revenues for the year ended
December 31, 2020 were fee - based and recurring in nature;
built a partnership currently comprised of over 4,000 wealth management - focused principals and
employees; and
established a national footprint across the United States and expanded our presence internationally with
partner firms in Australia, Canada and the United Kingdom.
We are in the midst of a fundamental shift in the growing wealth management services industry. The delivery of
wealth management services is moving from traditional brokerage, commission - based platforms to a fiduciary,
open - architecture and fee - based structure. This shift has resulted in a significant transfer of client assets and wealth
management professionals out of traditional brokerage, commission - based platforms to independent wealth management
practices. We believe that our leading partnership of independent, fiduciary wealth management firms positions us to
benefit from these trends.
The independent wealth management industry, including RIAs, is highly fragmented, which we believe enables
us to continue our growth strategy of acquiring high - quality independent wealth management firms, directly and through
acquisitions by our partner firms. We have a track record of enhancing the competitive position of our partner firms by
providing them with access to the intellectual expertise, resources and network benefits of our large organization. Our
scale enables us to help our partner firms achieve operational efficiencies and ensure organizational continuity.
Additionally, our scale, resources and value - added services increase our partner firms’ ability to achieve growth through
a variety of tactical, operational and strategic initiatives, as well as the consummation of their own acquisitions. As our
existing partner firms benefit from these growth initiatives, we continue to focus on acquisitions of new partner firms.
4
Our partnership is comprised of trusted professionals providing comprehensive wealth management services
through a largely recurring, fee - based model, which differentiates our partner firms from the traditional brokerage
platforms whose revenues are largely derived from commissions. We derive a substantial majority of our revenues from
wealth management fees for investment advice, financial and tax planning, consulting, tax return preparation, family
office services and other services. We also generate other revenues from recordkeeping and administration service fees,
commissions and distribution fees and outsourced services.
Our Growth Strategy
We believe we are well - positioned to take advantage of favorable trends in the wealth management industry,
including the migration of wealth management professionals from traditional brokerage, commission - based platforms to
a fiduciary, open - architecture and fee - based structure. We plan to grow our business through the growth of our existing
partner firms and the expansion of our partnership.
Growth of Our Existing Partner Firms
High - Quality, Growth - Oriented Partner Firms
Our goal has been and continues to be to acquire high - quality, entrepreneurial wealth management firms that
have built their businesses through a proven track record of growth. We believe that our partner firms will continue to
take advantage of the shift in client assets to the RIA space and grow organically through acquisitions of wealth
management practices and customer relationships, by attracting new clients, adding new wealth management
professionals, increasing client assets from existing clients and through financial market appreciation over time. The
economic arrangements put in place at the time of acquisition through our management agreements incentivize the
principals of our partner firms to continue executing on their growth plans.
Value - Added Services
We have a team of over 80 professionals who support our partner firms by providing value - added services,
including marketing and business development support; human resources support, including adviser coaching and
development and structuring compensation and incentive models, career path planning and succession planning advice;
operational and technology expertise, cash and credit solutions, legal and regulatory support and providing negotiating
leverage with vendors. Our value - added services also include access to our M&A expertise, which facilitates acquisition
opportunities for our partner firms through a proactive outreach program, structuring, executing and funding transactions
and providing guidance to partner firms to facilitate their integration into our partnership as well as integration of
mergers they execute. We assign a relationship leader to each partner firm who is responsible for coordinating our
value - added services to assist that partner firm in accelerating its growth. Our partner firms also have access to our
intellectual expertise and partner firm network, which ultimately enhance their operations, enabling them to better serve
their clients.
Some of our key value - added services are described in detail below.
Marketing and Business Development. We offer marketing and business development coaching to our partner
firms on topics including referral programs, revenue enhancement measures, communications, website and social media,
brand strategy and public relations support. Our marketing team works closely with each of our partner firms to
understand their unique value proposition and help them better market themselves to their clients and their centers of
influence, including accounting and law firms who serve as potential referral sources. To further support our partner
firms, in June 2018 we completed a minority investment in Financial Insight Technology, Inc. (known as SmartAsset), a
New York - based fintech company that connects prospective clients with financial advisers and provides tools to help
individuals make more informed financial decisions.
Talent Management. We support the mentoring of next - generation talent at each of our partner firms through
continuous coaching programs that we organize and execute. These programs emphasize key learnings gained from
observing top talent across our organization, allowing our firms to benefit from best practices across our talent pool.
5
Compensation Structures and Succession Planning. We help our partner firms align their compensation models
to further incentivize their teams. We also facilitate wealth management professional career path planning and advise on
principal promotions to the respective management company. These services allow our partner firms to attract and retain
the highest quality wealth management professionals. Our acquisition structure facilitates succession planning by
maintaining the partner firm and management company as separate entities, thereby allowing for the principals owning
the management company to transition over time without disrupting client relationships at the partner firm.
Operations and Technology. We assist partner firms in selecting and implementing third - party technology
solutions that strengthen each firm’s operational performance. Our partner firms can request that our operations team
conduct detailed operational assessments to determine their staffing and operating efficiency. Additionally, our
operations team provides partner firms negotiating leverage with vendors and cost - efficient access to third - party
technology.
Cash and Credit Solutions. Through Focus Client Solutions we have created a network of third-party banks and
non-bank lenders to provide a competitive array of cash and credit solutions. These alternatives enable our partner firms
to proactively help their clients achieve higher yields on cash, as well as unlock home equity and business opportunities
through refinancing, commercial lending and other options.
Legal and Regulatory Support. We have an experienced team of legal professionals in place to help support our
partner firms in fulfilling their regulatory responsibilities by providing subject matter guidance and expertise. We also
have relationships with numerous high quality law firms and compliance consultants that can assist our partner firms
create, implement and maintain a robust compliance environment.
Sharing of Best Practices / Collaboration with Other Partner Firms. Our partner firms have access to networking
opportunities, best practices roundtable discussions and training seminars. We offer offsite and virtual meetings,
seminars and other forums for partner firms to learn and adopt best practices. We host partners meetings where wealth
management professionals from our partner firms have opportunities to collaborate and share ideas. In addition we host
periodic summits for chief investment officers, chief compliance officers, chief operating officers, chief financial
officers and chief marketing officers, where our partner firms can share specialized expertise and business development
practices. Our partner firms are also encouraged to share best practices regularly in order to enhance their collective
ability to better serve their clients.
Expansion of Our Partnership
Our Acquisition Models
We are a source of permanent capital and buy substantially all of the assets of the firms we acquire. We utilize
three models for acquisitions: (1) direct acquisitions of wealth management practices who become partner firms of Focus
but operate on an autonomous basis, (2) acquisitions of wealth management practices and customer relationships on
behalf of our partner firms to accelerate the growth of their businesses, and (3) acquisitions of wealth management
practices on behalf of Connectus Wealth Advisers (“Connectus”), one of our partner firms. Firms that join Connectus
manage their client relationships and retain their brand identity post-acquisition, but rely on a shared infrastructure and
other services provided by Connectus.
Acquisitions of New Partner Firms
Since inception, a fundamental aspect of our growth strategy has been the acquisition of high - quality,
independent wealth management firms to expand our partnership. We believe that there are approximately 1,000 firms in
the United States that are high - quality targets for future acquisitions. While most of our acquisitions have taken place in
the United States, we also see opportunities in several countries where market and regulatory trends toward the fiduciary
standard and open - architecture access mirror those occurring in the United States. We have already begun expansion
into Australia, Canada and the United Kingdom.
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Our differentiated partnership model and track record have allowed us to grow and enhance our leadership
position in the independent wealth management industry.
We are highly selective in choosing our partner firms and conduct extensive financial, legal, regulatory, tax,
operational and business due diligence. We evaluate a variety of criteria including the quality of the wealth management
professionals, client characteristics, historical revenues and cash flows, the recurring nature of the revenues, compliance
policies and procedures and the alignment of interests between wealth management professionals and clients. We focus
on firms with owners who are committed to the long - term management and growth of their businesses.
With limited exceptions, our partner firm acquisitions have been structured as acquisitions of substantially all of
the assets of the firm we chose to partner with but only a portion of the underlying economics in order to align the
principals’ interests with our own objectives. To determine the acquisition price, we first estimate the operating cash
flow of the business based on current and projected levels of revenue and expense, before compensation and benefits to
the selling principals or other individuals who become principals. We refer to the operating cash flow of the business as
Earnings Before Partner Compensation (“EBPC”), and to this EBPC estimate as Target Earnings (“Target Earnings”). In
economic terms, we typically purchase 40% to 60% of the partner firm’s EBPC. The purchase price is a multiple of the
corresponding percentage of Target Earnings and may consist of cash or a combination of cash and equity, and the right
to receive contingent consideration. We refer to the corresponding percentage of Target Earnings on which we base the
purchase price as Base Earnings (“Base Earnings”). Under a management agreement between our operating subsidiary
and the management company and the principals, the management company is entitled to management fees typically
consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target Earnings,
plus a percentage of any EBPC in excess of Target Earnings. Through the management agreement, we create downside
protection for ourselves by retaining a cumulative preferred position in Base Earnings.
Since 2006, when we began revenue - generating and acquisition activities, we have grown to a partnership with
over 70 partner firms. Acquisitions of partner firms to date have been structured as illustrated below, with limited
exceptions. Subsidiary mergers at the partner firm level and acquisitions in foreign jurisdictions have been structured
differently, and we expect some differences in the future depending on legal and tax considerations.
(1)
(2)
Focus LLC forms a wholly owned subsidiary.
In exchange for cash or a combination of cash and equity and the right to receive contingent consideration, the
new operating subsidiary acquires substantially all of the assets of the target firm, which is owned by the selling
principals, and becomes the new operating subsidiary of Focus.
7
(3)
(4)
The selling principals form a management company. In addition to the selling principals, the management
company may include non - selling principals who become newly admitted in connection with the acquisition or
thereafter.
The new operating subsidiary, the principals and the management company enter into a management agreement
which typically has an initial term of six years subject to automatic renewals for consecutive one - year terms,
unless earlier terminated by either the management company or us in certain limited situations. Under the
management agreement, the management company is entitled to management fees typically consisting of all
future EBPC of the new operating subsidiary in excess of Base Earnings up to Target Earnings, plus
a percentage of any EBPC in excess of Target Earnings. Pursuant to the management agreement, the
management company provides the personnel who lead the day - to - day operations of the new operating
subsidiary. Through the management agreement, we create downside protection for ourselves by retaining a
cumulative preferred position in each partner firm’s Base Earnings.
In connection with a typical acquisition, we enter into an acquisition agreement with the target firm and its
selling principals pursuant to which we purchase substantially all of the assets of the target firm. The purchase price is a
multiple of Base Earnings, which is a percentage of Target Earnings. The purchase price is comprised of a base purchase
price and a right to receive contingent consideration in the form of earn out payments. The contingent consideration for
acquisitions of new partner firms is generally paid over a six-year period upon the satisfaction of specified growth
thresholds in years three and six. These growth thresholds are typically tied to the compounded annual growth rate
(“CAGR”) of the partner firm’s earnings. Such growth thresholds can be set annually over the six-year period as well.
The contingent consideration for acquisitions made by our partner firms is paid upon the satisfaction of specified
financial thresholds. These thresholds are typically tied to revenue as adjusted for certain criteria or other operating
metrics, based on the retention or growth of the business acquired. These arrangements may result in the payment of
additional purchase price consideration to the sellers for periods following the closing of an acquisition. Contingent
consideration payments are typically payable in cash and, in some cases, equity.
The acquisition agreements contain customary representations and warranties of the parties, and closing is
generally conditioned on the delivery of certain ancillary documents, including an executed management agreement, a
confidentiality and non - solicitation agreement, a non - competition agreement and a notice issued by the acquired firm to
its clients notifying them of the acquisition and requesting their consent for the assignment of any agreements to the
successor firm.
In connection with the acquisition, management companies and selling principals agree to non - competition and
non - solicitation provisions of the management agreement, as well as standalone non - competition and non - solicitation
agreements required by the acquisition agreement. Such non - competition and non - solicitation agreements typically have
five - year terms. The non - competition and non - solicitation provisions of the management agreement continue during the
term of the management agreement and for a period of two years thereafter.
Our partner firms are primarily overseen by the principals who own the management company formed
concurrently with the acquisition. Our operating subsidiary, the management company and the principals enter into a
long - term management agreement pursuant to which the management company provides the personnel responsible for
overseeing the day - to - day operations of the partner firm. The term of the management agreement is generally six years
subject to automatic renewals for consecutive one - year terms, unless earlier terminated by either the management
company or us in certain limited situations. Subject to applicable cure periods, we may terminate the management
agreement upon the occurrence of an event of cause, which may include willful misconduct by the management
company or any principal that is reasonably likely to result in a material adverse effect, the failure of the management
company to comply with regulatory or other governmental compliance procedures or a material breach of the agreement
by the management company or the principals. In some cases, we may have the right to terminate the agreement if any
principal ceases to be involved on a full - time basis in the management of the management company or the performance
of services under the agreement. Generally, the management company may terminate the management agreement upon a
material breach of the agreement by us and the expiration of the applicable cure period.
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This ownership and management structure allows the principals to maintain their entrepreneurial spirit through
autonomous day - to - day decision making, while gaining access to our extensive resources and preserving the principals’
long - term economic incentive to continue to grow the business. The management company structure provides both
flexibility to us and stability to our partner firms by permitting the principals to continue to build equity value in the
management company as the partner firm grows and to control their internal economics and succession plans within the
management company.
The following table provides an illustrative example of our economics, including management fees earned by
the management company, for periods of projected revenues, +10% growth in revenues and −10% growth in revenues.
This example assumes (i) Target Earnings of $3.0 million; (ii) Base Earnings acquired of 60% of Target Earnings or
$1.8 million; and (iii) a percentage of earnings in excess of Target Earnings retained by the management company of
40%.
Projected +10% Growth −10% Growth
in Revenues
in Revenues
Revenues
(in thousands)
New Partner Firm
New partner firm revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less:
Operating expenses (excluding management fees) . . . . . . . . . . . . . . . . . . .
EBPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Base Earnings to Focus Inc. (60%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees to management company (40%) . . . . . . . . . . . . . . . . . . .
EBPC in excess of Target Earnings:
To Focus Inc. (60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To management company as management fees (40%) . . . . . . . . . . . . . . . .
Focus Inc.
Focus Inc. revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less:
Operating expenses (excluding management fees) . . . . . . . . . . . . . . . . . . .
Less:
Management fees to management company . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,000 $
5,500 $
4,500
(2,000)
3,000 $
1,800
1,200
(2,000)
3,500 $
1,800
1,200
(2,000)
2,500
1,800
700
—
—
300
200
—
—
5,000 $
5,500 $
4,500
(2,000)
(1,200)
1,800 $
(2,000)
(2,000)
(1,400)
2,100 $
(700)
1,800
In certain circumstances, the structure of our relationship with partner firms may differ from the typical
structure described above. In addition, we expect some differences in the structure of our future international
acquisitions. For example, the structure of our ownership interests in non - U.S. partner firms may differ from the way in
which we own our U.S. partner firms.
Acquisitions by Our Partner Firms
We are instrumental to, and support the acquisition of, wealth management practices and customer relationships
by our partner firms to further expand their businesses. Partner firms pursue acquisitions for a variety of reasons,
including geographic expansion, acquisition of new talent and/or specific expertise and succession planning.
Acquisitions by our partner firms allow them to add new talent and services to better support their client base while
simultaneously capturing synergies from the acquired businesses. We believe there are currently approximately 5,000
firms in the United States that are suitable targets for our partner firms. We have an experienced team of professionals
with deep industry relationships to assist in identifying potential acquisition targets for our partner firms. Through our
proprietary in-house sourcing effort, we frequently identify acquisition opportunities for our partner firms. Additionally,
many of our partner firms are well known in the industry and have developed extensive relationships. In recent years,
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principals and employees of our partner firms have identified attractive merger candidates, and we believe this trend will
continue as our partner firms continue to build scale.
In addition to sourcing opportunities, we are actively involved through each stage of the process to provide
legal, financial, tax, compliance and operational expertise to guide our partner firms through the acquisition due
diligence process and execution. We provide the funding for acquisitions in the same manner that a parent company
would typically fund acquisitions by its subsidiaries.
Our partner firms typically acquire substantially all of the assets of a target firm for cash or a combination of
cash and equity and the right to receive contingent consideration. In certain situations, when the acquisition involves a
merger with a corporation, and the consideration includes our Class A common stock, Focus Inc. may purchase all of the
equity of a target firm and then contribute the assets to our partner firm. In certain instances, our partner firms may
acquire only the customer relationships. At the time a partner firm consummates an acquisition, we amend our
management agreement with the partner firm to adjust Base Earnings and Target Earnings to reflect the projected post
acquisition EBPC of the partner firm.
Our partner firms completed 17 transactions in 2018, 28 transactions in 2019 and 18 transactions in 2020,
including four transactions completed by Connectus. With our approval and support, our partner firms may choose to
merge with each other as well. Consolidation of our existing partner firms leads to efficiencies and incremental growth
in our cash flows. Since January 2017, three partner firms have consummated mergers with other partner firms. In 2020,
one of our partner firms also separated and spun out one of its offices into a new standalone partner firm.
Acquisitions Through Connectus
Connectus has wealth advisory subsidiaries in the United States, Australia and the United Kingdom. It was
launched through a partner firm that joined us in 2007 and subsequently expanded in the United States and into Australia
through the acquisition of four wealth management practices in 2020. In February 2021, Connectus completed its first
acquisition in the United Kingdom. We expect that Connectus’ international footprint will expand further. Connectus is
designed for founders and teams of wealth management practices who want to continue managing their client
relationships and maintaining their boutique cultures under their own brand names, while gaining the operational
efficiencies of shared infrastructure and other services provided by Connectus. Connectus offers integrated technology,
investment support and centralized services, including compliance, accounting and talent management. Connectus also
provides marketing capabilities to support business expansion through lead generation and organic growth programs.
Through us, Connectus advisers gain a strategic growth partner with specialized capabilities. They benefit from our
global scale and extensive network of partner firms, continuity planning expertise and client solutions.
In connection with a typical Connectus acquisition, we enter into an acquisition agreement with the target firm
and its selling principals pursuant to which Connectus purchases substantially all of the assets or equity of the target firm
for cash. Because of Connectus’ unique structure, Focus in most cases retains 100% of post-acquisition profitability and
the selling principals and advisers of the target firm receive market-based compensation and growth-based economics
generally based on the growth of revenues.
Lift Outs of Established Wealth Management Professionals
From time to time, through Focus Independence, we offer teams of wealth management professionals at
traditional brokerage firms and wirehouses with attractive track records and books of business the opportunity to
establish their own independent wealth management firm and ultimately join our partnership as a new partner firm. This
program gives these professionals the opportunity to build a business largely unencumbered by the conflicts of interest
they face at traditional brokerage firms and wirehouses and with more favorable economics. Focus Independence is a
targeted approach to lift out teams of wealth management professionals from traditional brokerage firms and wirehouses
with attractive track records and books of business and make them entrepreneurs within our partnership. The program
has been successful, with the substantial majority of ultra - high net worth and high net worth clients retained by the
newly formed partner firm. To date we have completed 14 acquisitions of new partner firms through Focus
Independence.
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We work with each team of wealth management professionals to establish a new RIA business and provide
consultation as needed on virtually everything needed to transition to and operate the new RIA as a full - service firm,
including technology, personnel and office space. With many teams, we enter into an option agreement, which provides
us with the option to acquire substantially all of the assets of the RIA 12 to 13 months after the team’s resignation date
from the brokerage firm or wirehouse. The option agreement provides a purchase price formula, typically equal to a
multiple of the portion of the new RIA’s run-rate EBPC at the time of acquisition closing. The option agreement also
establishes the portion of the purchase price to be paid in cash and equity. Transactions with teams where we do not
enter into an option agreement may be structured more like a typical acquisition.
Our Partner Firms
Our partner firms provide comprehensive wealth management services to ultra - high net worth and high net
worth individuals and families, as well as business entities, under a largely recurring, fee - based model. Our partner firms
provide these services across a diverse range of investment styles, asset classes and clients. The substantial majority of
our partner firms are RIAs, and certain of our partner firms also have affiliated broker - dealers and/or insurance brokers.
Several of our partner firms and their principals have been recognized as leading wealth management firms and advisers
by financial publications such as Barron’s, The Financial Times and Forbes.
Our partner firms derive a substantial majority of their revenues from wealth management fees, which are
comprised of fees earned from wealth management services, including investment advice, financial and tax planning,
consulting, tax return preparation, family office services and other services. Fees are primarily based either on a
contractual percentage of the client’s assets based on the market value of the client’s assets on the predetermined billing
date, a flat fee, an hourly rate based on predetermined billing rates or a combination of such fees and are billed either in
advance or arrears on a monthly, quarterly or semiannual basis. In certain cases, such wealth management fees may be
subject to minimum fee levels depending on the services performed. We also generate other revenue from recordkeeping
and administration service fees, commissions and distribution fees and outsourced services.
We currently have over 70 partner firms. All of our partner firm acquisitions have been paid for with cash or a
combination of cash and equity and the right to receive contingent consideration. We have to date, with limited
exceptions, acquired substantially all of the assets of the firms we choose to partner with and have assumed only
post - closing contractual obligations, not any material existing liabilities.
11
The following is a list of our partner firms as of February 19, 2021:
Partner Firm
Partner
Firm Since
Joined through Acquisition(s)
Completed by
Partner Firm
Focus
Independence
1 StrategicPoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 HoyleCohen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May
2007
January
February
3 Sentinel Benefits & Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 Buckingham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 Benefit Financial Services Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March
6 JFS Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
7 Connectus Wealth Advisers (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 GW & Wade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September
September
2008
9 Greystone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
July
10 WESPAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009
2006
January
11 Joel Isaacson & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November
12 Coastal Bridge Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December
2010
13 Pettinga . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December
14 Sapient Private Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 The Colony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
16 LVW Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
2011
September
2012
17 Vestor Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
18 Merriman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December
19 The Portfolio Strategy Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December
2013
20 LaFleur & Godfrey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
21 Telemus Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
2014
22 Summit Financial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
23 Flynn Family Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June
24 Gratus Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
25 Strategic Wealth Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November
26 IFAM Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 Dorchester Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
28 The Fiduciary Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
July
29 Quadrant Private Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 Relative Value Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July
31 Fort Pitt Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
32 Patton Albertson Miller Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
2015
February
33 Douglas Lane & Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34 Kovitz Investment Group Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35 Waddell & Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
36 Transform Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
37 GYL Financial Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
38 XML Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October
2016
January
January
2017
January
February
February
39 Crestwood Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40 CFO4Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41 One Charles Private Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42 Bordeaux Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March
43 Gelfand, Rennert & Feldman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
44 Lake Street Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
45 Financial Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May
July
46 SCS Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July
47 Brownlie & Braden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September
48 Eton Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
January
February
49 Cornerstone Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50 Fortem Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51 Bartlett Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
52 Campbell Deegan Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
53 Nigro, Karlin, Segal, Feldstein & Bolno (NKSFB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April
54 TrinityPoint Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May
July
55 Asset Advisors Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56 Edge Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
57 Vista Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August
58 Altman, Greenfield & Selvaggi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59 Prime Quadrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60 Foster, Dykema & Cabot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March
April
61 Escala Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April
62 Sound View Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August
63 Williams Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
February
64 Nexus Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65 Mediq Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May
66 TMD Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67 InterOcean Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68 Seasons of Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69 CornerStone Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70 Fairway Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71 Kavar Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October
October
November
December
December
December
2019
January
February
(1)
Atlas Private Wealth was the initial anchor firm of Connectus Wealth Advisors.
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The following shows certain of the value - added services we have provided to our partner firms through
February 19, 2021:
Value - Added Services
Operational
Marketing and
Business
and
Legal and
Technology Compliance
Talent
Succession
Management Planning
Partner Firm
Development Enhancements Support
1 . StrategicPoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 . HoyleCohen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 . Sentinel Benefits & Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 . Buckingham . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5 . Benefit Financial Services Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6 . JFS Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7 Connectus Wealth Advisers (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8 GW & Wade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9 Greystone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10 WESPAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 Joel Isaacson & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12 Coastal Bridge Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 Pettinga . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14 Sapient Private Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 The Colony Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16 LVW Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17 Vestor Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18 Merriman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19 The Portfolio Strategy Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20 LaFleur & Godfrey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21 Telemus Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22 Summit Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Flynn Family Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24 Gratus Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25 Strategic Wealth Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26 IFAM Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 Dorchester Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28 The Fiduciary Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29 Quadrant Private Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30 Relative Value Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31 Fort Pitt Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32 Patton Albertson Miller Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33 Douglas Lane & Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34 Kovitz Investment Group Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35 Waddell & Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36 Transform Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37 GYL Financial Synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38 XML Financial Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39 Crestwood Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40 CFO4Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41 One Charles Private Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
42 Bordeaux Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43 Gelfand, Rennert & Feldman. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44 Lake Street Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45 Financial Professionals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46 SCS Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47 Brownlie & Braden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48 Eton Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49 Cornerstone Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50 Fortem Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51 Bartlett Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52 Campbell Deegan Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53 Nigro, Karlin, Segal, Feldstein, & Bolno (NKSFB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54 TrinityPoint Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55 Asset Advisors Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56 Edge Capital Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57 Vista Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58 Altman, Greenfield & Selvaggi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59 Prime Quadrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
60 Foster, Dykema & Cabot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61 Escala Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62 Sound View Wealth Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63 Williams Jones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64 Nexus Investment Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65 Mediq Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
66 TMD Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
67 InterOcean Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68 Seasons of Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69 CornerStone Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70 Fairway Wealth Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71 Kavar Capital Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Atlas Private Wealth was the initial anchor firm of Connectus Wealth Advisors.
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Our partner firms are primarily located in the United States. In addition, we have three partner firms, Escala
Partners, Financial Professionals and MEDIQ Financial Services, in Australia, three partner firms, Dorchester Wealth
Management, Prime Quadrant and Nexus Investment Management, in Canada and one partner firm, Greystone, in the
United Kingdom. In addition, our partner firm Connectus has locations in Australia, the United Kingdom and the United
States. The following table shows our domestic and international revenues for the years ended December 31, 2018, 2019
and 2020:
2018
Year Ended December 31,
2019
(dollars in thousands)
2020
94.9 %
Domestic revenue . . . . $ 889,166
International revenue . 21,714
5.1 %
Total revenue . . . . . . . . $ 910,880 100.0 % $ 1,218,341 100.0 % $ 1,361,319 100.0 %
96.0 % $ 1,291,630
69,689
97.6 % $ 1,170,169
48,172
2.4 %
4.0 %
The maps below show the locations of our partner firms as of February 19, 2021. The majority of our partner
firms operate multiple offices and in multiple states.
Upon joining our partnership, each partner firm transitions its operations to our common general ledger, payroll
and cash management systems. Our common general ledger system provides us access to financial information of each
partner firm and is designed to accommodate the varied needs of each individual business. We control payroll and
payment of management fees for partner firms through a common disbursement process. The common payroll system
14
allows us to effectively monitor compensation, new hires, terminations and other personnel changes. We employ a cash
management system under which cash held by partner firms above a threshold is transferred into our centralized
accounts. The cash management system enables us to control and secure our cash flow and more efficiently monitor
partner firm earnings and financial position.
We and our partner firms devote substantial time and effort to remaining current on, and addressing, regulatory
and compliance matters. Each of our registered partner firms has its own chief compliance officer and has established a
compliance program to help detect and prevent compliance violations.
While the chief compliance officers at our partner firms are principally responsible for maintaining their
respective compliance programs and for tailoring them to the specifics of their partner firms’ businesses, we have an
experienced team of legal professionals in place at the holding company to support our partner firms in fulfilling their
regulatory responsibilities by providing additional guidance and expertise. We collaborate with each of our partner firms
in its completion of an annual compliance risk assessment, which is conducted by an outside law firm or a compliance
consulting firm. We also engage third - party firms to conduct periodic cybersecurity audits and help coordinate
completion of certain other employee training. We also monitor how our partner firms address risk assessment
recommendations and regulatory exam findings. We also work with our partner firms to assist them in identifying
qualified legal and compliance advisers by leveraging our extensive relationships.
Competition
The wealth management industry is very competitive. We compete with a broad range of wealth management
firms, including public and privately held investment advisers, traditional brokerage firms and wirehouses, firms
associated with securities broker - dealers, financial institutions, private equity firms and insurance companies. We
believe that important factors affecting our partner firms’ ability to compete for clients include the ability to attract and
retain key wealth management professionals, investment performance, wealth management fee rates, the quality of
services provided to clients, the depth and continuity of client relationships, adherence to the fiduciary standard and
reputation.
We strategically built a leading partnership of independent, fiduciary wealth management firms led by
entrepreneurs through a unique, disciplined and proven acquisition strategy. Our differentiated partnership model has
allowed us to grow and enhance our leadership position in the wealth management industry. As we continue our growth
strategy of acquiring high - quality partner firms, we believe that important factors affecting our ability to compete for
future acquisitions include:
•
•
•
the degree to which target wealth management firms view our partnership model as preferable, financially
and operationally or otherwise, to acquisition or other arrangements offered by other potential purchasers;
the reputation and performance of our existing and future partner firms, by which target wealth
management firms may judge us and our future prospects; and
the quality and breadth of our value - added services.
Human Capital
As of December 31, 2020, we had over 3,600 employees, 81 of whom were employed at the holding company.
Additionally, as of December 31, 2020, there were over 550 management company principals that oversaw partner firms
and were not our employees.
People are the key to our business, and we are guided in our human capital initiatives, as in all of our efforts, by
our culture which we conscientiously work to foster. We are committed to developing the following four fundamental
behaviors and skills to further our mission to be the globally recognized leader in independent fiduciary financial advice:
Be Entrepreneurial; Be Collaborative; Be Curious; and Be Professional. We seek to develop and reinforce these
15
behaviors and skills through frequent on-site and off-site training sessions, programs and presentations, and how we
work with one another every day.
We recognize that the diversity of our employees, including our partner firms, is a tremendous asset, and are
firmly committed to providing equal opportunity in all aspects of employment in order to attract, retain and develop
human capital.
Accordingly, we will not tolerate any discrimination, abuse or harassment of any kind. Our non-harassment
policy details its commitment to providing equal employment opportunities and a workplace that is respectful,
productive, and free from unlawful discrimination, abuse or harassment, including sexual harassment. This policy, which
is included in our Code of Business Conduct and Ethics and our Employee Handbook, outlines clear procedures for
reporting and responding to issues of concern.
We are committed to ensuring a healthy and safe environment and the wellness of our employees and this is
exhibited through a number of wellness, training and other programs.
We also conduct regular assessments of our compensation and benefit practices and pay levels to help ensure
that employees are compensated fairly and competitively.
For additional information on our human capital programs and initiatives, please see our “Policy on Human
Rights, Human Capital Development and Information Protection” available in the Sustainability section of the Investor
Relations page of our website.
Trademarks
We own many registered trademarks and service marks. We believe the Focus Financial Partners name and the
many distinctive marks associated with it are of significant value and are very important to our business. Accordingly, as
a general policy, we monitor the use of our marks and vigorously oppose any unauthorized use of them.
We register some of our copyrighted material and otherwise rely on common law protection of our copyrighted
materials, but these are not material to our business.
Available Information
We are required to file annual, quarterly and current reports, proxy statements and certain other information
with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC. Any documents filed by us with the SEC,
including this Annual Report, can be downloaded from the SEC’s website.
We also make available free of charge through our website, www.focusfinancialpartners.com, electronic copies
of certain documents that we file with the SEC, including our Annual Reports on Form 10 - K, Quarterly Reports on
Form 10 - Q, Current Reports on Form 8 - K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
Regulatory Environment
Existing Regulation
Most of our partner firms are subject to extensive regulation in the United States. In addition, some of our
partner firms are subject to extensive regulation in Australia, Canada and the United Kingdom, as applicable. In the
United States, our wealth management partner firms are subject to regulation primarily at the federal level, including
regulation by the SEC under the Advisers Act, by the U.S. Department of Labor (the “DOL”) under the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), and by the SEC and the Financial Industry Regulatory
16
Authority (“FINRA”) for our partner firm subsidiaries that are broker - dealers. Our partner firms may also be subject to
regulation by state regulators for insurance and several other aspects of our partner firms’ activities. Outside of the
United States, Escala, Financial Professionals and MEDIQ are primarily regulated by the Australian Securities &
Investments Commission (“ASIC”); Dorchester, Prime Quadrant and Nexus Investment Management are primarily
regulated by the securities regulators of Canada’s provinces; and Greystone is primarily regulated by the Financial
Conduct Authority in the United Kingdom. Connectus’ operations are regulated by the U.S., U.K. and Australia
regulators mentioned above.
Our U.S. based partner firms that are investment advisers are registered with the SEC under the Advisers Act.
The Advisers Act imposes numerous obligations on RIAs, including fiduciary duties, compliance and disclosure
obligations, recordkeeping requirements and operational requirements. Certain of our partner firms sponsor unregistered
and registered funds in the United States and certain foreign jurisdictions. These activities subject those partner firms to
additional regulatory requirements in those jurisdictions. In addition, many state securities commissions impose filing
requirements on investment advisers that operate or have places of business in their states. Similarly, many states require
certain client facing employees of RIAs and FINRA - registered broker - dealers to become state-licensed.
Certain of our partner firms have affiliated SEC-registered broker - dealers for the purpose of distributing funds
or other securities products or facilitating securities transactions. Broker - dealers and their personnel are regulated, to a
large extent, by the SEC and self - regulatory organizations, principally FINRA. In addition, state regulators have
supervisory authority over broker - dealer activities conducted in their states. Broker - dealers are subject to regulations
which cover virtually all aspects of their business, including sales practices, trading practices, use and safekeeping of
clients’ funds and securities, recordkeeping and the conduct of directors, officers, employees and representatives.
Broker - dealers are also subject to net capital rules that mandate that they maintain certain levels of capital. Certain
partner firms have employees who are registered representatives with either affiliated or unaffiliated broker - dealers.
Certain of our partner firms have licensed insurance affiliates. State insurance laws grant state insurance
regulators broad administrative powers. These supervisory agencies regulate many aspects of the insurance business,
including the licensing of insurance brokers and agents and other insurance intermediaries, and trade practices such as
marketing, advertising and compensation arrangements entered into by insurance brokers and agents.
Our partner firms are also subject to regulation by the DOL under ERISA and related regulations with respect
to investment advisory and management services provided to participants in retirement plans covered by ERISA and
subject to regulation by the Internal Revenue Service (“IRS”) with respect to individual retirement accounts (“IRAs”)
pursuant to comparable provisions within the Internal Revenue Code (“IRC”). Among other requirements, ERISA and
the IRC imposes duties on persons who are fiduciaries under ERISA and the IRC, respectively, and prohibit certain
transactions involving related parties.
Additionally, we and our partner firms are subject to various state, federal and international data privacy and
cybersecurity laws designed to protect client and employee personally identifiable information. These laws and
regulations are increasing in complexity and number, which has resulted in greater compliance risk and cost for us. The
unauthorized access, use, theft or destruction of client or employee personal, financial or other data could expose us to
potential financial penalties and legal liability.
Additional Regulatory Reform
Our partner firms are subject to the numerous regulatory reform initiatives in the United States and in
international jurisdictions where they operate. New laws or regulations, or changes in enforcement of existing laws or
regulations, could have a material and adverse impact on the scope or profitability of our partner firms’ business
activities or require us and/or our partner firms to change business practices and incur additional costs as well as
potential reputational harm.
As examples, on June 5, 2019, the SEC adopted a package of rulemakings and interpretations that imposed a
best interest standard of conduct for broker - dealers, required investment advisers and broker-dealers to deliver
short - form disclosure documents to retail investors and clarified the SEC’s views on the fiduciary duty that investment
17
advisers owe to their clients. These rules went effective on September 10, 2019. Our partner firms developed the
required short form disclosure documents.
On December 15, 2020, DOL adopted a new prohibited transaction exemption that is broadly aligned with the
SEC’s rulemaking regarding conduct standards for broker-dealers and investment advisers. The new exemption went
into effect on February 16, 2021. Among other things, the new DOL exemption clarified when advice regarding
rollovers from ERISA plans could be considered fiduciary advice and is generally consistent with the SEC’s position on
that issue.
On December 22, 2020, the SEC announced it had finalized reforms under the Investment Advisers Act
regarding investment adviser advertisements and payments to solicitors. These new rules will replace the current
advertising rule’s broad prohibitions and limitations with principles-based regulation. The new rules also clarify that
both cash and non-cash compensation paid to solicitors qualify as compensation for referrals. While initially the impact
of these rules appears positive for the business of our partner firms, the ultimate impact will be uncertain until after the
compliance date for these rules.
In 2019, a Royal Commission in Australia issued recommendations following a lengthy inquiry into misconduct
in the banking, superannuation and financial services industry. Many of those recommendations have now become law,
with various regulations scheduled to go into effect throughout 2021. Among other things, these regulations may restrict
or prevent product issuers from remunerating financial advisory firms who recommend their products to advisory clients.
Additionally, the Australian government will soon concentrate the regulation of financial advisers in the hands of the
Australian Securities and Investments Commission following the decommissioning of other regulatory bodies. Some of
the regulations include a repeal of carve-outs and grandfathering of certain conflicted remuneration prohibitions.
In December 2019, the Canadian Securities Administrators adopted amendments to National Instrument 31-103
and its related Companion Policy which will impose new heightened requirements on our Canadian partner firms with
respect to conflicts of interest, know your client, know your product and suitability obligations. Certain of the approved
amendments are in effect already, while the remainder are expected to go into effect in 2021.
In addition, in December 2019, our U.K. wealth management partner firm became subject to the new Senior
Managers and Certification Regime which provides for additional firm and individual responsibilities and enhanced
oversight by the U.K. Financial Conduct Authority.
Of the many data privacy and cybersecurity laws being enacted or considered, the California Consumer Privacy
Act (“CCPA”) became effective on January 1, 2020. The CCPA requires certain partner firms to review and enhance
their governance regarding the collection and categorizing of certain personal information. They were also required to
develop procedures to respond to consumer and employee requests to be informed of their personal information that is
collected and to have such information deleted if desired, among other elements. In September 2020, California extended
until January 1, 2022 the exemption from the CCPA for information collected by businesses about employees. Further,
in November 2020, California voters approved the California Privacy Rights Act (“CPRA”), which, among other things,
expands California residents’ rights over the processing of their personal information and creates a dedicated privacy
protection agency. The CPRA will become effective on January 1, 2023. Additionally, our U.K. based partner firms are
subject to the U.K. Data Protection Act 2018 (“DPA”) which became effective on May 23, 2018 and the U.K. General
Data Protection Regulation (“U.K. GDPR”), which became effective on January 1, 2021. The DPA and U.K. GDPR
require these partner firms to enhance (over standards applying prior to May 2018) their governance regarding the
collection, sharing and use of personal information. For example, specific disclosures are required about how personal
information is collected, shared and used, affected individuals are given certain rights to control use of their personal
information, and standards are set out relating to data transfers and the security of personal information.
In addition, financial regulators are increasing their enforcement and examination attention across a wide range
of activities and business practices, including disclosure, conflicts of interest, cybersecurity, business continuity and
succession planning. Such enhanced scrutiny may increase the likelihood of enforcement actions or violation findings, or
cause us or our partner firms to change business practices or incur additional costs. It is also not possible to predict how
such changes may impact the businesses of our competitors and the competitive dynamics of the industry.
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Item 1A. Risk Factors
You should carefully consider the information in this Annual Report and the following risks. Our business,
financial condition and results of operations could be materially and adversely affected by any of these risks. The risks
described below are not the only ones facing us. Additional risks not presently known to us or which we consider
immaterial also may adversely affect us.
Risks Related to Capital Markets and Competition
Our financial results largely depend on wealth management fees received by our partner firms, which are
impacted by market fluctuations.
The substantial majority of our revenues are derived from the wealth management fees charged by our partner
firms for providing clients with investment advice, financial and tax planning, consulting, tax return preparation, family
office services and other services. A material portion of these wealth management fees are calculated based on a
contractual percentage of the client’s assets. Wealth management fees may be adversely affected by prolonged declines
in the capital markets because assets of clients may decline and clients may reduce or eliminate the amount of their
assets with respect to which our partner firms provide advice, which in turn could have an adverse effect on our results
of operations and financial condition.
Our partner firms may not be able to maintain their current wealth management fee structure.
Our partner firms may not be able to maintain their current wealth management fee structure for any number of
reasons, including as a result of poor investment performance, competitive pressures or changes in their mix of wealth
management services. In order to maintain their fee structure in a competitive environment, our partner firms must be
able to continue to provide clients with services that their clients believe justify their fees. Any decline in fee rates could
have an adverse effect on our results of operations and financial condition.
The wealth management industry is very competitive.
We compete for acquisition opportunities and our partner firms compete for clients, advisers and other
personnel with a broad range of wealth management firms, including public and privately held investment advisers,
firms associated with securities broker - dealers, financial institutions, private equity firms and insurance companies,
many of whom have greater resources than we do. The wealth management industry is very competitive, with
competition based on a variety of factors, including the ability to attract and retain key wealth management
professionals, investment performance, wealth management fee rates, the quality of services provided to clients, the
depth and continuity of client relationships and adherence to the fiduciary standard and reputation. A number of factors,
including the following, serve to increase the competitive risks of our partner firms: (i) many competitors have greater
financial, technical, marketing, name recognition and other resources and more personnel than our partner firms do,
(ii) potential competitors have a relatively low cost of entering the wealth management industry, (iii) some competitors
may invest according to different investment styles or in alternative asset classes that the markets may perceive as more
attractive than the investment strategies our partner firms offer, (iv) some competitors charge lower fees for their wealth
management services than our partner firms do and (v) some competitors may be able to engage in more widespread
marketing activities or may have access to products and services to which our partner firms do not. If we are unable to
compete effectively, our results of operations and financial condition may be adversely affected.
Risks Related to Our Operations
Our clients can terminate their client service contracts at any time.
Our clients can generally terminate their client service contracts with us at any time. We cannot be certain that
we will be able to retain our existing clients or attract new clients, and these client service contracts and client
relationships may be terminated or not renewed for any number of reasons. In particular, poor wealth management
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service or performance of the investment strategies that our partner firms recommend relative to the performance of
other wealth management firms could result in the loss of accounts.
Our results of operations could be adversely affected if we are unable to facilitate smooth succession
planning.
We cannot predict with certainty how long the principals or employees of our partner firms will continue
working, and upon the retirement or exit of a principal or employee, a partner firm’s business may be adversely affected.
If we are not successful in facilitating succession planning of our partner firms, our results of operations and financial
condition could be adversely affected.
Our business and the businesses of our partner firms are heavily dependent on our reputations.
Our business depends on earning and maintaining the trust and confidence of our partner firms and the clients
of our partner firms. Our reputation is critical to our business and is vulnerable to threats that may be difficult or
impossible to control and costly or impossible to remediate. For example, failure to comply with applicable laws,
rules or regulations, errors in our public reports or litigation or the publicity surrounding these events, even if
satisfactorily addressed, could adversely impact our reputation, our relationships with our partner firms and the clients of
our partner firms and our ability to negotiate acquisitions and partner firm - level acquisitions with wealth management
firms, as well as adversely affect our results of operations and financial condition.
Our reliance on our partner firms to report their results to us may make it difficult to respond quickly to
negative business developments.
We rely on our partner firms to report their results to us on a monthly basis. We have implemented common
general ledger, payroll and cash management systems that allow us to monitor the financial performance and overall
operations of our partner firms. However, if our partner firms delay reporting results or informing us of negative
business developments, we may not be able to address the situation on a timely basis, which could have an adverse effect
on our results of operations and financial condition.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures may
be inadequate and operational risks could adversely affect our reputation and financial condition.
We and our partner firms have adopted various controls, procedures, policies and systems to monitor and
manage risk in our business. Some of our risk evaluation methods depend upon information provided by our partner
firms and others and public information regarding markets, clients or other matters. In some cases, however, that
information may not be accurate, complete or up - to - date. While we currently believe that our operational controls are
effective, we cannot provide assurance that those controls, procedures, policies and systems will always be adequate to
identify and manage the internal and external risks in our business in a timely manner. Furthermore, we may have errors
in our business processes or fail to implement proper procedures in operating our business, which may expose us to risk
of financial loss. We are also subject to the risk that our employees or contractors, the employees or contractors of our
partner firms or other third parties may deliberately seek to circumvent established controls to commit fraud or act in
ways that are inconsistent with our and our partner firms’ controls, policies and procedures. The financial and
reputational impact of control failures could be significant.
The potential for human error in connection with the operational systems of Focus Inc. or its partner firms
could disrupt operations, cause losses or lead to regulatory fines.
The operations of Focus Inc. and its partner firms are dependent on its employees and principals. From
time - to - time, employees or principals may make mistakes that are not always immediately detected by systems and
controls and policies and procedures intended to prevent and detect such errors. These can include calculation errors,
errors in inputting orders, errors in software implementation, failure to ensure data security, follow processes, patch
systems or report issues, follow regulations or internal compliance procedures or errors in judgment. Human errors, even
if promptly discovered and remediated, may disrupt operations or result in regulatory fines or sanctions, breach of client
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contracts, reputational harm or legal liability, which, in turn, may adversely affect our results of operations and financial
condition.
Failure to maintain and properly safeguard an adequate technology infrastructure and to protect against
cyber - attacks may limit our growth, result in losses or disrupt our business.
Our business is reliant upon financial, accounting and technology systems and networks to process, transmit
and store information, including sensitive client and proprietary information, and to conduct many business activities and
transactions with clients, advisers, vendors and other third parties. The failure to implement, maintain and safeguard an
infrastructure commensurate with the size and scope of our business could impede our productivity and growth, which
could adversely impact our results of operations and financial condition. Further, we rely heavily on third parties for
certain aspects of our business, including financial intermediaries and technology infrastructure and service providers,
and these parties are also susceptible to similar risks.
Although we and our partner firms take protective measures and endeavor to modify them as circumstances
warrant, our computer systems, software, networks and mobile devices, and those of third parties on whom we rely, have
been subject to and may in the future be vulnerable to cyber - attacks, breaches, unauthorized access, theft, including wire
and check fraud, misuse, computer viruses or other malicious code and other events that could have a security impact.
Further, our back - up procedures, cyber defenses and capabilities in the event of a failure, interruption or breach of
security may not be adequate. If any such events occur, it could jeopardize our, as well as our clients’, employees’ or
counterparties’ confidential, proprietary and other sensitive information processed and stored in, and transmitted
through, our or third - party computer systems, networks and mobile devices or otherwise cause interruptions or
malfunctions in our, as well as our clients’, employees’ or counterparties’ operations. Despite our efforts to ensure the
integrity of our systems and networks, it is possible that we may not be able to anticipate or to implement effective
preventive measures against all threats, especially because the techniques used change frequently and can originate from
a wide variety of sources. As a result, we could experience business disruptions, significant losses, increased costs,
reputational harm, regulatory actions or legal liability, any of which could have an adverse effect on our results of
operations and financial condition. We may in the future be required to spend significant additional resources to modify
existing protective measures or to investigate and remediate vulnerabilities or other exposures, including hiring
third - party technology service providers and additional information technology staff. Additionally, we may be subject to
litigation and financial losses that are either not insured against fully or not fully covered through any insurance that we
maintain.
Focus and its partner firms are dependent on a number of key vendors.
Focus and its partner firms depend on a number of key vendors for various accounting, custody, brokerage and
trading, software and technology systems and other operational needs (“Key Vendors”). Moreover, while Focus and its
partner firms perform diligence on its Key Vendors in an effort to ensure they operate in accordance with expectations,
to the extent any significant deficiencies are uncovered, there may be few, or no, alternative vendors available. In
addition, Focus or its partner firms may from time to time transfer key contracts from one vendor to another. Key
contract transfers may be costly and complex, and expose Focus or its partner firms to heightened operational risks. Any
failure to mitigate such risks could result in reputational harm, as well as financial losses to Focus or its partner firms.
The duration of the novel coronavirus (“Covid-19”) outbreak and its ultimate impact on our business
remains uncertain.
The transmission of Covid-19 and efforts to contain its spread have resulted in border closings and other travel
restrictions and disruptions, disruptions to business operations, supply chains and customer activity, event cancellations
and restrictions, service cancellations and reductions, significant challenges in the healthcare industry and quarantines.
These impacts and the uncertainty around the future impact of Covid-19, including the extent and duration of the impact
on economies around the world, have caused significant volatility in the U.S and global financial markets, which are
expected to impact our partner firms’ investment strategies and the wealth management fee revenues of our partner
firms.
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Our market correlated revenues for subsequent periods could be impacted by any negative effects of Covid-19
on the financial markets. Additionally, the cancellation of events and the general slowdown of other entertainment
activities have impacted and are expected to continue to impact a portion of our non-market correlated revenues that are
derived from family office type services for clients in the entertainment industry and relate to live events. We anticipate
that the ongoing cancellations of live events and slowdown of other entertainment activities will persist in 2021.
Furthermore, the effects of Covid-19 may impact the timing and our ability to pursue and make future acquisitions.
Although currently there has been no significant impact, the Covid-19 outbreak, and future pandemics, could
negatively affect Key Vendors which we and our partner firms rely on, and could otherwise disrupt the ability of our
Key Vendors to perform essential tasks.
Risks Related to Our Partnership Model and Growth Strategy
Our success depends, in part, on our ability to make successful acquisitions.
Our continued success will depend, in part, upon our ability to find suitable firms to acquire, either directly or
on behalf of our existing partner firms, our ability to acquire such firms on acceptable terms and our ability to raise the
capital necessary to finance such transactions. We compete with banks, outsourced service providers, private equity
firms and other wealth management and advisory firms to acquire high - quality wealth management firms. Some of our
competitors may be able to outbid us for these acquisition targets. If we identify suitable acquisition targets, we may not
be able to complete any such acquisition on terms that are commercially acceptable to us. If we are not successful in
acquiring suitable acquisition candidates, it may have an adverse effect on our business and on our earnings and revenue
growth.
Acquired businesses may not perform as expected and our due diligence process might not uncover all risk
or liabilities.
Acquisitions involve a number of risks, including the following, any of which could have an adverse effect on
our partner firms’ and our earnings and revenue growth: (i) incurring costs in excess of, or achieving synergies less than,
what we anticipated; (ii) potential loss of key wealth management professionals or other team members of the
predecessor firm; (iii) inability to generate sufficient revenue to offset transaction costs; (iv) inability to retain clients
following an acquisition; (v) incurring expenses associated with the amortization or impairment of intangible assets,
particularly for goodwill and other intangible assets; and (vi) payment of more than fair market value for the assets of the
partner firm.
While we intend that our completed acquisitions will improve profitability, past or future acquisitions may not
be accretive to earnings or otherwise meet operational or strategic expectations. The failure of any partner firm to
perform as expected after acquisition may have an adverse effect on our earnings and revenue growth.
In connection with our acquisitions, we conduct due diligence that we deem reasonable and appropriate based
on the facts and circumstances applicable to such transactions. Despite our efforts, due diligence might not reveal all
issues and existing and potential liabilities at a given firm.
Contingent consideration payments could result in a higher than expected impact on our future earnings.
Our acquisition structures typically include contingent consideration paid to the sellers upon the achievement of
specified financial thresholds. The contingent consideration for acquisitions of new partner firms is typically paid upon
the satisfaction of specified growth thresholds typically over a six - year period, and for acquisitions made by our partner
firms, upon the satisfaction of thresholds tied to revenue as adjusted for certain criteria or other operating metrics based
on the retention or growth of the business acquired. These arrangements may result in the payment of additional
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purchase price consideration to the sellers for periods following the closing of an acquisition and payments may occur in
periods subsequent to the periods in which the additional earnings or other specified financial thresholds are achieved.
We may incur debt, issue additional equity or use cash on hand to pay for future acquisitions, each of which
could adversely affect our financial condition or the market price of our Class A common stock. Additionally,
difficulty in obtaining debt, issuing equity or generating cash flow could affect our growth and financial condition
and the market price of our Class A common stock.
We will finance future acquisitions through debt financing, including significant draws on our first lien
revolving credit facility (the “First Lien Revolver”), issuance of additional term debt, the issuance of equity securities,
the use of existing cash or cash equivalents or any combination of the foregoing. Acquisitions financed with debt could
require us to dedicate a substantial portion of our cash flow to principal and interest payments. Acquisitions financed
with the issuance of our equity securities would be dilutive to the share value and voting power of our existing Class A
common stock, which could affect the market price of our Class A common stock. Future acquisitions financed with our
own cash could deplete the cash and working capital available to fund our operations adequately. Difficulty borrowing
funds, selling securities or generating sufficient cash from operations to finance our activities may have a material
adverse effect on our results of operations and financial condition.
The growth of Connectus may create unique challenges and risks.
In 2020, our partner firm Connectus completed acquisitions of wealth management firms and intends to acquire
additional wealth management firms in the future. Connectus is different from our other partner firms in that we have a
greater degree of management control over areas other than client service and investment operations. Additionally,
Connectus is designed to offer integrated technology, investment support, regulatory compliance support and other
centralized services on a countrywide basis. If these centralized services are not adequate, or other unanticipated issues
with Connectus arise as it grows, such as inability to find a sufficient number of firms to merge into Connectus or
integrate them effectively, then our reputation and our results of operations and financial condition could be adversely
impacted.
The success of Focus Independence depends upon our ability to lift out teams of wealth management
professionals from traditional brokerages and wirehouses.
Our ability to lift out teams of wealth management professionals from traditional brokerages and wirehouses
depends on our ability to offer more favorable opportunities than those provided by their current employers, many of
which have substantially greater financial resources and may be able to entice their employees to stay. If we are not
successful in attracting and lifting out suitable wealth management professionals for our Focus Independence program, it
may have an adverse effect on the growth of our revenues and earnings.
We may face operational risks associated with expanding internationally.
Our business strategy includes expanding our presence in non - U.S. markets through acquisitions. This strategy
presents a number of risks, including: (i) greater difficulties in supporting, or the need to hire additional personnel to
support, the operations of foreign partner firms, (ii) language and cultural differences, (iii) unfavorable fluctuations in
foreign currency exchange rates, (iv) higher operating costs, (v) unexpected changes in wealth management policies and
other regulatory requirements, (vi) adverse tax consequences and (vii) more complex acquisition structures. If our
international business increases relative to our total business, these factors could have a more pronounced effect on our
results of operations and financial condition.
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Risks Related to Our Business Model and Key Professionals
Our partner firms’ autonomy limits our ability to alter their management practices and policies, and our
dependence on the principals who manage the businesses of our partner firms may have an adverse effect on our
business.
Under the management agreements between our partner firms and the management companies formed by the
principals, the management companies provide the personnel who manage the partner firm’s day - to - day operations and
oversee the provision of wealth management and other financial services, the implementation of employment policies,
the negotiation, execution and delivery of contracts in connection with the management and operation of the partner
firm’s business in the ordinary course and the implementation of policies and procedures to ensure compliance with all
applicable laws, rules and regulations. Such individuals also maintain the primary relationships with clients and vendors.
As a consequence, we are exposed to losses resulting from day - to - day decisions of the principals who manage our
partner firm, and our financial condition and results of operations may be adversely affected by problems stemming from
the day - to - day operations of a partner firm, where weaknesses or failures in internal processes or systems could lead to a
disruption of the partner firm’s operations, liability to its clients or exposure to disciplinary action. Unsatisfactory
performance by the principals could also hinder the partner firms’ ability to grow and could have an adverse effect on
our business. Further, there is a risk of reputational harm to us if any of our partner firms, among other things, have
engaged in, or in the future were to engage in, poor or non - compliant business practices or were to experience adverse
results.
We rely on our key personnel and principals.
We depend on the efforts of our executive officers, other management team members, employees and
principals. Our executive officers, in particular, play an important role in the stability and growth of our business,
including the growth and stability of existing partner firms and in identifying potential acquisition opportunities for us.
However, there is no guarantee that these officers will remain with us. In addition, our partner firms depend heavily on
the services of key principals, who in many cases have managed their predecessor firms for many years. Although we
use a combination of economic incentives, transfer restrictions and non - solicitation and non - competition agreements in
an effort to retain key management personnel, there is no guarantee that these principals will remain with the respective
partner firms. The loss of key management personnel at our partner firms could have an adverse impact on our business.
If a management company terminates its management agreement with us, our financial condition and
results could be negatively affected.
At the time of the acquisition of a partner firm, we enter into a management agreement with the management
company that is substantially owned by the selling principals. Pursuant to the management agreement, the management
company provides the personnel who conduct the day to day management and operation of the partner firm. These
management agreements can be terminated by the management company at the end of the initial term, which is typically
six years. Termination of a management agreement could lead to a disruption of the partner firm’s operations, which
could negatively affect our financial condition and results of operations.
Our partner firms may be unable to attract, develop and retain talented wealth management professionals.
Attracting, developing and retaining talented wealth management and other financial services professionals are
essential components of the business strategy of our partner firms. To do so, it is critical that they continue to foster an
environment and provide compensation that is attractive for their existing and prospective wealth management
professionals. If they are unsuccessful in maintaining such an environment (for instance, because of changes in
management structure, corporate culture or corporate governance arrangements) or compensation levels for any reason,
their existing wealth management professionals may leave the firm or fail to produce their best work on a consistent,
long - term basis and/or our partner firms may be unsuccessful in attracting talented new wealth management
professionals, any of which could negatively impact their financial results and our ability to grow and may have an
adverse effect on our results of operations and financial condition.
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Risks Related to Our Structure
Focus Inc. is dependent upon distributions from Focus LLC. Additionally, to the extent Focus Inc. receives
distributions in excess of its tax liabilities and other obligations and retains such excess cash, the unitholders of
Focus LLC would benefit from such accumulated cash balances if they exercise their exchange right.
Focus Inc. is a holding company and its most significant asset is its equity interest in Focus LLC. Focus Inc. has
no independent means of generating revenue. To the extent Focus LLC has available cash and subject to the terms of
Focus LLC’s credit agreements and any other debt instruments, we have caused and intend to continue to cause
Focus LLC to make (i) generally pro rata distributions to its unitholders, including Focus Inc., in an amount generally
intended to allow such unitholders to satisfy their respective income tax liabilities with respect to their allocable share of
the income of Focus LLC, based on certain assumptions and conventions (and actual liability in the case of Focus Inc.),
and to allow Focus Inc. to make payments under its three and any subsequent tax receivable agreements (“Tax
Receivable Agreements”), and (ii) non pro rata distributions to Focus Inc. in an amount at least sufficient to reimburse
Focus Inc. for its corporate and other overhead expenses. We are limited, however, in our ability to cause Focus LLC
and its subsidiaries to make these and other distributions to Focus Inc. due to the restrictions under our credit facilities
entered into in July 2017, as amended (collectively, the “Credit Facility”). Funds used by Focus LLC to satisfy its
distribution obligations will not be available for reinvestment in our business. To the extent that Focus Inc. needs funds
and Focus LLC or its subsidiaries are restricted from making such distributions under applicable law or regulation or
under the terms of their financing arrangements or are otherwise unable to provide such funds, Focus Inc.’s liquidity and
financial condition could be adversely affected.
As a result of potential differences in the amount of net taxable income allocable to Focus Inc. and to the other
Focus LLC unitholders, as well as the use of an assumed tax rate in calculating Focus LLC’s tax distribution obligations,
Focus Inc. may receive distributions significantly in excess of its tax liabilities and obligations to make payments under
the Tax Receivable Agreements. If Focus Inc. retains such cash balances, the unitholders of Focus LLC would benefit
from any value attributable to such accumulated cash balances as a result of their exercise of an exchange right.
Focus Inc. is required to make payments under the Tax Receivable Agreements for certain tax benefits it
may claim, and the amounts of such payments is expected to be substantial.
The Tax Receivable Agreements generally provide for the payment by Focus Inc. to each TRA holder of 85%
of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that Focus Inc. actually realizes
(computed using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain
circumstances in periods after the IPO as a result of certain increases in tax basis and certain tax benefits attributable to
imputed interest. We will retain the benefit of the remaining 15% of these cash savings.
The payment obligations under the Tax Receivable Agreements are Focus Inc.’s obligations and not obligations
of Focus LLC, and we expect that such payments required to be made under the Tax Receivable Agreements will be
substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreements
is by its nature imprecise. Please read “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources—Tax Receivable Agreements.”
In certain cases, payments under the Tax Receivable Agreements may be accelerated and/or significantly
exceed the actual benefits, if any, realized in respect of the tax attributes subject to the Tax Receivable Agreements.
If we experience a change of control (as defined under the Tax Receivable Agreements, which includes certain
mergers, asset sales and other forms of business combinations) or the Tax Receivable Agreements terminate early (at our
election or as a result of our breach), Focus Inc. could be required to make a substantial, immediate lump - sum payment.
This payment would equal the present value of hypothetical future payments that could be required to be paid under the
Tax Receivable Agreements (determined by applying a discount rate of one - year London Interbank Offered Rate
(“LIBOR”) plus 1.5%). The calculation of hypothetical future payments will be based upon certain assumptions and
deemed events set forth in the Tax Receivable Agreements, and may materially exceed, the actual realization, if any, of
the future tax benefits to which the termination payments relate.
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Any such accelerated payments could have a substantial negative impact on our liquidity and could have the
effect of delaying, deferring or preventing certain mergers, asset sales or other forms of business combinations or
changes of control. There can be no assurance that we will be able to finance any payments required to be made under
the Tax Receivable Agreements. Please read “Part II, Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Tax Receivable Agreements.”
As a result of this payment obligation, holders of our Class A common stock could receive substantially less
consideration in connection with a change of control transaction than they would receive in the absence of such
obligation. Further, any payment obligations under the Tax Receivable Agreements will not be conditioned upon the
TRA holders’ having a continued interest in Focus Inc. or Focus LLC. Accordingly, the TRA holders’ interests may
conflict with those of the holders of our Class A common stock.
We will not be reimbursed for any payments made under the Tax Receivable Agreements in the event that
any tax benefits are subsequently disallowed.
Payments under the Tax Receivable Agreements will be based on the tax reporting positions that we will
determine. The TRA holders will not reimburse us for any payments previously made under the Tax Receivable
Agreements if any tax benefits that have given rise to payments under the Tax Receivable Agreements are subsequently
disallowed, except that excess payments made to any TRA holder will be netted against payments that would otherwise
be made to such TRA holder, if any, after our determination of such excess. As a result, in such circumstances, we could
make payments that are greater than our actual cash tax savings, if any, and may not be able to recoup those payments,
which could adversely affect our liquidity.
If Focus LLC were to become a publicly traded partnership taxable as a corporation for U.S. federal income
tax purposes, significant tax inefficiencies might result.
A number of aspects of our structure depend on the classification of Focus LLC as a partnership for U.S. federal
income tax purposes. While Focus LLC has taken steps to avail itself of safe harbors to protect itself from being treated
as a “publicly traded partnership” under U.S. Treasury regulations, such a treatment would likely result in significant tax
inefficiencies, including as a result of Focus Inc.’s inability to file a consolidated U.S. federal income tax return with
Focus LLC. In addition, Focus Inc. would no longer have the benefit of the increases in tax basis covered under the Tax
Receivable Agreements, and Focus Inc. would not be able to recover any payments previously made under the Tax
Receivable Agreements, even if the corresponding tax benefits (including any claimed increase in the tax basis of
Focus LLC’s assets) were subsequently determined to have been unavailable.
Risks Related to Financing and Liquidity
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take
other actions to satisfy our obligations under applicable debt instruments, which may not be successful.
At December 31, 2020, we had outstanding borrowings under the Credit Facility of approximately $1.5 billion
at stated value and in January 2021, we increased the term loan borrowings under our Credit Facility by $500.0 million.
Our ability to make scheduled payments on or to refinance our indebtedness including the Credit Facility, depends on
our financial condition and operating performance, which are subject to prevailing economic and competitive conditions
and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow
from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to
reduce or delay acquisitions or partner firm - level acquisitions and capital expenditures, sell assets, seek additional
capital or restructure or refinance indebtedness. Our ability to restructure or refinance indebtedness will depend on the
condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at
higher interest rates and may require us to comply with more onerous covenants, which could further restrict business
operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In
addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis could
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harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could
face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service
and other obligations. The Credit Facility currently restricts our ability to dispose of assets and our use of the proceeds
from such disposition. We may not be able to consummate those dispositions, and the proceeds of any such disposition
may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful
and may not permit us to meet scheduled debt service obligations.
Our outstanding variable rate indebtedness uses LIBOR as a benchmark for establishing the interest rate. While
we expect any such alternative to be a reasonable replacement for LIBOR, at this time we cannot predict the implications
of the use of such a new benchmark on the interest rates we pay.
Restrictions in our existing and future debt agreements could limit our growth and our ability to engage in
certain activities.
The Credit Facility contains a number of customary covenants, including (i) incurring additional indebtedness
or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a
merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other
restricted payments.
In addition, the Credit Facility requires us to maintain certain financial ratios. These restrictions may also limit
our ability to obtain future financings, to withstand a future downturn in our business or the economy in general, or to
otherwise conduct necessary corporate activities. We may also be prevented from taking advantage of acquisitions or
other business opportunities that arise because of the limitations that the restrictive covenants under the Credit Facility
impose on us.
A breach of any covenant in the Credit Facility would result in a default under the applicable agreement after
any applicable grace periods. A default, if not waived, could result in acceleration of the indebtedness outstanding under
the Credit Facility. The accelerated indebtedness would become immediately due and payable. If that occurs, we may
not be able to make all of the required payments or borrow on short notice sufficient funds to refinance such
indebtedness.
Risks Related to Regulation and Litigation
Our business is highly regulated.
Our partner firms are subject to extensive regulation by various regulatory and self - regulatory authorities in the
United States, Australia, Canada and the United Kingdom. See “Part I. Item 1, Business—Regulatory Environment.”
Providing investment advice to clients is regulated on both the federal and state level in the United States. Our
partner firms are predominantly investment advisers registered with the SEC under the Advisers Act. Each firm that is a
federally registered investment adviser is regulated and subject to examination by the SEC. The Advisers Act imposes
numerous obligations on RIAs, including fiduciary duties, disclosure obligations, recordkeeping and reporting
requirements, marketing restrictions and general anti - fraud prohibitions. Some of our partner firms manage registered
and unregistered funds that subject them to additional disclosure and compliance requirements. The failure to comply
with the Advisers Act and other securities laws and regulations could cause the SEC to institute proceedings and impose
sanctions for violations, including censure or terminating their SEC registrations and could also result in litigation or
reputational harm. In addition, our partner firms who are investment advisers are subject to notice filings and the
anti - fraud rules of state securities regulators and certain individuals are subject to state registration in many instances
under applicable state securities laws.
Our U.S. partner firms are also subject to regulation by the DOL under ERISA and related regulations with
respect to investment advisory and management services provided to retirement plans and plan participants covered by
ERISA and by the IRS with respect to IRAs pursuant to comparable provisions within the IRC. Among other
27
requirements, ERISA and the IRC impose duties on persons who are fiduciaries under ERISA and the IRC, respectively,
and prohibits certain transactions involving related parties.
Certain of our partner firms have affiliated SEC - registered broker - dealers. Broker - dealers and their personnel
are regulated, to a large extent, by the SEC and self - regulatory organizations, principally FINRA and are subject to
regulations which cover all aspects of the securities business Further, certain of our partner firms have licensed
insurance affiliates. State insurance laws grant supervisory agencies, including state insurance departments, broad
administrative authority.
Additionally, we and our partner firms are subject to various data privacy and cybersecurity laws designed to
protect client and employee personally identifiable information. These laws and regulations are increasing in complexity
and number which has resulted in greater compliance risk and cost for us. The unauthorized access, use, theft or
destruction of client or employee personal, financial or other data could expose us to potential financial penalties and
legal liability. Further, we and our partner firms are subject to anti-corruption laws and certain of our firms are subject
to anti-money laundering laws in the jurisdictions in which we operate, as well as regulation and enforcement by
agencies charged with administering those laws.
Our international operations are subject to additional non - U.S. regulatory requirements.
We have partner firms located in Australia, Canada and the United Kingdom. We may have partner firms
located in other non - U.S. jurisdictions in the future. Failure to comply with the applicable laws, rules, regulations, codes,
directives, notices or guidelines in any jurisdiction outside of the United States could result in a wide range of penalties
and disciplinary actions, including fines, censures and the suspension or expulsion from a particular jurisdiction or
market or the revocation of licenses, any of which could adversely affect our reputation and operations and our partner
firms in those jurisdictions. Regulators in jurisdictions outside of the United States could also change their policies or
laws in a manner that might restrict or otherwise impede the ability of such partner firms to offer wealth management
services in their respective markets, or they may be unable to keep up with, or adapt to, changing, complex regulatory
requirements in such jurisdictions or markets, which could further negatively impact our business.
In the future, we may further expand our business outside of the markets in which we currently operate in such
a way or to such an extent that we may be required to register with additional foreign regulatory agencies or otherwise
comply with additional non - U.S. laws and regulations that do not currently apply to us. Lack of compliance with any
such non - U.S. laws and regulations may increase our risk of becoming party to litigation and subject to regulatory
actions. We are also subject to the enhanced risk that our differentiated partnership model might not be enforceable in
some non - U.S. jurisdictions.
The regulatory environment in which our partner firms operate is subject to continuous change, and
regulatory developments designed to increase oversight may adversely affect our business.
The legislative and regulatory environment in which our partner firms operate has undergone significant
changes in the recent past. Regulatory review or the issuance of interpretations of existing laws and regulations may
result in the enactment of new laws and regulations that could adversely affect our operations or our ability to conduct
business profitably. We are unable to predict whether any such laws or regulations will be enacted and to what extent
such laws and regulations would affect our business. See “Part I. Item 1, Business – Regulatory Environment.”
Our business is subject to risks related to legal proceedings and governmental inquiries.
Our business is subject to litigation, regulatory investigations and claims arising in the normal course of
operations. The risks associated with these matters often may be difficult to assess or quantify and the existence and
magnitude of potential claims often remain unknown for substantial periods of time.
Our partner firms depend to a large extent on their network of relationships and on their reputation to attract and
retain clients. The principals and other wealth management professionals at our partner firms make investment decisions
on behalf of clients that could result in substantial losses. If clients suffer significant losses, or are otherwise dissatisfied
28
with wealth management services, we could be subject to the risk of legal liabilities or actions alleging negligent
misconduct, breach of contract, unjust enrichment and/or fraud. Moreover, our partner firms are predominantly U.S.
RIAs and have a legal obligation to operate under the fiduciary standard, a heightened standard as compared to the
standard of conduct applicable to broker - dealers. These risks are often difficult to assess or quantify and their existence
and magnitude often remain unknown for substantial periods of time, even after an action has been commenced.
Our involvement in any investigations and lawsuits would cause us to incur additional legal and other costs and,
if we were found to have violated any laws, we could be required to pay fines, damages and other costs, perhaps in
material amounts. Regardless of final costs, these matters could have an adverse effect on our business by exposing us to
negative publicity, reputational damage, harm to our partner firms’ client relationships or diversion of personnel and
management resources.
Principal or employee misconduct or disclosure of confidential information could expose us to significant
legal liability and reputational harm.
We are vulnerable to reputational harm because our partner firms operate in an industry in which personal
relationships, integrity and the confidence of clients are of critical importance. The principals and employees at our
partner firms could engage in misconduct that adversely affects our business. For example, if a principal or employee
were to engage in illegal or suspicious activities, a partner firm could be subject to regulatory sanctions and we could
suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), our
financial position, our partner firms’ client relationships and their ability to attract new clients.
The wealth management business often requires that we deal with confidential information. If principals or
employees at our partner firms were to improperly use or disclose this information, even if inadvertently, we or our
partner firms could be subject to legal action and suffer serious harm to our reputation, financial position and current and
future business relationships or those of our partner firms. It is not always possible to deter misconduct, and the
precautions we take to detect and prevent this activity may not always be effective. Misconduct by principals or
employees at our partner firms, or even unsubstantiated allegations of misconduct, could result in an adverse effect on
our reputation and our business.
Failure to properly disclose conflicts of interest and comply with fiduciary duty requirements could harm our
reputation, business and results of operations.
Some of our partner firms have affiliated SEC - registered broker - dealers and licensed insurance affiliates, which
create conflicts of interests. Certain of our partner firms also have compensation arrangements pursuant to which they
receive payments based on client assets invested in certain third - party mutual funds. Such arrangements allow a partner
firm to receive payments from multiple parties based on the same client asset and can incentivize a partner firm to act in
a manner contrary to the best interests of its clients. As investment advisers subject to a legal obligation to operate under
the fiduciary standard, these partner firms must fully disclose any conflicts between their interests and those of their
clients. The SEC and other regulators have increased their scrutiny of potential conflicts of interest, and our partner firms
have implemented policies and procedures to mitigate conflicts of interest. However, if our partner firms fail to fully
disclose conflicts of interest or if their policies and procedures are not effective, they could face reputational damage,
litigation or regulatory proceedings or penalties, any of which may adversely affect our reputation, business and results
of operations.
Acquisitions of newly established RIA firms formed by teams of wealth management professionals formerly
employed at traditional brokerages and wirehouses expose us to litigation risk.
As part of the Focus Independence program, we have to date, with limited exceptions, acquired substantially all
of the assets of new RIA firms formed by teams of wealth management professionals formerly employed at traditional
brokerages and wirehouses. These acquisitions may expose us to the risk of legal actions alleging misappropriation of
confidential information, including client information, unfair competition, and breach of contract. These risks are often
difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time,
even after an action has been commenced. We may incur significant legal expenses in defending against litigation
29
commenced by a brokerage or wirehouse. Substantial legal liability could have an adverse effect on our business, results
of operations or financial condition or cause significant reputational harm to us.
In the event of a change of control of our company, we may be required to obtain the consent of our partner
firms’ advisory clients to the change of control.
As required by the Advisers Act, the investment advisory agreements entered into by our investment adviser
subsidiaries provide that an “assignment” of the agreement may not be made without the client’s consent. Under the
Investment Company Act of 1940 (the “Investment Company Act”), advisory agreements with registered funds provide
that they terminate automatically upon “assignment” and the board of directors and the shareholders of the registered
fund must approve a new agreement for advisory services to continue. Under both the Advisers Act and the Investment
Company Act, a change of ownership may constitute such an “assignment” if it is a change of control. For example,
under certain circumstances, an assignment may be deemed to occur if a controlling block of voting securities is
transferred, if any party acquires control, or, in certain circumstances, if a controlling party gives up control. Under the
Investment Company Act, a 25% voting interest is presumed to constitute control. An assignment or a change of control
could be deemed to occur in the future if we, or one of our investment adviser subsidiaries, were to gain or lose a
controlling person, or in other situations that may depend significantly on facts and circumstances. In any such case we
would seek to obtain the consent of our advisory clients, including any funds, to the assignment. To the extent of any
failure to obtain these consents, our results of operations, financial condition or business could be adversely affected.
Risks Related to Our Class A Common Stock, Ownership and Governance
An active, liquid and orderly trading market for our Class A common stock may not be maintained, and our
stock price may be volatile.
Prior to July 2018, our Class A common stock was not traded on any market. An active, liquid and orderly
trading market for our Class A common stock may not be maintained. Active, liquid and orderly trading markets usually
result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. The market price of
our Class A common stock could vary significantly as a result of a number of factors, some of which are beyond our
control. In the event of a drop in the market price of our Class A common stock, you could lose a substantial part or all
of your investment in our Class A common stock.
If our operating and financial performance in any given period does not meet the guidance that we have
provided to the public or the expectations of our investors and analysts, our stock price may decline.
We provide public guidance on our expected operating and financial results for future periods. Although we
believe that this guidance provides investors and analysts with a better understanding of management’s expectations for
the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking
statements subject to the risks and uncertainties described in this report and in our other public filings and public
statements. Our actual results may not always be in line with or exceed the guidance we have provided or the
expectations of our investors and analysts, especially in times of economic uncertainty. In the past, when results have
differed from such guidance or expectations, the market price of our common stock has declined. If, in the future, our
operating or financial results for a particular period do not meet our guidance or the expectations of our investors and
analysts or if we reduce our guidance for future periods, the market price of our common stock may decline.
Investment vehicles affiliated with our private equity investors own a substantial percentage of the voting
power of our common stock.
Holders of Class A common stock and Class B common stock vote together as a single class on all matters
presented to our shareholders for their vote or approval, except as otherwise required by applicable law or our certificate
of incorporation. As of February 15, 2021, investment vehicles affiliated with Stone Point Capital LLC (together with its
affiliates, “Stone Point”) and Kohlberg Kravis Roberts & Co. L.P. (together with its affiliates, “KKR” or, together with
Stone Point, the “PE Holders”) collectively owned approximately 32.5% of our Class A common stock (representing
30
20.5% of the economic interest and 23.2% of the voting power) and 69.1% of our Class B common stock (representing
0% of the economic interest and 19.9% of the voting power).
Although the PE Holders are entitled to act separately in their own respective interests with respect to their
stock in us, they together hold almost enough voting power to elect all of the members of our board of directors and
thereby to control our management and affairs. Additionally, the PE Holders have the right to nominate an aggregate of
three members of our board of directors for so long as they maintain certain ownership stakes. The PE Holders are likely
able to determine the outcome of all matters requiring shareholder approval, including mergers and other material
transactions, and are able to cause or prevent a change in the composition of our board of directors or a change in control
of our company that could deprive our shareholders of an opportunity to receive a premium for their shares of Class A
common stock as part of a sale of our company. The existence of significant shareholders may also have the effect of
deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability
of our other shareholders to approve transactions that they may deem to be in the best interests of our company.
Moreover, this concentration of stock ownership may also adversely affect the trading price of our Class A
common stock to the extent investors perceive a disadvantage in owning stock of our company.
The interests of the PE Holders may differ from those of our public shareholders.
So long as the PE Holders continue to control a significant amount of our common stock, they will continue to
be able to strongly influence all matters requiring shareholder approval, regardless of whether or not other shareholders
believe that a potential transaction is in their own best interests. In any of these matters, the interests of the PE Holders
(including their interests, if any, as TRA holders) may differ or conflict with the interests of our other shareholders. For
example, the PE Holders may have different tax positions from us which could influence their decisions regarding
whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, especially in
light of the existence of the Tax Receivable Agreements, and whether and when Focus Inc. should terminate the Tax
Receivable Agreements and accelerate its obligations thereunder; provided that any decision to terminate the Tax
Receivable Agreements and accelerate the obligations thereunder would also require the approval of a majority of the
disinterested directors of Focus Inc. In addition, the structuring of future transactions may take into consideration the PE
Holders’ tax or other considerations even where no similar benefit would accrue to us. See “Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Tax Receivable Agreements.”
Our certificate of incorporation and bylaws, as well as Delaware law, contain provisions that could
discourage acquisition bids or merger proposals, which may adversely affect the market price of our Class A common
stock.
Our certificate of incorporation authorizes our board of directors to issue one or more classes or series of
preferred stock, the terms of which may be established and the shares of which may be issued without shareholder
approval, and which may include super voting, special approval, dividend, repurchase rights, liquidation preferences or
other rights or preferences superior to the rights of the holders of Class A common stock. The terms of one or more
classes or series of preferred stock could adversely impact the value or our Class A common stock. Furthermore, if our
board of directors elects to issue preferred stock it could be more difficult for a third party to acquire us. For example,
our board of directors may grant holders of preferred stock the right to elect some number of our directors in all events
or upon the occurrence of specified events or the right to veto specified transactions.
In addition, some provisions of our certificate of incorporation and bylaws could make it more difficult for a
third party to acquire control of us, even if the change of control would be beneficial to our shareholders, including:
(i) prohibiting us from engaging in any business combination with any interested shareholder for a period of three years
following the time that the shareholder became an interested shareholder, subject to certain exceptions, (ii) establishing
advance notice provisions with regard to shareholder proposals relating to the nomination of candidates for election as
directors or new business to be brought before meetings of our shareholders, (iii) providing that the authorized number
of directors may be changed only by resolution of the board of directors, (iv) providing that all vacancies in our board of
directors may, except as otherwise be required, be filled by the affirmative vote of a majority of directors then in office,
31
even if less than a quorum, (v) providing that our amended and restated certificate of incorporation and amended and
restated bylaws may be amended by the affirmative vote of the holders of at least two - thirds of our then outstanding
voting stock, (vi) providing for our board of directors to be divided into three classes of directors, (vii) providing that our
amended and restated bylaws can be amended by the board of directors, (viii) limitations on the ability of shareholders to
call special meetings, (ix) limitations on the ability of shareholders to act by written consent, (x) requiring the
affirmative vote of the holders of a majority of the voting stock held by affiliates of Stone Point and KKR, for so long as
they collectively own at least 25% of our outstanding voting stock, to amend, alter, repeal or rescind certain provisions
in our amended and restated certificate of incorporation and (xi) renouncing any reasonable expectancy interest that we
have in, or right to be offered an opportunity to participate in, any corporate or business opportunities that are from time
to time presented to Stone Point, KKR, directors affiliated with these parties and their respective affiliates.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of
Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our
shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or
our directors, officers, employees or agents.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the
selection of an alternative forum, the Court of Chancery of the State of Delaware will, to the fullest extent permitted by
applicable law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any
action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees, agents or
trustees to us or our shareholders, (iii) any action asserting a claim against us or any director or officer or other employee
of ours arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our amended and
restated certificate of incorporation or our bylaws or (iv) any action asserting a claim against us or any director or officer
or other employee of ours that is governed by the internal affairs doctrine, in each such case subject to such Court of
Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Unless we consent in
writing to the selection of an alternative forum, to the fullest extent permitted by law, the federal district courts of the
United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the
federal securities laws of the United States. Any person or entity purchasing or otherwise acquiring any interest in shares
of our capital stock will be deemed to have notice of, and consented to, the provisions of our amended and restated
certificate of incorporation described in the preceding sentence. This choice of forum provision may limit a
shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers, employees or agents, which may discourage such lawsuits against us and such persons. Alternatively, if a court
were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable
in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with
resolving such matters in other jurisdictions, which could adversely affect our results of operations and financial
condition.
We do not have any current plans to pay dividends on our Class A common stock. Consequently, the only
opportunity that holders of our Class A common stock will have to achieve a return on their investment in our Class
A common stock is if the price of our Class A common stock appreciates.
We do not have any current plans to declare dividends on shares of our Class A common stock in the
foreseeable future. Consequently, the only opportunity that holders of our Class A common stock will have to achieve a
return on their investment in our Class A common stock will be if they sell their shares of Class A common stock at a
price greater than they may pay for them. There is no guarantee that the price of our Class A common stock will ever
exceed the price that a holder of our Class A common stock may pay for them.
Future sales or other issuances of our Class A common stock in the public market could reduce our stock
price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your
ownership in us.
Unitholders of Focus LLC (other than Focus Inc. and any of its subsidiaries) may receive shares of our Class A
common stock pursuant to the exercise of an exchange right or the call right and then sell those shares of Class A
common stock. Additionally, we may issue additional shares of Class A common stock or convertible securities in
subsequent offerings or as consideration for future acquisitions.
32
We have approximately 6,800,000 shares of our Class A common stock registered under our registration
statements on Form S-8 for additional issuances under our equity incentive plan, that are available for resale in the
public market without restriction, subject to the satisfaction of vesting, the requirements of Rule 144 and any other
conditions.
We cannot predict the size of future issuances or sales of our Class A common stock or securities convertible
into Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock
will have on the market price of our Class A common stock. Sales of substantial amounts or other issuances of our
Class A common stock (including shares issued in connection with an acquisition), or the perception that such could
occur, may adversely affect prevailing market prices of our Class A common stock.
We have and may in the future finance acquisitions of partner firms by issuing equity securities that could
be dilutive to shareholders.
We have and may in the future finance acquisitions through the issuance of equity securities, including Focus
LLC common units and our Class A common stock. Acquisitions financed with the issuance of Focus LLC common
units could significantly reduce our percentage ownership of Focus LLC. Furthermore, the new holders of Focus LLC
common units may receive shares of our Class A common stock pursuant to the exercise of an exchange right or the call
right, which could impact shareholders.
Acquisitions financed with the issuance of our Class A common stock could be dilutive to the share value and
voting power of our existing Class A common stock, which could affect the market price of our Class A common stock.
General Risks
Our insurance coverage may be inadequate or expensive.
We maintain voluntary and required insurance coverage, including, among others, general liability, property,
director and officer, errors and omissions, network security and privacy, fidelity bond and fiduciary liability insurance,
and insurance required under ERISA. While we endeavor to purchase coverage that is appropriate to our assessment of
our risk, we are unable to predict with certainty the frequency, nature or magnitude of claims for direct or consequential
damages. Our business may be negatively affected if in the future our insurance proves to be inadequate or unavailable.
In addition, insurance claims may harm our reputation or divert management resources away from operating our
business.
If our system of internal controls has flaws, weaknesses or otherwise is not effective, we may not be able to
accurately report our financial results or prevent fraud, which could result in a loss of investor confidence.
Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate
successfully as a public company. For example, Section 404 of the Sarbanes Oxley Act of 2002 (the “Sarbanes Oxley
Act”) requires us, among other things, to annually review and report on, and our independent registered public
accounting firm to attest to, the effectiveness of our internal controls over financial reporting. Any failure to develop or
maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could
adversely affect our results of operations and financial condition or cause us to fail to meet our reporting obligations.
Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which
would likely have a negative effect on the trading price of our Class A common stock.
Our inability to successfully recover from a disaster or other business continuity problem could cause
material financial loss, regulatory actions, reputational harm or legal liability.
Should we experience a local or regional disaster or other business continuity problem, such as a terrorist
attack, pandemic, security breach, power loss, telecommunications failure, earthquake, hurricane or other natural or man
made disaster, our continued success will depend, in part, on the availability of personnel and office facilities, and the
proper functioning of computer, telecommunication and other related systems and operations. Further, we could
potentially lose client data or experience adverse interruptions to our operations or delivery of services to clients in a
33
disaster recovery scenario, which could result in material financial loss, regulatory action, reputational harm or legal
liability.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We and our partner firms conduct our operations using leased office facilities. While we believe we have
suitable office space currently, we will continue to evaluate our office space requirements and will complement these
facilities as necessary.
Our corporate headquarters is located at 875 Third Avenue, 28th Floor, New York, New York, where we occupy
approximately 29,700 square feet of space under a lease, the term of which expires in 2035. In addition, each of our
partner firms lease office space in the city or cities in which it conducts business.
Item 3. Legal Proceedings
We are, from time to time, involved in various legal claims and regulatory matters arising out of our operations
in the normal course of business. After consultation with legal counsel, we do not believe that the resolutions of any such
matters we are currently involved in, individually or in the aggregate, will have a material adverse impact on our
consolidated financial statements. However, we can provide no assurance that any pending or future matters will not
have a material effect on our financial condition, results of operations or cash flows in future reporting periods.
From time to time, our partner firms receive requests for information from governmental authorities regarding
business activities. We have cooperated and will continue to cooperate with all governmental agencies. We continue to
believe that the resolution of any governmental inquiry will not have a material impact on our financial condition, results
of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable
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PART II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information and Holders
Our Class A common stock began trading on the Nasdaq Global Select Market under the symbol “FOCS” on
July 26, 2018. Prior to that, there was no public market for our Class A common stock.
As of February 15, 2021, we had approximately 11 holders of record of our Class A common stock. This
number excludes owners for whom Class A common stock may be held in “street” name.
There is no public market for our Class B common stock. As of February 15, 2021, we had 33 holders of record
of our Class B common stock.
Dividends
We do not have any current plans to declare dividends on shares of our Class A common stock in the
foreseeable future. We currently intend to retain future earnings, if any, to finance the growth of our business and for
other ordinary corporate purposes. Our future dividend policy is within the discretion of our board of directors and will
depend upon then - existing conditions, including our results of operations, financial condition, capital requirements,
investment opportunities, statutory restrictions on our ability to pay dividends and other factors our board of directors
may deem relevant. In addition, the Credit Facility contains certain restrictions on our ability to pay cash dividends.
Securities Authorized for Issuance Under Equity Compensation Plans
The information relating to our equity compensation plans required by Item 5 is incorporated by reference to
such information as set forth in “Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.”
Recent Sales of Unregistered Securities
During the three months ended December 31, 2020, we issued an aggregate of 348,094 shares of our Class A
common stock and retired 233,786 shares of our Class B common stock and 249,087 incentive units in Focus LLC and
acquired 348,094 common units in Focus LLC, in each case as part of our regular quarterly exchanges offered to holders
of units in Focus LLC.
Each Focus LLC common unit, together with a corresponding share of Class B common stock, and Focus LLC
incentive unit (after conversion into a number of common units taking into account the then current value of the common
units and such incentive unit’s aggregate hurdle amount) is exchangeable, pursuant to the terms and subject to the
conditions set forth in the Operating Agreement, for one share of our Class A common stock, or, if either we or Focus
LLC so elects, cash.
The issuance of such securities was made in reliance upon an exemption from the registration requirements of
the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
Item 6. Selected Financial Data
Focus Inc. was formed in July 2015 and did not have any historical financial or operating results prior to the
IPO. Following the IPO, Focus Inc. became the sole managing member of Focus LLC. As a result, Focus Inc.
consolidates the financial results of Focus LLC and its subsidiaries. For periods prior to the completion of the IPO, the
accompanying consolidated financial statements reflect the historical financial position and results of operations of
Focus LLC, our predecessor.
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You should read the following table in conjunction with “Part II, Item 7, Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements included
in “Part II, Item 8, Financial Statements and Supplementary Data.”
Focus Financial Partners, LLC
Focus Financial Partners Inc.
2016
Year Ended December 31,
2018
(dollars in thousands, except per share data)
2017
2019
2020
Consolidated Statements of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to common shareholders . . . . . . . . .
Income (loss) per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet Data (at period end):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total mezzanine equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deficit/equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Financial Data:
Revenue Metrics:
Revenue growth(1) from prior period . . . . . . . . . . . . . . . . . . . . . .
Organic revenue growth(2) from prior period . . . . . . . . . . . . . . . .
Management Fees Metrics (operating expense):
Management fees growth(3) from prior period . . . . . . . . . . . . . . . .
Organic management fees growth(4) from prior period . . . . . . . . . .
Net Income (Loss) Metrics:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income growth from prior period . . . . . . . . . . . . . . . . . . . . . .
Income (loss) per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) per share of Class A common stock growth from
prior period:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA Metrics:
Adjusted EBITDA(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted EBITDA growth(5) from prior period . . . . . . . . . . . . . . .
Adjusted Net Income Excluding Tax Adjustments Metrics:
Adjusted Net Income Excluding Tax Adjustments (5)(6) . . . . . . . . $
Adjusted Net Income Excluding Tax Adjustments growth (5)(6)
485,444
447,161
38,283
(21,580)
16,703
981
15,722
$
$
662,887 $
657,134
5,753
(55,613)
(49,860)
(1,501)
(48,359) $
$
$
$
910,880 $
866,446
44,434
(76,071)
(31,637)
9,450
(41,087) $
40,497
(590) $
1,218,341 $
1,150,695
67,646
(72,622)
(4,976)
7,049
(12,025) $
(847)
(12,872) $
1,361,319
1,241,491
119,828
(50,203)
69,625
20,660
48,965
(20,920)
28,045
(0.01) $
(0.01) $
(0.28) $
(0.28) $
0.58
0.57
16,508
752,941
562,339
452,485
(261,883)
$
51,455 $
33,213 $
65,178 $
1,234,837
1,148,749
864,749
(778,661)
1,937,778
1,125,258
—
812,520
2,653,629
1,849,659
—
803,970
65,858
3,062,881
2,204,002
—
858,879
27.0 %
5.2 %
28.0 %
3.6 %
36.6 %
13.4 %
42.5 %
23.0 %
37.4 %
13.0 %
42.2 %
14.3 %
33.8 %
15.1 %
30.9 %
10.2 %
11.7 %
7.0 %
14.7 %
7.8 %
15,722
$
68.7 %
(48,359) $
*
(41,087) $
15.0 %
(12,025) $
70.7 %
48,965
*
N/A
N/A
N/A
N/A
N/A $
N/A $
(0.01) $
(0.01) $
(0.28) $
(0.28) $
0.58
0.57
N/A
N/A
N/A
N/A
*
*
*
*
103,038
$
36.6 %
145,226 $
40.9 %
203,402 $
40.1 %
269,834 $
32.7 %
321,763
19.2 %
56,578
$
70,484 $
102,520 $
146,718 $
195,562
from prior period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.0 %
24.6 %
45.5 %
43.1 %
33.3 %
Tax Adjustments
Tax Adjustments (5)(6)(7)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax Adjustments growth from prior period (5)(6)(7)(8) . . . . . . . . .
Adjusted Net Income Excluding Tax Adjustments Per Share
and Tax Adjustments Per Share
Adjusted Net Income Excluding Tax Adjustments Per Share
(5)(6)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax Adjustments Per Share (5)(6)(7)(8) . . . . . . . . . . . . . . . . . . . . $
Adjusted Net Income Excluding Tax Adjustments Per Share
growth (5)(6)(7) from prior period. . . . . . . . . . . . . . . . . . . . . . .
Tax Adjustments Per Share growth from prior period (5)(6)(7)(8) . .
Adjusted Shares Outstanding
Adjusted Shares Outstanding (5)(6) . . . . . . . . . . . . . . . . . . . . . . .
Other Metrics:
Net Leverage Ratio (9) at period end . . . . . . . . . . . . . . . . . . . . . . .
Acquired Base Earnings(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Number of partner firms at period end(11) . . . . . . . . . . . . . . . . . . .
* Not meaningful
11,991
$
48.4 %
16,217 $
35.2 %
22,828 $
40.8 %
31,860 $
39.6 %
37,254
16.9 %
0.78
0.17
$
$
0.98 $
0.23 $
1.42 $
0.32 $
1.96 $
0.42 $
25.8 %
54.5 %
25.6 %
35.3 %
44.9 %
39.1 %
38.0 %
31.3 %
2.46
0.47
25.5 %
11.9 %
71,843,916
71,843,916
71,960,540
75,039,357
79,397,568
N/A
23,217
42
$
5.60x
44,191 $
51
3.33x
37,750 $
58
4.00x
35,138 $
63
3.89x
22,121
71
36
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Represents period - over - period growth in our GAAP revenue.
Organic revenue growth represents the period - over - period growth in revenue related to partner firms, including
growth related to acquisitions of wealth management practices and customer relationships by our partner firms,
including Connectus, and partner firms that have merged, that for the entire periods presented, are included in
our consolidated statements of operations for each of the entire periods presented. We believe these growth
statistics are useful in that they present full - period revenue growth of partner firms on a “same store” basis
exclusive of the effect of the partial period results of partner firms that are acquired during the comparable
periods.
The terms of our management agreements entitle the management companies to management fees typically
consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in
excess of Target Earnings. Management fees growth represents the period - over - period growth in GAAP
management fees earned by management companies. While an expense, we believe that growth in management
fees reflect the strength of the partnership.
Organic management fees growth represents the period - over - period growth in management fees earned by
management companies related to partner firms, including growth related to acquisitions of wealth management
practices and customer relationships by our partner firms and partner firms that have merged, that for the entire
periods presented, are included in our consolidated statements of operations for each of the entire periods
presented. We believe that these growth statistics are useful in that they present full - period growth of
management fees on a “same store” basis exclusive of the effect of the partial period results of partner firms
that are acquired during the comparable periods.
Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments, Adjusted Net Income Excluding Tax
Adjustments Per Share, Tax Adjustments Per Share and Adjusted Shares Outstanding are non-GAAP financial
measures. For definitions of Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments, Adjusted
Net Income Excluding Tax Adjustments Per Share, Tax Adjustments, Tax Adjustments Per Share and Adjusted
Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income Excluding Tax
Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share to the most directly comparable
GAAP financial measure, please read “Part II, Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operations—How We Evaluate Our Business.”
In disclosures, including filings with the SEC, made prior to the quarter ended September 30, 2020, “Adjusted
Net Income Excluding Tax Adjustments” and “Tax Adjustments” were presented together as “Adjusted Net
Income.” Additionally, “Adjusted Net Income Excluding Tax Adjustments Per Share” and “Tax Adjustments
Per Share” were presented together as “Adjusted Net Income Per Share.
For periods ended prior to the closing of the IPO and the consummation of the Reorganization Transactions on
July 30, 2018, certain tax related adjustments are made and Adjusted Shares Outstanding of 71,843,916 are
deemed to be outstanding for comparative purposes only.
Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions
allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax
rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax
purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due
to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant
supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit
of deductions for acquired intangible assets with the step-up in tax basis. As of December 31, 2020, estimated
Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro
forma 27% income tax rate for the next 12 months is $41,718.
37
(9)
(10)
Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in the Credit Facility), and means the
ratio of amounts outstanding under our first lien term loan (the “First Lien Term Loan”) and our First Lien
Revolver plus other outstanding debt obligations secured by a lien on the assets of Focus LLC (excluding letters
of credit other than unpaid drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated
EBITDA (as defined in the Credit Facility). A different facility was in place in periods prior to 2017,
accordingly the amount is not comparable or applicable for 2016.
The terms of our management agreements entitle the management companies to management fees typically
consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target
Earnings, plus a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings is equal to our
retained cumulative preferred position in Base Earnings. We are entitled to receive these earnings
notwithstanding any earnings that we are entitled to receive in excess of Target Earnings. Base Earnings may
change in future periods for various business or contractual matters. For example, from time to time when a
partner firm consummates an acquisition, the management agreement among the partner firm, the management
company and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected
post - acquisition earnings of the partner firm.
(11)
Represents the number of partner firms on the last day of the period presented.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this discussion and analysis of our financial condition and results of operations in conjunction
with “Part II, Item 6, Selected Financial Data” and the historical financial statements and related notes included
elsewhere in this Annual Report. The information in this section contains forward - looking statements. Please read
“Cautionary Statement Regarding Forward - Looking Statements.” Our actual results may differ significantly from the
results suggested by these forward - looking statements and from our historical results. Some factors that may cause our
results to differ are described in “Part I, Item 1A, Risk Factors.” The historical financial data discussed below reflects
the historical results of operations and financial position of Focus Inc., including consolidation of its investment in
Focus LLC, since July 30, 2018. Prior to July 30, 2018, the closing date of the IPO, the historical financial data
discussed below represents the historical results of operations and financial position of Focus LLC.
Overview
We are a leading partnership of independent, fiduciary wealth management firms operating in the highly
fragmented RIA industry, with a footprint of over 70 partner firms primarily in the United States. We have achieved this
market leadership by positioning ourselves as the partner of choice for many firms in an industry where a number of
secular trends are driving consolidation. Our partner firms primarily service ultra - high net worth and high net worth
individuals and families by providing highly differentiated and comprehensive wealth management services. Our partner
firms benefit from our intellectual and financial resources, operating as part of a scaled business model with aligned
economic interests, while retaining their entrepreneurial culture and independence.
Our partnership is comprised of trusted professionals providing comprehensive wealth management services
through a largely recurring, fee - based model, which differentiates our partner firms from the traditional brokerage
platforms whose revenues are largely derived from commissions. We derive a substantial majority of our revenues from
wealth management fees for investment advice, financial and tax planning, consulting, tax return preparation, family
office services and other services. We also generate other revenues primarily from recordkeeping and administration
service fees, commissions and distribution fees and outsourced services.
Since we began revenue - generating and acquisition activities in 2006, we have created a partnership of over 70
partner firms, the substantial majority of which are RIAs registered with the SEC and built a business with revenues in
excess of $1.3 billion for the year ended December 31, 2020. For the year ended December 31, 2020, in excess of 95%
of our revenues were fee - based and recurring in nature. We have established a national footprint across the United States
and expanded our international footprint into Australia, Canada and the United Kingdom.
38
Sources of Revenue
Our partner firms provide comprehensive wealth management services through a largely recurring, fee - based
model. We derive a substantial majority of our revenue from wealth management fees, which are comprised of fees
earned from wealth management services, including investment advice, financial and tax planning, consulting, tax return
preparation, family office services and other services. Fees are primarily based either on a contractual percentage of the
client’s assets based on the market value of the client’s assets on the predetermined billing date, a flat fee, an hourly rate
based on predetermined billing rates or a combination of such fees and are billed either in advance or arrears on a
monthly, quarterly or semiannual basis. In certain cases, such wealth management fees may be subject to minimum fee
levels depending on the services performed. We also generate other revenues, which primarily include recordkeeping
and administration service fees, commissions and distribution fees and outsourced services. The following table
summarizes our sources of revenue:
2018
% of Total
Revenues Revenues
Revenues
% of Total
Revenues
Revenues
% of Total
Revenues
Year Ended December 31,
2019
2020
Wealth management fees . . . . . . . . . . . . $ 853,033
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,847
Total revenues . . . . . . . . . . . . . . . . . . . . . $ 910,880
93.6 % $ 1,149,655
68,686
6.4 %
100.0 % $ 1,218,341
94.4 % $ 1,286,130
75,189
5.6 %
100.0 % $ 1,361,319
94.5 %
5.5 %
100.0 %
(dollars in thousands)
During the years ended December 31, 2018, 2019 and 2020, our wealth management fees were impacted by the
acquisitions of new partner firms and the growth of existing partner firms, which includes the acquisitions of wealth
management practices and customer relationships by our existing partner firms. In 2018, 2019 and 2020, we completed
acquisitions of eight, six and seven partner firms, respectively. In 2018, the new partner firms were Cornerstone Wealth,
Fortem Financial, Bartlett Wealth Management, Campbell Deegan Financial, Nigro Karlin Segal Feldstein & Bolno,
Asset Advisors Investment Management, Edge Capital Group and Vista Wealth Management. In 2019, the new partner
firms were Altman Greenfield & Selvaggi, Prime Quadrant, Foster Dykema & Cabot, Escala Partners, Sound View
Wealth Advisors and Williams Jones. In 2020, the new partner firms were Nexus Investment Management, MEDIQ
Financial Services, InterOcean Capital, Seasons of Advice, CornerStone Partners, Fairway Wealth Management and
Kavar Capital Partners.
In 2018, 2019 and 2020, our partner firms completed 17, 28 and 18 transactions, respectively, consisting of
business acquisitions accounted for in accordance with Accounting Standard Codification (“ASC”) Topic 805: Business
Combinations and asset acquisitions, including four transactions completed by Connectus in 2020.
See Note 5 to our consolidated financial statements for additional information about our acquisitions.
For the year ended December 31, 2020, in excess of 95% of our revenues were fee - based and recurring in
nature. Although the substantial majority of our revenues are fee - based and recurring, our revenues can fluctuate due to
macroeconomic factors and the overall state of the financial markets, particularly in the United States. Our partner firms’
wealth management fees are primarily based either on a contractual percentage of the client’s assets based on the market
value of the client’s assets on the predetermined billing date, a flat fee, an hourly rate based on predetermined billing
rates or a combination of such fees and are billed either in advance or arrears on a monthly, quarterly or semiannual
basis. We estimate that approximately 26% of our revenues for the year ended December 31, 2020 were not directly
correlated to the financial markets. Of the 74% of our revenues that were directly correlated to the financial markets,
primarily equities and fixed income, for the year ended December 31, 2020, we estimate that approximately 67% of such
revenues were generated from advance billings. We estimate that approximately 25% of our revenues for the three
months ended December 31, 2020 were not directly correlated to the financial markets. Of the 75% of our revenues that
were directly correlated to the financial markets, primarily equities and fixed income, for the three months ended
December 31, 2020, we estimate that approximately 63% of such revenues were generated from advance billings. These
revenues are impacted by market movements as a result of contractual provisions with clients that entitle our partner
firms to bill for their services either in advance or arrears based on the value of client assets at such time. Since
approximately 63% of our market correlated revenues are set based on the market value of client assets in advance of the
39
respective service period, this generally results in a one quarter lagged effect of any market movements on our revenues.
Longer term trends in the financial markets may favorably or unfavorably impact our total revenues, but not in a linear
relationship. For example, during 2018, 2019 and 2020, the Standard & Poor’s 500 Index had a total return of (4.4)%,
31.5% and 18.4%, respectively, and the Barclays U.S. Aggregate Bond Index had a total return for the same periods of
0.0%, 8.7% and 7.5% respectively. By comparison, for the same periods our organic revenue growth was 13.0%, 15.1%
and 7.0%, respectively. For additional information, please read “—How We Evaluate our Business.”
During the year ended December 31, 2020, our revenues were negatively impacted by the effects of Covid-19
on the financial markets as a result of our market correlated revenues, which represented 74% of our total revenues for
the year ended December 31, 2020. Our market correlated revenues for subsequent periods could be impacted by any
negative effects of Covid-19 on the financial markets. Additionally, a portion of our non-market correlated revenues are
derived from family office type services for clients in the entertainment industry and relate to live events. The
cancellation of events and the general slowdown of other entertainment activities will impact a portion of our non-
market correlated revenues in subsequent periods. We anticipate that the ongoing cancellations of live events and
slowdown of other entertainment activities will persist in 2021. However, this revenue outlook is subject to material
change because it is dependent on the continued impact of the Covid-19 pandemic which is highly uncertain and cannot
be predicted.
Operating Expenses
Our operating expenses consist of compensation and related expenses, management fees, selling, general and
administrative expenses, management contract buyout, intangible amortization, non - cash changes in fair value of
estimated contingent consideration and depreciation and other amortization expense.
Compensation and Related Expenses
Compensation and related expenses include salaries, wages, related employee benefits and taxes for employees
at our partner firms and employees at the Focus LLC company level. Compensation and related expenses also include
non - cash compensation expense, associated with both Focus Inc.’s and Focus LLC’s equity grants to employees and
non - employees, including management company principals.
Management Fees
While we have to date, with limited exceptions, acquired substantially all of the assets of a target firm,
following our acquisition of a new partner firm, the partner firm continues to be primarily managed by its principals
through their 100% ownership of a management company formed by them concurrently with the acquisition. Our
operating subsidiary, the management company and the principals enter into a management agreement that provides for
the payment of ongoing management fees to the management company. The terms of the management agreements are
generally six years subject to automatic renewals for consecutive one - year terms, unless earlier terminated by either the
management company or us in certain limited situations. Under the management agreement, the management company
is entitled to management fees typically consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus
a percentage of EBPC in excess of Target Earnings.
We retain a cumulative preferred position in Base Earnings. To the extent earnings of an acquired business in
any year are less than Base Earnings, in the following year we are entitled to receive Base Earnings together with the
prior years’ shortfall before any management fees are earned by the management company.
The following table provides an illustrative example of our economics, including management fees earned by
the management company, for periods of projected revenues, +10% growth in revenues and −10% growth in revenues.
This example assumes (i) Target Earnings of $3.0 million; (ii) Base Earnings acquired of 60% of Target Earnings or
40
$1.8 million; and (iii) a percentage of earnings in excess of Target Earnings retained by the management company of
40%.
Projected
Revenues
+10% Growth in −10% Growth
Revenues
(in thousands)
in Revenues
(2,000)
New Partner Firm
New partner firm revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 $
Less:
Operating expenses (excluding management fees) . . . . . . . . . . . . . . . . . . . .
EBPC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $
Base Earnings to Focus Inc. (60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees to management company (40%) . . . . . . . . . . . . . . . . . . .
EBPC in excess of Target Earnings:
To Focus Inc. (60%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To management company as management fees (40%) . . . . . . . . . . . . . . . . .
Focus Inc.
Focus Inc. revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 $
Less:
Operating expenses (excluding management fees) . . . . . . . . . . . . . . . . . . . .
Less:
Management fees to management company . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,800 $
1,800
1,200
(1,200)
(2,000)
—
—
5,500 $
4,500
(2,000)
3,500 $
1,800
1,200
(2,000)
2,500
1,800
700
300
200
—
—
5,500 $
4,500
(2,000)
(2,000)
(1,400)
2,100 $
(700)
1,800
As a result of our economic arrangements with the various management company entities, 100% of
management fees are variable expenses.
Selling, General and Administrative
Selling, general and administrative expenses include rent, insurance premiums, professional fees, travel and
entertainment and other costs.
Management Contract Buyout
Management contract buyout represents cash consideration to buyout a management agreement with one of our
retiring principals whereby the business operations of the relevant partner firm were transitioned to one of our other
partner firms.
Intangible Amortization
Amortization of intangibles consists primarily of the amortization of intangibles we acquired through our
various acquisitions of new partner firms and acquisitions by our partner firms.
Non - Cash Changes in Fair Value of Estimated Contingent Consideration
We have typically incorporated into our acquisition structure contingent consideration paid to the sellers upon
the satisfaction of specified financial thresholds, and the purchase price for a typical acquisition is comprised of a base
purchase price and the right to receive such contingent consideration in the form of earn out payments. The contingent
consideration for acquisitions of new partner firms is generally paid over a six-year period upon the satisfaction of
41
specified growth thresholds, in years three and six. These growth thresholds are typically tied to the compounded annual
growth rate (“CAGR”) of the partner firm’s earnings. Such growth thresholds can be set annually over the six-year
period as well. The contingent consideration for acquisitions made by our partner firms is paid upon the satisfaction of
specified financial thresholds. These thresholds are generally tied to revenue as adjusted for certain criteria or other
operating metrics based on the retention or growth of the business acquired. These arrangements may result in the
payment of additional purchase price consideration to the sellers for periods following the closing of an acquisition.
Contingent consideration payments are typically payable in cash and, in some cases, equity.
For business acquisitions, we recognize the fair value of estimated contingent consideration at the acquisition
date as part of the consideration transferred in exchange for substantially all of the assets or equity of the wealth
management firm. The contingent consideration is remeasured to fair value at each reporting date until the contingency
is resolved. Any changes in fair value are recognized each reporting period in non - cash changes in fair value of
estimated contingent consideration in our consolidated statements of operations.
Depreciation and Other Amortization
Depreciation and other amortization expense primarily represents the benefits we received from using
long - lived assets such as computers and equipment, leasehold improvements and furniture and fixtures. Those assets
primarily consist of purchased fixed assets as well as fixed assets acquired through our acquisitions.
Business Acquisitions
We completed 19, 31 and 21 business acquisitions during the years ended December 31, 2018, 2019 and 2020,
respectively, consisting of both new partner firms and acquisitions by our partner firms. Such business acquisitions were
accounted for in accordance with ASC Topic 805: Business Combinations.
The purchase price is comprised of a base purchase price and a right to receive contingent consideration in the
form of earn out payments. The base purchase price typically consists of an upfront cash payment and may include
equity. The contingent consideration for acquisitions of new partner firms generally consists of earn outs over a six year
period following the closing, with payment upon the satisfaction of specified growth thresholds in years three and six.
The growth thresholds are typically tied to the CAGR of the partner firm’s earnings. Such growth thresholds can be set
annually over the six-year period as well. The contingent consideration for acquisitions made by our partner firms
generally is earned upon the satisfaction of specified financial thresholds. These thresholds are generally tied to revenue
as adjusted for certain criteria or other operating metrics based on the retention or growth of the business acquired. The
contingent consideration is typically payable in cash and, in some cases, equity.
The following table summarizes our business acquisitions for the years ended December 31, 2018, 2019 and
2020 (dollars in thousands):
Number of business acquisitions closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration:
2018
2019
2020
19
31
21
Cash and option premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,478 $ 507,498 $ 327,722
Cash due subsequent to closing at net present value and working capital
adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(174)
Fair market value of Focus LLC common units issued . . . . . . . . . . . . . . . . . . .
—
Fair market value of Class A common stock issued . . . . . . . . . . . . . . . . . . . . . .
—
Fair market value of estimated contingent consideration . . . . . . . . . . . . . . . . . .
46,918
Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653,615 $ 594,620 $ 374,466
39,134
51,456
112,461
42,086
4,341
—
—
82,781
In addition, we completed six, three and four acquisitions during the years ended December 31, 2018, 2019 and
2020, respectively, that did not meet the definition of a business under ASC Topic 805: Business Combinations. These
acquisitions primarily related to the acquisition of customer relationships.
42
Substantially all of our acquisitions have been paid for with a combination of cash flow from operations,
proceeds from the IPO, proceeds from borrowings under our Credit Facility and equity, valued at the then - fair market
value.
Our acquisition activity was negatively impacted during 2020 by the effects of Covid-19 as a result of targets
focusing on management and client matters as well as potential uncertainties around valuations during periods of Covid-
19 related market stress. We completed 21 business acquisitions during the year ended December 31, 2020 compared to
31 business acquisitions during the year ended December 31, 2019. The effects of Covid-19 may impact the timing and
our ability to pursue and make future acquisitions.
Recent Development
In January 2021, we announced a joint venture with Orion Advisor Solutions, which will make the cash, credit
and related services developed by Focus Client Solutions available to wealth management firms on Orion’s WealthTech
platform. While an important and innovative initiative, we do not expect the joint venture to have a meaningful impact
on our results of operations in the short term but believe that this joint venture will create important value over time.
43
How We Evaluate Our Business
We focus on several key financial metrics in evaluating the success of our business, the success of our partner
firms and our resulting financial position and operating performance. Key metrics include the following:
Revenue Metrics:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Revenue growth (1) from prior period . . . . . . . . . . . . . . . . . . . . . . . . . . .
Organic revenue growth (2) from prior period . . . . . . . . . . . . . . . . . . . .
Management Fees Metrics (operating expense):
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Management fees growth (3) from prior period . . . . . . . . . . . . . . . . . . .
Organic management fees growth (4) from prior period . . . . . . . . . . . .
Net Income (Loss) Metrics:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) growth from prior period . . . . . . . . . . . . . . . . . . . . . .
Income (loss) per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) per share of Class A common stock growth from prior
period:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA Metrics:
Adjusted EBITDA (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted EBITDA growth (6) from prior period . . . . . . . . . . . . . . . . . .
Adjusted Net Income Excluding Tax Adjustments Metrics:
Adjusted Net Income Excluding Tax Adjustments (5)(6) . . . . . . . . . . . $
Adjusted Net Income Excluding Tax Adjustments growth (5)(6)
Year Ended December 31,
2018
2020
2019
(dollars in thousands, except per share data)
910,880 $ 1,218,341
$ 1,361,319
37.4 %
13.0 %
33.8 %
15.1 %
11.7 %
7.0 %
232,703 $
42.2 %
14.3 %
304,701
$
30.9 %
10.2 %
349,475
14.7 %
7.8 %
(41,087) $
15.0 %
(12,025)
$
70.7 %
48,965
*
(0.01) $
(0.01) $
(0.28)
(0.28)
$
$
0.58
0.57
N/A
N/A
*
*
*
*
203,402 $
40.1 %
269,834
$
32.7 %
321,763
19.2 %
102,520 $
146,718
$
195,562
from prior period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
45.5 %
43.1 %
33.3 %
Tax Adjustments
Tax Adjustments (5)(6)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Tax Adjustments growth from prior period (5)(6)(7) . . . . . . . . . . . . . . .
Adjusted Net Income Excluding Tax Adjustments Per Share and
Tax Adjustments Per Share Metrics:
22,828 $
40.8 %
31,860
$
39.6 %
37,254
16.9 %
Adjusted Net Income Excluding Tax Adjustments Per Share (5)(6) . . . $
Tax Adjustments Per Share (5)(6)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjusted Net Income Excluding Tax Adjustments Per Share growth
1.42 $
0.32 $
(5)(6) from prior period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Adjustments Per Share growth from prior period (5)(6)(7) . . . . . .
Adjusted Shares Outstanding
Adjusted Shares Outstanding (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,960,540
Other Metrics:
Net Leverage Ratio (8) at period end . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired Base Earnings (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Number of partner firms at period end (10). . . . . . . . . . . . . . . . . . . . . . .
3.33x
37,750 $
58
44.9 %
39.1 %
1.96
0.42
$
$
38.0 %
31.3 %
2.46
0.47
25.5 %
11.9 %
75,039,357
79,397,568
4.00x
35,138
63
$
3.89x
22,121
71
* Not meaningful
(1)
Represents period - over - period growth in our GAAP revenue.
44
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Organic revenue growth represents the period - over - period growth in revenue related to partner firms, including
growth related to acquisitions of wealth management practices and customer relationships by our partner firms,
including Connectus, and partner firms that have merged, that for the entire periods presented, are included in
our consolidated statements of operations for each of the entire periods presented. We believe these growth
statistics are useful in that they present full - period revenue growth of partner firms on a “same store” basis
exclusive of the effect of the partial results of partner firms that are acquired during the comparable periods.
The terms of our management agreements entitle the management companies to management fees typically
consisting of all EBPC in excess of Base Earnings up to Target Earnings, plus a percentage of any EBPC in
excess of Target Earnings. Management fees growth represents the period - over - period growth in GAAP
management fees earned by management companies. While an expense, we believe that growth in management
fees reflect the strength of the partnership.
Organic management fees growth represents the period - over - period growth in management fees earned by
management companies related to partner firms, including growth related to acquisitions of wealth management
practices and customer relationships by our partner firms and partner firms that have merged, that for the entire
periods presented, are included in our consolidated statements of operations for each of the entire periods
presented. We believe that these growth statistics are useful in that they present full - period growth of
management fees on a “same store” basis exclusive of the effect of the partial period results of partner firms
that are acquired during the comparable periods.
In disclosures, including filings with the SEC, made prior to the quarter ended September 30, 2020, “Adjusted
Net Income Excluding Tax Adjustments” and “Tax Adjustments” were presented together as “Adjusted Net
Income.” Additionally, “Adjusted Net Income Excluding Tax Adjustments Per Share” and “Tax Adjustments
Per Share” were presented together as “Adjusted Net Income Per Share.”
For additional information regarding Adjusted EBITDA, Adjusted Net Income Excluding Tax Adjustments,
Adjusted Net Income Excluding Tax Adjustments Per Share, Tax Adjustments, Tax Adjustments Per Share and
Adjusted Shares Outstanding, including a reconciliation of Adjusted EBITDA, Adjusted Net Income Excluding
Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share to the most directly
comparable GAAP financial measure, please read “—Adjusted EBITDA” and “—Adjusted Net Income
Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share.”
Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions
allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax
rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax
purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due
to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant
supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit
of deductions for acquired intangible assets with the step-up in tax basis. As of December 31, 2020, estimated
Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro
forma 27% income tax rate for the next 12 months is $41,718.
Net Leverage Ratio represents the First Lien Leverage Ratio (as defined in the Credit Facility), and means the
ratio of amounts outstanding under the First Lien Term Loan and First Lien Revolver plus other outstanding
debt obligations secured by a lien on the assets of Focus LLC (excluding letters of credit other than unpaid
drawings thereunder) minus unrestricted cash and cash equivalents to Consolidated EBITDA (as defined in the
Credit Facility).
The terms of our management agreements entitle the management companies to management fees typically
consisting of all future EBPC of the acquired wealth management firm in excess of Base Earnings up to Target
Earnings, plus a percentage of any EBPC in excess of Target Earnings. Acquired Base Earnings is equal to our
retained cumulative preferred position in Base Earnings. We are entitled to receive these earnings
notwithstanding any earnings that we are entitled to receive in excess of Target Earnings. Base Earnings may
45
change in future periods for various business or contractual matters. For example, from time to time when a
partner firm consummates an acquisition, the management agreement among the partner firm, the management
company and the principals is amended to adjust Base Earnings and Target Earnings to reflect the projected
post - acquisition earnings of the partner firm.
(10)
Represents the number of partner firms on the last day of the period presented.
Adjusted EBITDA
Adjusted EBITDA is a non - GAAP measure. Adjusted EBITDA is defined as net income (loss) excluding
interest income, interest expense, income tax expense (benefit), amortization of debt financing costs, intangible
amortization and impairments, if any, depreciation and other amortization, non - cash equity compensation expense,
non - cash changes in fair value of estimated contingent consideration, gain on sale of investment, loss on extinguishment
of borrowings, other expense/income, net, impairment of equity method investment, management contract buyout and
other one - time transaction expenses, if any. We believe that Adjusted EBITDA, viewed in addition to and not in lieu of,
our reported GAAP results, provides additional useful information to investors regarding our performance and overall
results of operations for various reasons, including the following:
•
•
•
non - cash equity grants made to employees or non - employees at a certain price and point in time do not
necessarily reflect how our business is performing at any particular time; stock - based compensation
expense is not a key measure of our operating performance;
contingent consideration or earn outs can vary substantially from company to company and depending
upon each company’s growth metrics and accounting assumption methods; the non - cash changes in fair
value of estimated contingent consideration is not considered a key measure in comparing our operating
performance; and
amortization expenses can vary substantially from company to company and from period to period
depending upon each company’s financing and accounting methods, the fair value and average expected
life of acquired intangible assets and the method by which assets were acquired; the amortization of
intangible assets obtained in acquisitions are not considered a key measure in comparing our operating
performance.
We use Adjusted EBITDA:
•
•
•
•
as a measure of operating performance;
for planning purposes, including the preparation of budgets and forecasts;
to allocate resources to enhance the financial performance of our business; and
to evaluate the effectiveness of our business strategies.
Adjusted EBITDA does not purport to be an alternative to net income (loss) or cash flows from operating
activities. The term Adjusted EBITDA is not defined under GAAP, and Adjusted EBITDA is not a measure of net
income (loss), operating income or any other performance or liquidity measure derived in accordance with GAAP.
Therefore, Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a
substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA does not reflect all cash expenditures, future requirements for capital expenditures or
contractual commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and
46
• Adjusted EBITDA does not reflect the interest expense on our debt or the cash requirements necessary to
service interest or principal payments.
In addition, Adjusted EBITDA can differ significantly from company to company depending on strategic
decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We
compensate for these limitations by also relying on the GAAP results and using Adjusted EBITDA as supplemental
information.
Set forth below is a reconciliation of net income (loss) to Adjusted EBITDA:
2018
Year Ended December 31,
2019
(in thousands)
2020
48,965
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (41,087) $ (12,025) $
(453)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,658
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,660
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,909
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,783
12,451
Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,285
Non - cash equity compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,197
Non - cash changes in fair value of estimated contingent consideration . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loss on extinguishment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,094
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
214
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Management contract buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other one - time transaction expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203,402 $ 269,834 $ 321,763
(1,164)
58,291
7,049
3,452
130,718
10,675
18,329
38,797
—
—
1,049
11,749
1,428
1,486
(1,266)
56,448
9,450
3,498
90,381
8,370
44,468
6,638
(5,509)
21,071
2,350
—
—
8,590
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per
Share
We analyze our performance using Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income
Excluding Tax Adjustments Per Share. Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income
Excluding Tax Adjustments Per Share are non GAAP measures. We define Adjusted Net Income Excluding Tax
Adjustments as net income (loss) excluding income tax expense (benefit), amortization of debt financing costs,
intangible amortization and impairments, if any, non-cash equity compensation expense, non-cash changes in fair value
of estimated contingent consideration, gain on sale of investment, loss on extinguishment of borrowings, management
contract buyout, if any, and other one time transaction expenses. The calculation of Adjusted Net Income Excluding Tax
Adjustments also includes adjustments to reflect a pro forma 27% income tax rate reflecting the estimated U.S. federal,
state, local and foreign income tax rates applicable to corporations in the jurisdictions we conduct business.
Adjusted Net Income Excluding Tax Adjustments Per Share is calculated by dividing Adjusted Net Income
Excluding Tax Adjustments by the Adjusted Shares Outstanding. Adjusted Shares Outstanding includes: (i) the weighted
average shares of Class A common stock outstanding during the periods, (ii) the weighted average incremental shares of
Class A common stock related to stock options outstanding during the periods, (iii) the weighted average incremental
shares of Class A common stock related to unvested Class A common stock outstanding during the periods, (iv) the
weighted average incremental shares of Class A common stock related to restricted stock units outstanding during the
periods, (v) the weighted average number of Focus LLC common units outstanding during the periods (assuming that
100% of such Focus LLC common units have been exchanged for Class A common stock), (vi) the weighted average
47
number of Focus LLC unvested restricted common units outstanding during the periods (assuming that 100% of such
Focus LLC unvested restricted common units have been exchanged for Class A common stock) and (vii) the weighted
average number of common unit equivalents of Focus LLC vested and unvested incentive units outstanding during the
periods based on the closing price of our Class A common stock on the last trading day of the periods (assuming that
100% of such Focus LLC common units have been exchanged for Class A common stock).
We believe that Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax
Adjustments Per Share, viewed in addition to and not in lieu of, our reported GAAP results, provide additional useful
information to investors regarding our performance and overall results of operations for various reasons, including the
following:
•
•
•
non - cash equity grants made to employees or non - employees at a certain price and point in time do not
necessarily reflect how our business is performing at any particular time; stock - based compensation
expense is not a key measure of our operating performance;
contingent consideration or earn outs can vary substantially from company to company and depending
upon each company’s growth metrics and accounting assumption methods; the non - cash changes in fair
value of estimated contingent consideration is not considered a key measure in comparing our operating
performance; and
amortization expenses can vary substantially from company to company and from period to period
depending upon each company’s financing and accounting methods, the fair value and average expected
life of acquired intangible assets and the method by which assets were acquired; the amortization of
intangible assets obtained in acquisitions are not considered a key measure in comparing our operating
performance.
Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per
Share do not purport to be an alternative to net income (loss) or cash flows from operating activities. The terms Adjusted
Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share are not defined
under GAAP, and Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax
Adjustments Per Share are not a measure of net income (loss), operating income or any other performance or liquidity
measure derived in accordance with GAAP. Therefore, Adjusted Net Income Excluding Tax Adjustments and Adjusted
Net Income Excluding Tax Adjustments Per Share have limitations as an analytical tool and should not be considered in
isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments
Per Share do not reflect all cash expenditures, future requirements for capital expenditures or contractual
commitments;
• Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax Adjustments
Per Share do not reflect changes in, or cash requirements for, working capital needs; and
• Other companies in the financial services industry may calculate Adjusted Net Income Excluding Tax
Adjustments and Adjusted Net Income Excluding Tax Adjustments Per Share differently than we do,
limiting its usefulness as a comparative measure.
In addition, Adjusted Net Income Excluding Tax Adjustments and Adjusted Net Income Excluding Tax
Adjustments Per Share can differ significantly from company to company depending on strategic decisions regarding
capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for these
limitations by relying also on the GAAP results and use Adjusted Net Income Excluding Tax Adjustments and Adjusted
Net Income Excluding Tax Adjustments Per Share as supplemental information.
48
Tax Adjustments and Tax Adjustments Per Share
Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions
allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income tax rate.
Such amounts were generated from acquisitions completed where we received a step-up in basis for tax purposes.
Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due to our acquisitive
nature, tax deductions allowed on acquired intangible assets provide additional significant supplemental economic
benefit. The tax benefit from amortization is included to show the full economic benefit of deductions for acquired
intangible assets with the step-up in tax basis.
Tax Adjustments Per Share is calculated by dividing Tax Adjustments by the Adjusted Shares Outstanding.
Set forth below is a reconciliation of net income (loss) to Adjusted Net Income Excluding Tax Adjustments and
Adjusted Net Income Excluding Tax Adjustments Per Share:
Year Ended December 31,
2019
(dollars in thousands, except per share data)
2018
2020
48,965
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20,660
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,909
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,783
22,285
Non - cash equity compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,197
Non - cash changes in fair value of estimated contingent consideration . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loss on extinguishment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,094
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Management contract buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other one - time transaction expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
267,893
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(72,331)
Pro forma income tax expense (27%) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income Excluding Tax Adjustments . . . . . . . . . . . . . . . . . . . . . $
195,562
37,254
Tax Adjustments (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.46
Adjusted Net Income Excluding Tax Adjustments Per Share . . . . . . . . . . . . $
Tax Adjustments Per Share (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.47
Adjusted Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,960,540 75,039,357 79,397,568
(12,025) $
7,049
3,452
130,718
18,329
38,797
—
—
11,749
1,428
1,486
200,983
(54,265)
146,718 $
31,860 $
1.96 $
0.42 $
(41,087) $
9,450
3,498
90,381
44,468
6,638
(5,509)
21,071
—
—
11,529
140,439
(37,919)
102,520 $
22,828 $
1.42 $
0.32 $
Calculation of Adjusted Shares Outstanding:
Weighted average shares of Class A common stock outstanding—basic (4) . 43,122,782 46,792,389 48,678,584
Adjustments:
Weighted average incremental shares of Class A common stock related
to stock options, unvested Class A common stock and restricted stock
units (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,029
Weighted average Focus LLC common units outstanding (6) . . . . . . . . . . 22,630,668 22,424,378 21,461,080
Weighted average Focus LLC restricted common units outstanding (7) . .
5,005
Weighted average common unit equivalent of Focus LLC incentive
102,549
20,428
—
—
units outstanding (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,104,541 5,802,162
9,134,870
Adjusted Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,960,540 75,039,357 79,397,568
(1)
In 2018, primarily relates to one - time expenses related to (a) Loring Ward severance cash compensation of
$507 during the three months ended December 31, 2018, which was recorded in compensation and related
expenses, and IPO and Reorganization Transaction cash compensation expenses of $5,926 during the three
months ended September 30, 2018, which were recorded in compensation and related expenses, (b) transaction
expenses of $1,762, which were recorded in selling, general and administrative expenses, associated with the
49
acquisition of Loring Ward, of which $1,114 were incurred during the three months ended December 31, 2018
and $648 were incurred during the three months ended September 30, 2018 and (c) other expenses, net of
$2,373 during the three months ended December 31, 2018, which were recorded in other (expense) income - net,
primarily related to the loss on sale of a tax customer list and related receivables. In 2019, relates to one time
expenses related to (a) Loring Ward severance cash compensation of $280 during the three months ended
March 31, 2019, which were recorded in compensation and related expenses and (b) transaction expenses of
$786 and $420, associated with the acquisition of Loring Ward, which were recorded in selling, general and
administrative expenses during the three months ended March 31, 2019 and June 30, 2019, respectively.
The pro forma income tax rate of 27% reflects the estimated U.S. federal, state, local and foreign income tax
rates applicable to corporations in the jurisdictions we conduct business.
Tax Adjustments represent the tax benefits of intangible assets, including goodwill, associated with deductions
allowed for tax amortization of intangible assets in the respective periods based on a pro forma 27% income
tax rate. Such amounts were generated from acquisitions completed where we received a step-up in basis for tax
purposes. Acquired intangible assets may be amortized for tax purposes, generally over a 15-year period. Due
to our acquisitive nature, tax deductions allowed on acquired intangible assets provide additional significant
supplemental economic benefit. The tax benefit from amortization is included to show the full economic benefit
of deductions for acquired intangible assets with the step-up in tax basis. As of December 31, 2020, estimated
Tax Adjustments from intangible asset related income tax benefits from closed acquisitions based on a pro
forma 27% income tax rate for the next 12 months is $41,718.
Represents our GAAP weighted average Class A common stock outstanding—basic.
The incremental shares for the year ended December 31, 2018 and 2019 related to stock options, unvested
Class A common stock and restricted stock units as calculated using the treasury stock method were not
included in the calculation of the GAAP weighted average shares of Class A common stock—diluted as the
result would have been anti - dilutive.
Assumes that 100% of Focus LLC common units were exchanged for Class A common stock.
Assumes that 100% of Focus LLC unvested restricted common units were exchanged for Class A common
stock.
Assumes that 100% of the vested and unvested Focus LLC incentive units were converted into Focus LLC
common units based on the closing price of our Class A common stock at the end of the respective period and
such Focus LLC common units were exchanged for Class A common stock.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Factors Affecting Comparability
Our future results of operations may not be comparable to our historical results of operations, principally for the
following reasons:
Tax Treatment
As a flow - through entity, Focus LLC is generally not and has not been subject to U.S. federal and certain state
income taxes at the entity level, although it has been subject to the New York City Unincorporated Business Tax.
Instead, for U.S. federal and certain state income tax purposes, taxable income was and is passed through to its
unitholders, which, after the IPO on July 30, 2018, now includes Focus Inc. Focus Inc. is subject to U.S. federal and
certain state income taxes applicable to corporations. Accordingly, our effective tax rate, and the absolute dollar amount
of our tax expense, has increased as a result of the IPO.
50
Public Company Expenses
Our operating expenses have increased as a result of being a publicly traded company, including expenses
related to annual and quarterly report preparation, tax return preparation, independent auditor fees, investor relations
activities, transfer agent fees, incremental director and officer liability insurance costs and independent director
compensation. Our accounting, legal, tax and personnel - related expenses have increased as we supplemented our
compliance and governance functions, maintained and reviewed internal controls over financial reporting and prepared
and distributed periodic reports as required by the rules and regulations of the SEC.
Results of Operations
Year Ended December 31, 2018 Compared to Year Ended December 31, 2019
For a comparison of the years ended December 31, 2018 and 2019, see Part II. Item 7, Management’s
Discussion and Analysis of Financial Condition and Results of Operations, in our Form 10-K for the year ended
December 31, 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2020
The following discussion presents an analysis of our results of operations for the years ended December 31,
2019 and 2020. Where appropriate, we have identified specific events and changes that affect comparability or trends
and, where possible and practical, have quantified the impact of such items.
Revenues:
Year Ended
December 31,
2019
2020
$ Change % Change
(dollars in thousands)
Wealth management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,149,655 $ 1,286,130 $ 136,475
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,503
142,978
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68,686
1,218,341
75,189
1,361,319
Operating expenses:
Compensation and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management contract buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non - cash changes in fair value of estimated contingent consideration . . .
Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
431,465
304,701
232,911
1,428
130,718
38,797
10,675
1,150,695
67,646
476,208
349,475
236,377
—
147,783
19,197
12,451
1,241,491
119,828
44,743
44,774
3,466
(1,428)
17,065
(19,600)
1,776
90,796
52,182
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12,025) $
1,164
(58,291)
(3,452)
—
(1,049)
755
(11,749)
(72,622)
(4,976)
7,049
(711)
453
16,633
(41,658)
543
(2,909)
(6,094)
(6,094)
835
(214)
(536)
219
11,749
—
22,419
(50,203)
74,601
69,625
20,660
13,611
48,965 $ 60,990
* Not meaningful
51
11.9 %
9.5 %
11.7 %
10.4 %
14.7 %
1.5 %
*
13.1 %
(50.5)%
16.6 %
7.9 %
77.1 %
(61.1)%
28.5 %
15.7 %
*
79.6 %
(71.0)%
*
30.9 %
*
193.1 %
*
Revenues
Wealth management fees increased $136.5 million, or 11.9%, for the year ended December 31, 2020 compared
to the year ended December 31, 2019. New partner firms added subsequent to the year ended December 31, 2019 that
are included in our results of operations for the year ended December 31, 2020 include Nexus Investment Management,
MEDIQ Financial Services, InterOcean Capital, Seasons of Advice, CornerStone Partners, Fairway Wealth Management
and Kavar Capital Partners. Additionally, our partner firms completed 18 acquisitions subsequent to the year ended
December 31, 2019. The new partner firms contributed approximately $20.9 million in wealth management fees during
the year ended December 31, 2020. The balance of the increase of $115.6 million was due to the revenue growth at our
existing partner firms associated with wealth management services and partner firm - level acquisitions as well as a full
period of revenue recognized during the year ended December 31, 2020 for partner firms that were acquired during
the year ended December 31, 2019.
Other revenues increased $6.5 million, or 9.5%, for the year ended December 31, 2020 compared to the year
ended December 31, 2019. The increase related to new partner firms was approximately $0.9 million. The balance of
the increase of $5.6 million was due primarily to an increase in recordkeeping and administration fees from a partner
firm-level acquisition.
Operating Expenses
Compensation and related expenses increased $44.7 million, or 10.4%, for the year ended December 31, 2020
compared to the year ended December 31, 2019. The increase related to new partner firms was approximately
$3.8 million. Non-cash equity compensation increased $4.0 million primarily from incentive units granted in 2019. The
balance of the increase of $36.9 million was due to an increase in salaries and related expense, in part the result of a full
period of expense recognized during the year ended December 31, 2020 for partner firms acquired and partner firm-level
acquisitions during the year ended December 31, 2019 and partner firm-level acquisitions during the year ended
December 31, 2020.
Management fees increased $44.8 million, or 14.7%, for the year ended December 31, 2020 compared to
the year ended December 31, 2019. The increase related to the new partner firms was approximately $8.9 million.
Management fees are variable and a function of earnings during the period. The balance of the increase of $35.9 million
was due to the increase in earnings during the year ended December 31, 2020 compared to the year ended December 31,
2019, in part the result of a full period of earnings recognized during the year ended December 31, 2020 for partner firms
acquired and partner firm-level acquisitions during the year ended December 31, 2019, and partner firm-level
acquisitions during the year ended December 31, 2020.
Selling, general and administrative expenses increased $3.5 million, or 1.5%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. New partner firms added approximately $3.1 million.
Management contract buyout of $1.4 million for the year ended December 31, 2019 was related to cash
consideration for the buyout of a management agreement with one of our retiring principals whereby the business
operations of the relevant partner firm were transitioned to one of our other partner firms.
Intangible amortization increased $17.1 million, or 13.1%, for the year ended December 31, 2020 compared to
the year ended December 31, 2019. The increase related to new partner firms was approximately $3.0 million. The
balance of the increase of $14.1 million was due in part to a full period of amortization during the year ended
December 31, 2020 for partner firms acquired and partner firm-level acquisitions during the year ended December 31,
2019, and in part to partner firm-level acquisitions during the year ended December 31, 2020.
Non - cash changes in fair value of estimated contingent consideration decreased $19.6 million or 50.5%, for
the year ended December 31, 2020 compared to the year ended December 31, 2019. During the year ended
December 31, 2020 the probability that certain contingent consideration payments would be achieved decreased
resulting in a decrease in the fair value of the contingent consideration liability.
52
Depreciation and other amortization expense increased $1.8 million, or 16.6%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. The increase was primarily related to fixed assets at our corporate
headquarters during the year ended December 31, 2019.
Other income (expense)
Interest expense decreased $16.6 million, or 28.5%, for the year ended December 31, 2020 compared to the
year ended December 31, 2019. The decrease was due to lower average interest rates during the year ended
December 31, 2020 as a result of the January 2020 Credit Facility amendment to reduce the interest rate spread on the
First Lien Term Loan and lower LIBOR rates.
During the year ended December 31, 2020, a loss on extinguishment of borrowings of $6.1 million was
recognized in connection with the January 2020 Credit Facility amendment.
During the year ended December 31, 2019, we recognized an impairment of an equity method investment of
$11.8 million due to an other-than-temporary decline in the fair value of the investment. This investment contributed
$0.5 million to income from equity method investments during the year ended December 31, 2019.
Income Tax Expense
Income tax expense increased $13.6 million, or 193.1%, for the year ended December 31, 2020 compared to
the year ended December 31, 2019. For the year ended December 31, 2020, we recorded a tax expense of approximately
$20.7 million resulting in an estimated annual effective tax rate of 29.7%. The estimated annual effective tax rate is
primarily related to federal, state and local income taxes imposed on Focus Inc.’s allocable portion of taxable income
from Focus LLC as a result of the IPO and Reorganization Transactions.
Liquidity and Capital Resources
Sources of Liquidity
During the year ended December 31, 2020, we met our cash and liquidity needs primarily through cash
generated by our operations and borrowings under our Credit Facility. Over the next twelve months, and in the longer
term, we expect that our cash and liquidity needs will continue to be met by cash generated by our ongoing operations as
well as the Credit Facility, especially for acquisition activities. If our acquisition activity continues at an accelerated
pace, or for larger acquisition opportunities, we may decide to issue equity either as consideration or in an offering. For
information regarding the Credit Facility, please read “—Credit Facilities.”
Tax Receivable Agreements
Our Tax Receivable Agreements with the TRA holders generally provide for the payment by Focus Inc. to each
TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and franchise tax that
Focus Inc. actually realizes (computed using simplifying assumptions to address the impact of state and local taxes) or is
deemed to realize in certain circumstances in periods after the IPO as a result of certain increases in tax basis and certain
tax benefits attributable to imputed interest. Focus Inc. will retain the benefit of the remaining 15% of these cash
savings.
The payment obligations under the Tax Receivable Agreements are Focus Inc.’s obligations and not obligations
of Focus LLC, and we expect that such payments required to be made under the Tax Receivable Agreements will be
substantial. Estimating the amount and timing of payments that may become due under the Tax Receivable Agreements
is by its nature imprecise. For purposes of the Tax Receivable Agreements, cash savings in tax generally are calculated
by comparing Focus Inc.’s actual tax liability (determined by using the actual applicable U.S. federal income tax rate and
an assumed combined state and local income and franchise tax rate) to the amount Focus Inc. would have been required
to pay had it not been able to utilize any of the tax benefits subject to the Tax Receivable Agreements. As of
53
December 31, 2020, we expect that future payments to the TRA holders will be $81.6 million, in aggregate. Future
payments under the Tax Receivable Agreements in respect of subsequent exchanges will be in addition to this amount.
The actual increases in tax basis, as well as the amount and timing of any payments under the Tax Receivable
Agreements, will vary depending upon a number of factors, including the timing of any redemption of units, the price of
our Class A common stock at the time of each redemption, the extent to which such redemptions are taxable
transactions, the amount of Focus LLC’s assets that consist of equity in entities taxed as corporations at the time of each
redemption, the amount and timing of the taxable income we generate in the future, the U.S. federal income tax rates
then applicable and the portion of the payments under the Tax Receivable Agreements that constitute imputed interest or
give rise to depreciable or amortizable tax basis.
The foregoing amount of expected future payments to TRA holders is merely an estimate and the actual
payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax
benefits realized and the corresponding payments under the Tax Receivable Agreements as compared to the foregoing
estimates. Moreover, there may be a negative impact on our liquidity if, as a result of timing discrepancies or otherwise,
(i) the payments under the Tax Receivable Agreements exceed the actual benefits realized in respect of the tax attributes
subject to the Tax Receivable Agreements and/or (ii) distributions to Focus Inc. by Focus LLC are not sufficient to
permit Focus Inc. to make payments under the Tax Receivable Agreements after it has paid its taxes and other
obligations.
The payments under the Tax Receivable Agreements will not be conditioned upon a TRA holder’s having a
continued ownership interest in either Focus Inc. or Focus LLC.
We expect that future unitholders may become party to one or more Tax Receivable Agreements entered into in
connection with future acquisitions by Focus LLC or issuances of units of Focus LLC to employees, partners and
directors.
Cash Flows
The following table presents information regarding our cash flows and cash and cash equivalents for the year
ended December 31, 2019 compared to the year ended December 31, 2020. For information regarding our cash flows
and cash and cash equivalents for the year ended December 31, 2018 compared to the year ended December 31, 2019,
see Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our
Form 10-K for the year ended December 31, 2019:
Year Ended
December 31,
2019
2020
$ Change
% Change
Cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 194,774 $ 211,361 $
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—end of period . . . . . . . . . . . . .
(556,455)
393,567
65,178
(372,973)
161,831
65,858
16,587
183,482
(231,736)
680
8.5 %
33.0 %
(58.9)%
1.0 %
Operating Activities
Net cash provided by operating activities includes net income (loss) adjusted for non - cash expenses such as
intangible amortization, depreciation and other amortization, amortization of debt financing costs, non - cash equity
compensation expense, non - cash changes in fair value of estimated contingent consideration, other non - cash items and
changes in cash resulting from changes in operating assets and liabilities. Operating assets and liabilities include
receivables from our clients, prepaid expenses and other assets, accounts payable and accrued expenses, deferred
revenues and other assets and liabilities.
54
Net cash provided by operating activities increased $16.6 million, or 8.5%, for the year ended December 31,
2020 compared to the year ended December 31, 2019. The increase was primarily related to an increase in net income of
$61.0 million offset in part by a decrease in adjustments to reconcile net income of $3.9 million, due primarily to a
decrease in non-cash changes in fair value of estimated contingent consideration and impairment of equity method
investment offset in part by an increase in intangible amortization, and a decrease in operating assets and liabilities of
$40.5 million during the year ended December 31, 2020 compared to the year ended December 31, 2019.
Investing Activities
Net cash used in investing activities decreased $183.5 million, or 33.0%, for the year ended December 31, 2020
compared to the year ended December 31, 2019. The decrease was primarily due to a decrease of $183.8 million in cash
paid for acquisitions and contingent consideration during the year ended December 31, 2020 compared to the year ended
December 31, 2019.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 decreased $231.7 million, or
58.9%, compared to the year ended December 31, 2019. The decrease was primarily due to a decrease in net borrowings
made under the Credit Facility of $210.9 million and an increase in contingent consideration paid of $27.9 million
during the year ended December 31, 2020 compared to the year ended December 31, 2019.
Adjusted Free Cash Flow
To supplement our statements of cash flows presented on a GAAP basis, we use a non-GAAP liquidity measure
on a trailing 4-quarter basis to analyze cash flows generated from our operations. We consider Adjusted Free Cash Flow
to be a liquidity measure that provides useful information to investors about the amount of cash generated by the
business and is one factor in evaluating the amount of cash available to pay contingent consideration, make strategic
acquisitions and repay outstanding borrowings. Adjusted Free Cash Flow does not represent our residual cash flow
available for discretionary expenditures as it does not deduct our mandatory debt service requirements and other non-
discretionary expenditures. We define Adjusted Free Cash Flow as net cash provided by operating activities, less
purchase of fixed assets, distributions for Focus LLC unitholders and payments under Tax Receivable Agreements (if
any). Adjusted Free Cash Flow is not defined under GAAP and should not be considered as an alternative to net cash
from operating, investing or financing activities. Adjusted free cash flow may not be calculated the same for us as for
other companies. The table below reconciles net cash provided by operating activities, as reflected on our cash flow
statement, to our adjusted free cash flow.
Trailing 4-Quarters Ended December 31,
2019
2020
(in thousands)
Net cash provided by operating activities (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions for unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments under tax receivable agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Free Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
194,774 $
(25,472)
(20,641)
—
148,661 $
211,361
(19,349)
(22,457)
—
169,555
(1) A portion of contingent consideration paid is classified as operating cash outflows in accordance with
GAAP, with the balance reflected in investing and financing cash flows. Contingent consideration paid
classified as operating cash outflows for each quarter in the trailing 4-quarters ended December 31, 2019
was $9.2 million, $4.0 million, $0.8 million and $0.8 million, respectively, totaling $14.8 million for the
trailing 4-quarters ended December 31, 2019. Contingent consideration paid classified as operating cash
outflows for each quarter in the trailing 4-quarters ended December 31, 2020 was $8.3 million, $16.4
million, $3.8 million and $2.4 million, respectively, totaling $30.9 million for the trailing 4-quarters ended
December 31, 2020. See Note 8 to our consolidated financial statements for additional information.
55
Contractual Obligations
The following table describes our contractual obligations as of December 31, 2020:
Total
Less than
1 Year
1 - 3 Years
(in thousands)
More than
3 - 5 Years
5 Years
Credit Facility maturities . . . . . . . . . . . . . . . . . . . . . . . $ 1,507,622 $ 11,565 $ 403,131 $ 1,092,926 $
Credit Facility interest . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Facility letters of credit . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreements obligations . . . . . . . . . . . .
—
—
—
122,481
59,485
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,029,437 $ 106,722 $ 558,387 $ 1,182,362 $ 181,966
111,132
7,587
321,533
81,563
11,910
—
68,015
9,511
64,446
—
82,359
8,451
34,776
7,587
48,678
4,116
Off - Balance Sheet Arrangements
We have no off - balance sheet arrangements.
Credit Facilities
As of December 31, 2020, our Credit Facility consisted of a $1.13 billion First Lien Term Loan and a
$650.0 million First Lien Revolver.
In January 2020, we amended our First Lien Term Loan to reduce the interest rates. The First Lien Term Loan
bears interest (at our option) at: (i) the LIBOR plus a margin of 2.00% or (ii) the lender’s Base Rate (as defined in the
Credit Facility) plus a margin of 1.00%.
In January 2021, we amended and expanded our First Lien Term Loan by $500.0 million and incurred $2.7
million in debt financing costs. The debt was issued at a discount of 0.125% or $0.6 million which is being amortized to
interest expense over the remaining term of the First Lien Term Loan. The required quarterly installment repayments of
$2.9 million were increased to $4.2 million. The First Lien Term Loan has a maturity date of July 2024.
The First Lien Revolver has a maturity date of July 2023. Up to $30.0 million of the First Lien Revolver is
available for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver bears interest at
LIBOR plus a margin of 2.00% with step downs to 1.75%, 1.50% and 1.25% or the lender’s Base Rate plus a margin of
1.00% with step downs to 0.75%, 0.50% and 0.25%, based on achievement of a specified First Lien Leverage Ratio. The
First Lien Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a
specified First Lien Leverage Ratio.
Our obligations under the Credit Facility are collateralized by the majority of our assets. The Credit Facility
contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness or guarantees,
(ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a merger or similar
transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other restricted payments.
We are required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more than
6.25:1.00 as of the last day of each fiscal quarter. At December 31, 2020, our First Lien Leverage Ratio was 3.89:1.00,
which satisfied the maximum ratio of 6.25:1.00. First Lien Leverage Ratio means the ratio of amounts outstanding under
the First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured by a lien on the assets
of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted cash and cash
equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for purposes of the
Credit Facility was $370.5 million at December 31, 2020. Focus LLC is also subject on an annual basis to contingent
principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal year if the
First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made in 2020. Based
56
on the excess cash flow calculation for the year ended December 31, 2020, no contingent principal payments are
required to be made in 2021.
We defer and amortize our debt financing costs over the respective terms of the First Lien Term Loan and First
Lien Revolver. The debt financing costs related to the First Lien Term Loan are recorded as reduction of the carrying
amount of the First Lien Term Loan in the consolidated balance sheets. The debt financing costs related to the First Lien
Revolver are recorded in debt financing costs - net in the consolidated balance sheets.
At December 31, 2020, outstanding stated value borrowings under the Credit Facility were approximately $1.5
billion. The weighted - average interest rate for outstanding borrowings was approximately 3% for the year ended
December 31, 2020. As of December 31, 2020, the First Lien Revolver available unused commitment line was
$262.4 million. At December 31, 2020, we had outstanding letters of credit in the amount of $7.6 million bearing interest
at an annual rate of approximately 2%.
In March 2020, we entered into a 4 year floating to fixed interest rate swap with a notional amount of $400.0
million. The interest rate swap effectively fixes the variable interest rate applicable to $400.0 million of borrowings
outstanding on the First Lien Term Loan. The terms of the interest rate swap provide that we pay interest to the
counterparty each month at a rate of 0.713% and receive interest from the counterparty each month at the 1 month USD
LIBOR rate, subject to a 0% floor.
In April 2020, we entered into two 4 year floating to fixed interest rate swap agreements with notional amounts
of $250.0 million and $200.0 million. These swaps effectively fix the variable interest rate applicable to associated
amount of borrowings outstanding on the First Lien Term Loan. The terms of these swaps provide that we pay interest to
the counterparty each month at a rate of 0.537% and 0.5315%, respectively, and receive interest from the counterparty
each month at the 1 month USD LIBOR rate, subject to a 0% floor.
In summary, at December 31, 2020, $850.0 million or approximately 75% of borrowings under the First Lien
Term Loan have been swapped from a variable interest rate to a fixed interest rate. The weighted average interest rate
on these borrowings is approximately 2.62%, inclusive of the 2.0% LIBOR spread.
Critical Accounting Policies
Our financial statements are prepared in accordance with GAAP. Our financial statements include the accounts
of Focus Inc. and our subsidiaries. Intercompany transactions and balances are eliminated in consolidation. Critical
accounting policies are those that are the most important to the preparation of our financial condition and results of
operations and that require our most difficult, subjective and complex judgments as a result of the need to make
estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are described
in more detail in the Note 2 to our financial statements, our most critical accounting policies are discussed below. The
preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the amounts reported in our financial statements and the accompanying notes. Management
believes that the estimates utilized in preparing the financial statements are reasonable and prudent. Actual results could
differ from those estimates.
Revenue Recognition
Wealth Management Fees
We recognize revenue from wealth management fees, which are primarily comprised of fees earned for
advising on the assets of clients, financial and tax planning fees, consulting fees, tax return preparation fees, fees for
family office services, and fees for wealth management and operational support services provided to third-party wealth
management firms. Client arrangements may contain one of the services or multiple services, resulting in either a single
or multiple performance obligations within the same client arrangement, each of which are separately identifiable and
priced, and accounted for as the related services are provided and consumed over time. Fees are primarily based either
on a contractual percentage of the client’s assets based on the market value of the client’s assets on the predetermined
57
billing date, a flat fee, an hourly rate based on predetermined billing rates or a combination of such fees and are billed
either in advance or arrears on a monthly, quarterly, or semiannual basis. Revenue is recognized over the respective
service period based on time elapsed or hours expended, as the case may be, which is deemed to be the most faithful
depiction of the transfer of services as clients benefit from services over the respective period. Revenue for wealth
management and operational support services provided to third party wealth management firms is presented net since
these services are performed in an agent capacity. Client agreements typically do not have a specified term and may be
terminated at any time by either party subject to the respective termination and notification provisions in each
agreement.
A majority of our wealth management fees are correlated to the markets, and therefore are considered variable
consideration. Our market-correlated fees are dependent on the market and, thus, are susceptible to factors outside our
control. Therefore, at inception of the contractual service period for fees which are based on the market values at the end
of the service period, we cannot conclude that it is probable that a reversal in the cumulative revenue recognized would
not occur if the estimate was included in the transaction price at that time. However, at each quarterly reporting date, we
update our estimate of the transaction price as the market uncertainty is typically resolved. We can then reasonably
conclude that a reversal of the variable consideration will not occur for those services already provided.
Wealth management fees are recorded when: (i) an arrangement with a client has been identified; (ii) the
performance obligations have been identified; (iii) the fee or other transaction price has been determined; (iv) the fee or
other transaction price has been allocated to each performance obligation based on standalone fee rates; and (v) we have
satisfied the applicable performance obligation.
Other
Other revenue primarily includes recordkeeping and administration service fees, commissions and distribution
fees and outsourced services. Client arrangements may contain a single or multiple performance obligations, each of
which are separately identifiable and accounted for as the related services are provided and consumed over time.
Recordkeeping and administration and outsourced services revenue, in accordance with the same five criteria above, are
recognized over the period in which services are provided. Commissions and distribution fees are recognized when
earned.
Business Acquisitions
Business acquisitions are accounted for in accordance with ASC Topic 805: Business Combinations. Business
acquisitions are accounted for by allocating the purchase price consideration to the fair value of assets acquired and
liabilities assumed. The purchase price allocations are based upon preliminary valuations, and our estimates and
assumptions are subject to change within the measurement period as valuations are finalized. Any change in the
estimated fair value of the net assets, prior to the finalization of the more detailed analyses, but not to exceed one year
from the dates of acquisition, will change the amount of the purchase price allocations. Goodwill is recognized as the
excess of the purchase price consideration over the fair value of net assets of the business acquired. All transaction costs
are expensed as incurred.
We have incorporated contingent consideration into the structure of our partner firm acquisitions. These
arrangements may result in the payment of additional purchase price consideration to the sellers based on the growth of
certain financial thresholds for periods following the closing of the respective acquisition. The additional purchase price
consideration is payable in the form of cash and, in some cases, equity.
For business acquisitions, we recognize the fair value of estimated contingent consideration at the acquisition
date as part of the consideration transferred in exchange for the acquired wealth management firm. The contingent
consideration is remeasured to fair value at each reporting date until the contingency is resolved. Any changes in fair
value are recognized each reporting period in non - cash changes in fair value of estimated contingent consideration in the
consolidated statements of operations.
58
The results of the acquired wealth management firms are included in our consolidated financial statements from
the respective dates of acquisition.
Goodwill, Intangible Assets and Other Long - Lived Assets
Goodwill is deemed to have an indefinite useful life and is not amortized. Intangible assets are amortized over
their respective estimated useful lives. We have no indefinite - lived intangible assets.
Goodwill is tested annually for impairment as of October 1, or more frequently if events and circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We compare
the fair value of the reporting unit to the carrying value of the net assets of the reporting unit. The fair value of the
reporting unit is determined using a market approach. If the fair value of the reporting unit exceeds the carrying value of
the net assets of the reporting unit no further consideration is necessary. If the carrying value exceeds the fair value of
the reporting unit, we would record an impairment charge for the amount that the carrying value exceeds the fair value of
the reporting unit.
Intangible assets and other long - lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the asset might be impaired or that the estimated useful life should be changed prospectively.
If impairment indicators are present, the recoverability of these assets is measured by a comparison of the carrying
amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined using a
discounted cash flow approach.
Income Taxes and Tax Receivable Agreements
In connection with the IPO and Reorganization Transactions, Focus Inc. became a holding company whose
most significant asset is a membership interest in Focus LLC, and, as a result, Focus Inc. became subject to U.S. federal,
state and local income taxes on Focus Inc.’s allocable portion of taxable income from Focus LLC. Focus LLC is treated
as a partnership for U.S. federal income tax purposes. Accordingly, Focus LLC is generally not and has not been subject
to U.S. federal and certain state income taxes at the entity level, although it has been subject to the New York City
Unincorporated Business Tax and certain of its subsidiaries have been subject to U.S. federal and certain state and local
or foreign income taxes. Instead, for U.S. federal and certain state income tax purposes, the income, deductions, losses
and credits of Focus LLC are passed through to its unitholders, which after the IPO includes Focus Inc. Focus LLC has
historically made tax distribution payments in accordance with its Third Amended and Restated Operating Agreement,
which was replaced by the Fourth Amended and Restated Focus LLC Agreement on July 30, 2018, and Focus Inc.
intends to cause Focus LLC to continue to make tax distribution payments, to the extent of available cash, in accordance
with the Fourth Amended and Restated Focus LLC Agreement. Focus Inc. files income tax returns with the U.S. federal
government as well as various state and local jurisdictions.
We apply the asset and liability method for deferred income taxes. Deferred tax assets and liabilities are
recognized for future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using tax
rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or
settled. Valuation allowances, if any, are recorded to reduce the deferred tax assets to an amount that is more likely than
not to be realized.
We review and evaluate tax positions in our major tax jurisdictions and determine whether or not there are
uncertain tax positions that require financial statement recognition. Based on this review, we have recorded no reserves
for uncertain tax positions at December 31, 2019 and December 31, 2020.
We have entered into Tax Receivable Agreements with the TRA holders. The agreements generally provide for
the payment by us to each TRA holder of 85% of the net cash savings, if any, in U.S. federal, state and local income and
franchise tax that we actually realize (computed using simplifying assumptions to address the impact of state and local
taxes) or are deemed to realize in certain circumstances in connection with the Reorganization Transactions and in
59
periods after the IPO, as a result of certain increases in tax bases and certain tax benefits attributable to imputed interest.
We will retain the benefit of the remaining 15% of these cash savings.
As a result of the Reorganization Transactions and the exchange of certain units of Focus LLC, as of
December 31, 2020, Focus Inc. had a liability of $81.6 million relating to its obligations under the Tax Receivable
Agreements. The foregoing amount of expected future payments to TRA holders is merely an estimate and the actual
payments could differ materially. It is possible that future transactions or events could increase or decrease the actual tax
benefits realized and the corresponding payments under the Tax Receivable Agreements as compared to the foregoing
estimates.
Consolidation Considerations
ASC Topic 810, Consolidation, requires an entity to perform a qualitative analysis to determine whether its
variable interests give it a controlling financial interest in a variable interest entity (“VIE”). Under the standard, an
enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to
receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling
financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE.
Certain of our subsidiaries have management agreements with the respective management company, which
causes these operating subsidiaries to be VIEs. We have assessed whether or not we are the primary beneficiary for these
operating subsidiaries and have concluded that we are the primary beneficiary. Accordingly, the results of these
subsidiaries have been consolidated.
Certain of our subsidiaries have variable interests in certain investment funds that are deemed voting interest
entities. Due to substantive kick - out rights possessed by the limited partners of these funds, we do not consolidate the
investment funds.
From time to time, we enter into option agreements with wealth management firms (each, an “Optionee”) and
their owners. In exchange for payment of an option premium, the option agreement allows us, at our sole discretion, to
acquire substantially all of the assets of the Optionee at a predetermined time and at a predetermined purchase price
formula. If we choose to exercise our option, the acquisition and the corresponding management agreement would be
executed in accordance with our typical acquisition structure. We have determined that the respective option agreements
with the Optionees qualify the Optionees as VIEs. We have determined that we are not the primary beneficiary of the
Optionees and do not consolidate the results of the Optionees.
Stock Based Compensation Costs
Compensation cost for Focus LLC incentive units and Focus Inc. stock option awards is measured based on the
fair value of awards determined by the Black-Scholes option pricing model or the Monte Carlo Simulation Model on the
date that the awards are granted or modified, and is adjusted for the estimated number of awards that are expected to be
forfeited. Compensation cost for unvested Class A common stock and restricted stock units, as well as Focus LLC
restricted common units, is measured based on the market value of the Class A common stock on the date that the
awards are granted and is adjusted for the estimated number of awards that are expected to be forfeited. The
compensation cost is recognized on a straight-line basis over the requisite service period. Non-cash equity compensation
expense, associated with employees and non-employees, including principals in the management companies, is included
in compensation and related expenses in the consolidated statements of operations. We estimate forfeitures at the time of
the respective grant and revise those estimates in subsequent periods if actual forfeitures differ materially from those
estimates. We use historical data to estimate forfeitures and record non-cash equity compensation expense only for those
awards that are expected to vest.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements.
60
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our exposure to market risk is primarily related to our partner firms’ wealth management services. For the year
ended December 31, 2020, over 95% of our revenues were fee - based and recurring in nature. Although the substantial
majority of our revenues are fee - based and recurring, our revenues can fluctuate due to macroeconomic factors and the
overall state of the financial markets, particularly in the United States. The substantial majority of our revenues are
derived from the wealth management fees charged by our partner firms for providing clients with investment advice,
financial and tax planning, consulting, tax return preparation, family office services and other services. The majority of
our wealth management fees are based on the value of the client assets and we expect those fees to increase over time as
the assets increase. A decrease in the aggregate value of client assets across our partner firms may cause our revenue and
income to decline.
During the year ended December 31, 2020, our revenues were negatively impacted by the effects of Covid-19
on the financial markets as a result of our market correlated revenues, which represented 74% of our total revenues for
the year ended December 31, 2020. Our market correlated revenues for subsequent periods could be impacted by any
negative effects of Covid-19 on the financial markets. Additionally, a portion of our non-market correlated revenues are
derived from family office type services for clients in the entertainment industry and relate to live events. The
cancellation of events and the general slowdown of other entertainment activities will impact a portion of our non-
market correlated revenues in subsequent periods. We anticipate that the ongoing cancellations of live events and
slowdown of other entertainment activities will persist in 2021. However, this revenue outlook is subject to material
change because it is dependent on the continued impact of the Covid-19 pandemic which is highly uncertain and cannot
be predicted.
Interest Rate Risk
Interest payable on our Credit Facility is variable. Interest rate changes will therefore affect the amount of our
interest payments, future earnings and cash flows. We entered into interest rate swap agreements in March and
April 2020 to manage interest rate exposure in connection with our variable interest rate borrowings. As of
December 31, 2020, we had total stated value borrowings outstanding under our Credit Facility of approximately $1.5
billion. At December 31, 2020, interest payments associated with $850 million of these borrowings was effectively
converted to a fixed rate through the use of interest rate swaps and interest on the remaining borrowings remained
subject to variable rates based on LIBOR. If LIBOR based interest rates were higher by 1.0% throughout the year ended
December 31, 2020, our interest expense would have increased by approximately $7.4 million.
Our outstanding variable rate indebtedness uses LIBOR as a benchmark for establishing the interest
rate. LIBOR is expected to be replaced by an alternative in 2023. While we expect any such alternative to be a
reasonable replacement for LIBOR, at this time we cannot predict the implications of the use of such a new benchmark
on the interest rates we pay.
Item 8. Financial Statements and Supplementary Data
Our financial statements and supplementary data are included in this Annual Report beginning on page F - 1 and
incorporated by reference herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
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Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined
in Rules 13a - 15(e) and 15d - 15(e) under the Exchange Act) as of December 31, 2020. Our disclosure controls and
procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms and that such information is accumulated and communicated to management, including the
principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Based
on such evaluation, our principal executive officer and principal financial officer concluded that, as of December 31,
2020, our disclosure controls and procedures were effective, at the reasonable assurance level. Any controls and
procedures, no matter how well designed and operated can only provide reasonable assurance of achieving the desired
control objective and management necessarily applies its judgment in evaluating the cost - benefit relationship of all
possible controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2020. Based on management’s assessment, management has concluded that the
Company’s internal control over financial reporting was effective as of December 31, 2020 using the criteria set forth in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework).
Under guidelines established by the SEC, companies are permitted to exclude acquired businesses from
management’s report on internal control over financial reporting for up to one year from the date of the acquisition while
integrating the acquired operations. Accordingly, internal control over financial reporting of certain acquired businesses
have been excluded from management’s report on internal control over financial reporting as of December 31, 2020.
These acquired businesses represent approximately 2% of our consolidated revenues for the year ended December 31,
2020 and approximately 1% of our consolidated assets as of December 31, 2020.
Our internal control over financial reporting is designed to provide reasonable, but not absolute, assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S.
generally accepted accounting principles. There are inherent limitations to the effectiveness of any system of internal
control over financial reporting. These limitations include the possibility of human error, the circumvention or overriding
of the system and reasonable resource constraints. Because of its inherent limitations, our internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risks discussed in Part I Item 1A—Risk Factors of this report.
The effectiveness of our internal control over financial reporting as of December 31, 2020, has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm and is below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Focus Financial Partners Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Focus Financial Partners Inc. and subsidiaries
(the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
62
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the
Company and our report dated February 19, 2021, expressed an unqualified opinion on those consolidated financial
statements.
As described in the Management’s Report on Internal Controls Over Financial Reporting, management
excluded from its assessment the internal control over financial reporting at certain businesses acquired during the 12-
month period ended December 31, 2020, whose financial statements constitute approximately 1% of assets and 2% of
revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Accordingly,
our audit did not include the internal control over financial reporting at these acquired businesses.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 19, 2021
Changes in Internal Control over Financial Reporting
In preparation for management’s report on internal control over financial reporting, we documented and tested
the design and operating effectiveness of our internal control over financial reporting. There were no significant changes
in our internal controls over financial reporting that occurred during the year ended December 31, 2020, that have
63
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that most
of our employees are working remotely due to the Covid-19 pandemic. We are continually monitoring and assessing the
Covid-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
Item 9B. Other Information
None.
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Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information as to Item 10 will be set forth in the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 26, 2021 (the “Annual Meeting”) and is incorporated herein by reference.
Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all of our directors,
officers and employees, including our principal executive officer, principal financial officer, principal accounting officer
and controller or persons performing similar functions, as well as to directors, principals, officers and employees of each
of our subsidiaries and a Financial Code of Ethics, applicable to our chief executive officer, chief financial officer and
principal accounting officer, in accordance with applicable U.S. federal securities laws and corporate governance
rules of NASDAQ. Our Code of Business Conduct and Ethics and our Financial Code of Ethics are available on our
website at www.focusfinancialpartners.com under “Corporate Governance” within the “Investor Relations” section. We
will provide copies of these documents to any person, without charge, upon request, by writing to us at Focus Financial
Partners Inc., Attn: Investor Relations, 875 Third Avenue, 28th Floor, New York, NY. We intend to satisfy the
disclosure requirement under Item 406(b) of Regulation S - K regarding amendments to, or waivers from, provisions of
our Code of Business Conduct and Ethics and our Financial Code of Ethics by posting such information on our website
at the address and the location specified above.
Item 11. Executive Compensation
Information as to Item 11 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information as to Item 12 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information as to Item 13 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated
herein by reference.
Item 14. Principal Accountant Fees and Services
Information as to Item 14 will be set forth in the Proxy Statement for the Annual Meeting and is incorporated
herein by reference.
Item 15. Exhibits
Financial Statements
The consolidated financial statements of Focus Inc. and Subsidiaries and the Report of Independent Registered
Public Accounting Firm are included in “Part II, Item 8, Financial Statements and Supplementary Data.” Reference is
made to the accompanying Index to Financial Statements.
Financial Statement Schedules
All financial statement schedules have been omitted because they are not applicable or the required information
is presented in the financial statements or the notes thereto.
65
Index to Exhibits
The exhibits required to be filed or furnished pursuant to Item 601 of Regulation S - K are set forth below.
Exhibit
Number
Description
3.1 Amended and Restated Certificate of Incorporation of Focus Financial Partners Inc.(1)
3.2 Amended and Restated Bylaws of Focus Financial Partners Inc.(1)
4.1 Registration Rights Agreement, dated as of July 30, 2018, by and among Focus Financial Partners Inc.,
Focus Financial Partners, LLC and the other parties named therein(1)
4.2* Description of Securities registered under Section 12 of the Securities Exchange Act of 1934
10.1 Nomination Agreement, dated as of July 30, 2018, by and among Focus Financial Partners Inc. and the
affiliates of Stone Point Capital LLC named therein(1)
10.2 Nomination Agreement, dated as of July 30, 2018, by and among Focus Financial Partners Inc. and the
affiliates of Kohlberg Kravis Roberts & Co. L.P. named therein(1)
10.3 Fourth Amended and Restated Operating Agreement of Focus Financial Partners, LLC(1)
10.4 Amendment No.1 to the Fourth Amended and Restated Operating Agreement of Focus Financial Partners,
LLC (4)
10.5 Tax Receivable Agreement, dated as of July 30, 2018, by and among Focus Financial Partners Inc. and the
affiliates of the Private Equity Investors named therein(1)
10.6 Tax Receivable Agreement, dated as of July 30, 2018, by and among Focus Financial Partners Inc. and the
parties named therein(1)
10.7 Tax Receivable Agreement, dated as of March 25, 2020, by and among Focus Financial Partners Inc. and
the parties named therein(8)
10.8† Focus Financial Partners Inc. 2018 Omnibus Incentive Plan(1)
10.9 First Lien Credit Agreement, dated as of July 3, 2017, by and among Focus Financial Partners, LLC, the
lenders party thereto, Bank of America, N.A., as revolver administrative agent for the Lenders, Swing
Line Lender and L/C Issuer and Royal Bank of Canada, as term administrative agent for the Lenders(2)
10.10 Amendment No. 1 to First Lien Credit Agreement, dated as of January 17, 2018, by and among Focus
Financial Partners, LLC, Royal Bank of Canada, as term administrative agent and collateral agent, and the
lenders party thereto(2)
10.11 Amendment No. 2 to First Lien Credit Agreement, dated as of March 2, 2018, by and among Focus
Financial Partners, LLC and Royal Bank of Canada, as term administrative agent and collateral agent(2)
10.12 Amendment No. 3 to First Lien Credit Agreement, dated as of April 2, 2018, by and among Focus
Financial Partners, LLC, Royal Bank of Canada, as term administrative agent and collateral agent, and the
lenders party thereto(2)
10.13 Amendment No. 4 to First Lien Credit Agreement, dated as of June 29, 2018, by among Focus LLC, as
borrower, the lenders party thereto, Royal Bank of Canada, as term administrative agent, collateral agent
and fronting bank, and Bank of America, N.A., as revolver administrative agent and letter of credit
issuer(3)
10.14 Amendment No. 5 to the First Lien Credit Agreement, dated as of July 26, 2019, among Focus Financial
Partners, LLC, Royal Bank of Canada, as term administrative agent and collateral agent and each new
term loan lender party thereto(5)
10.15 Amendment No. 6 to the First Lien Credit Agreement, dated as of January 27, 2020, among Focus
Financial Partners, LLC, Royal Bank of Canada, as term administrative agent, collateral agent and
fronting bank and the lender parties thereto (6)
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Exhibit
Number
Description
10.16 Amendment No. 7 to the First Lien Credit Agreement, dated as of January 25, 2021, among Focus
Financial Partners, LLC, Royal Bank of Canada, as term administrative agent and collateral agent and
each lender party thereto (11)
10.17† Amended and Restated Employment Agreement, by and between Ruediger Adolf and Focus Financial
Partners, LLC(3)
10.18† Amended and Restated Employment Agreement, by and between Rajini Sundar Kodialam and Focus
Financial Partners, LLC(3)
10.19† Amended and Restated Employment Agreement, by and between James Shanahan and Focus Financial
Partners, LLC(3)
10.20† Employment Agreement, by and between Leonard R. Chang and Focus Financial Partners, LLC(7)
10.21† Amendment No. 1 to the Employment Agreement, by and between Leonard R. Chang and Focus
Financial Partners, LLC(9)
10.22† Amended and Restated Employment Agreement, by and between J. Russell McGranahan and Focus
Financial Partners, LLC(7)
10.23† Form of Incentive Unit Award Agreement pursuant to the Fourth Amended and Restated Operating
Agreement of Focus Financial Partners, LLC, dated as of July 3, 2017, as amended(3)
10.24 Form of Restricted Unit Award Agreement pursuant to the Fourth Amended and Restated Operating
Agreement of Focus Financial Partners, LLC, dated as of July 3, 2017, as amended(3)
10.25
Indemnification Agreement (Ruediger Adolf)(1)
10.26
Indemnification Agreement (Rajini Sundar Kodialam)(1)
10.27
Indemnification Agreement (James Shanahan)(1)
10.28
Indemnification Agreement (James D. Carey)(1)
10.29
Indemnification Agreement (Fayez S. Muhtadie)(1)
10.30
Indemnification Agreement (Christopher J. Harrington)(1)
10.31
Indemnification Agreement (Joseph Feliciani Jr.)(4)
10.32
Indemnification Agreement (Leonard R. Chang)(7)
10.33
Indemnification Agreement (J. Russell McGranahan)(7)
10.34
Indemnification Agreement (Greg S. Morganroth, MD)(10)
10.35* Indemnification Agreement (Kristine M. Mashinsky)
21.1* List of Subsidiaries of Focus Financial Partners Inc.
23.1* Consent of Independent Registered Public Accounting Firm
31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. § 1350, as
adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
101.INS*
Inline XBRL Instance Document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
67
Exhibit
Number
Description
104* Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the inline XBRL
document.
* Filed or furnished herewith.
† Compensation, plan or arrangement.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 001 - 38604) filed with the
SEC on July 31, 2018.
Incorporated by reference to the Registrant’s Registration Statement on Form S - 1 (File No. 333 - 225166) filed
with the SEC on May 24, 2018.
Incorporated by reference to the Registrant’s Registration Statement on Form S - 1 (File No. 333 - 225166) filed
with the SEC on June 29, 2018.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38604) filed with
the SEC on May 9, 2019.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38604) filed with the
SEC on July 26, 2019.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38604) filed with the
SEC on January 27, 2020.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-38604) filed with the
SEC on February 25, 2020.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38604) filed with the
SEC on March 27, 2020.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38604) filed with
the SEC on May 7, 2020.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-38604) filed with
the SEC on November 5, 2020.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-38604) filed with the
SEC on January 25, 2021.
68
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 19, 2021
FOCUS FINANCIAL PARTNERS INC.
By:
/s/ RUEDIGER ADOLF
Ruediger Adolf
Chairman and Chief Executive Officer
(Principal Executive Officer)
By:
/s/ JAMES SHANAHAN
James Shanahan
Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RUEDIGER ADOLF
Ruediger Adolf
Chief Executive Officer and Chairman
(Principal Executive Officer)
February 19, 2021
/s/ JAMES SHANAHAN
James Shanahan
Chief Financial Officer (Principal Financial
Officer and Principal Accounting Officer)
February 19, 2021
/s/ JAMES D. CAREY
James D. Carey
/s/ JOSEPH FELICIANI JR.
Joseph Feliciani Jr.
/s/ CHRISTOPHER J. HARRINGTON
Christopher J. Harrington
/s/ RAJINI SUNDAR KODIALAM
Rajini Sundar Kodialam
/s/ KRISTINE M. MASHINSKY
Kristine M. Mashinsky
/s/GREG S. MORGANROTH, MD
Greg S. Morganroth, MD
/s/ FAYEZ S. MUHTADIE
Fayez S. Muhtadie
Director
Director
Director
Director
Director
Director
Director
69
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
February 19, 2021
(This page has been left blank intentionally.)
INDEX TO FINANCIAL STATEMENTS
FOCUS FINANCIAL PARTNERS INC.
Consolidated Financial Statements as of December 31, 2019 and 2020 and for the Years Ended
December 31, 2018, 2019 and 2020
F-2
Report of independent registered public accounting firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-5
Balance sheets as of December 31, 2019 and 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-6
Statements of operations for the years ended December 31, 2018, 2019 and 2020 . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Statements of comprehensive income (loss) for the years ended December 31, 2018, 2019 and 2020 . . . . . . . .
F-8
Statements of cash flows for the years ended December 31, 2018, 2019 and 2020 . . . . . . . . . . . . . . . . . . . . . . . .
Statements of members’ deficit/shareholders’ equity for the years ended December 31, 2018, 2019 and 2020 . .
F-9
Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Page
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Focus Financial Partners Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Focus Financial Partners Inc. and subsidiaries (the
"Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive
income (loss), cash flows and members’ deficit/shareholders' equity, for each of the three years in the period ended
December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 19, 2021, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on
the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill and Other Intangible Assets Valuation — Refer to Notes 2, 5 and 6 to the financial statements
Critical Audit Matter Description
The Company acquires businesses throughout the year in transactions which qualify as business acquisitions pursuant to
relevant accounting literature. The Company also separately purchases customer relationships and other intangible assets
in asset acquisitions that do not qualify as business acquisitions pursuant to relevant accounting literature.
F-2
The purchase price associated with each business acquisition consists of cash and contingent consideration. The
purchase price is allocated across the estimated fair value of tangible assets acquired, liabilities assumed and the fair
value of intangible assets, with the excess purchase price allocated to goodwill.
The fair value of other intangible assets and goodwill involves significant management judgment in estimating
projections, forecasting growth rates used to produce financial projections for the acquired entities, and the selection of
unobservable inputs and other assumptions. The inputs used in establishing the fair value are in most cases unobservable
and reflect the Company’s own judgments about the assumptions market participants would use in pricing the asset.
Auditing the fair value of other intangible assets and goodwill at the time of each business acquisition involves a high
degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists for
certain acquisitions, when performing audit procedures to evaluate the reasonableness of management’s forecasts of
future growth rates and the selection of the unobservable inputs used in the models.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the purchase price allocation for business acquisitions occurring during the year included
the following, utilizing fair value specialists for certain procedures and transactions:
1. We tested the effectiveness of controls over the purchase price allocation, including understanding
management’s processes and management’s controls over the valuation of other intangible assets and the
underlying assumptions used for estimating the fair value of assets acquired and liabilities assumed.
2. We evaluated management’s policies and methodology for establishing the fair values used in the purchase
price allocations and the prospective financial information, including testing the completeness and accuracy of
underlying data.
3. We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management to
determine the reasonableness of the fair value of the other intangible assets and goodwill.
4. We evaluated the reasonableness of management’s revenue and operating margin forecasts by comparing the
forecasts to:
• Actual historical revenues and operating margins of the acquired entity
• Internal communications to management and the Board of Directors
• Forecasted information included in Company press releases, analyst and industry reports for the Company,
market trends, and certain of its guideline companies.
5. We evaluated the future revenue growth rates used by the Company to determine forecasted revenues and
operating margins, by comparing them to industry benchmarks and data, as well as evaluated the relevance and
reliability of third-party market data points used to develop the future revenue growth rates.
6. We evaluated the reasonableness of management’s assumptions through independent analysis using publicly
available market data for comparable entities and comparison to industry benchmark and data.
Contingent Consideration Valuation — Refer to Notes 2, 5 and 8 to the financial statements
Critical Audit Matter Description
The purchase price associated with acquisitions consist of cash and/or the right of the seller to receive contingent
consideration. For business acquisitions, the Company recognizes the fair value of estimated contingent consideration at
the acquisition date as part of purchase price allocation. Contingent consideration is paid upon the satisfaction of
specified financial performance targets. The performance targets are typically tied to acquired entity’s revenues or
earnings. The estimated contingent consideration is remeasured to fair value at each reporting date until the contingency
is resolved. Any changes in fair value are recognized each reporting period in non-cash changes in fair value of
estimated contingent consideration. In determining fair value of the estimated contingent consideration, the acquired
entities future performance is estimated using financial projections for the acquired entities. The Company uses the
F-3
Monte Carlo Simulation Model to determine the fair value of the Company's estimated contingent consideration given
the non-linear nature of the arrangements.
The fair value of the estimated contingent consideration involves significant management judgment in forecasting
growth rates used to produce financial projections for the acquired entities and selecting unobservable inputs and other
assumptions used in the Monte Carlo Simulation.
We identified the valuation of estimated contingent consideration at acquisition and the remeasurement thereafter as a
critical audit matter because of the significant estimates and assumptions management makes related to the unobservable
inputs and financial projections. This required a high degree of auditor judgment and an increased extent of effort,
including the need to involve our fair value specialists for certain acquisitions and year-end estimates, when performing
audit procedures to evaluate the reasonableness of the financial projections and the selection of the unobservable inputs
used in the Monte Carlo Simulation.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of contingent consideration included the following, utilizing fair value
specialists for certain procedures and transactions:
1. We tested the effectiveness of controls over the valuation of contingent consideration including understanding
management processes and controls in forecasting future revenues and operating margins as well as those over
the estimation process for inputs used in the Monte Carlo Simulation.
2. We evaluated management’s policies and methodology for establishing the valuation of estimated contingent
consideration.
3. We evaluated the reasonableness of the unobservable inputs, and other key judgments made by management as
well as independently running the Monte Carlo Simulations to calculate an independent estimate of fair value.
We compared the results of our estimate of fair value of the contingent consideration liabilities to the
Company’s fair value estimate.
4. We evaluated the reasonableness of management’s revenue and operating margin forecasts of the acquired
entities by comparing the forecasts to:
• Actual historical revenues and operating margins
• Internal communications to management and the Board of Directors
• Performing sensitivity analysis and evaluating potential effect of changes in certain assumptions.
5. We evaluated management’s ability to accurately estimate fair value by comparing management’s historical
estimates to subsequent results.
6. We evaluated the reasonableness of management’s assumptions through independent analysis using publicly
available market data for comparable entities and comparison to industry benchmark and data.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 19, 2021
We have served as the Company’s auditor since 2008.
F-4
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2019 AND DECEMBER 31, 2020
(In thousands, except share and per share amounts)
ASSETS
2019
2020
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts receivable less allowances of $684 at 2019 and $2,178 at 2020 . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt financing costs—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,858
169,220
65,581
49,209
229,748
6,950
107,289
1,255,559
1,113,467
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,653,629 $ 3,062,881
LIABILITIES AND EQUITY
LIABILITIES
65,178 $
129,337
58,581
41,634
180,114
9,645
75,453
1,090,231
1,003,456
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under credit facilities (stated value of $1,279,188 and $1,507,622 at
8,077 $
41,442
58,600
7,839
215,878
196,425
9,634
53,862
66,428
9,190
222,911
253,295
December 31, 2019 and December 31, 2020, respectively) . . . . . . . . . . . . . . . . . . . . . . .
Tax receivable agreements obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND CONTINGENCIES (Note 15)
EQUITY
Class A common stock, par value $0.01, 500,000,000 shares authorized; 47,421,315
and 51,158,712 shares issued and outstanding at December 31, 2019 and
December 31, 2020, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock, par value $0.01, 500,000,000 shares authorized; 22,075,749
1,272,999
48,399
1,849,659
1,507,119
81,563
2,204,002
474
512
and 20,661,595 shares issued and outstanding at December 31, 2019 and
December 31, 2020, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207
526,664
14,583
(2,167)
539,799
319,080
858,879
TOTAL LIABILITIES AND EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,653,629 $ 3,062,881
221
498,186
(13,462)
(1,299)
484,120
319,850
803,970
See notes to consolidated financial statements
F-5
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except share and per share amounts)
REVENUES:
Wealth management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
853,033 $
57,847
910,880
1,149,655 $
68,686
1,218,341
1,286,130
75,189
1,361,319
2018
2019
2020
OPERATING EXPENSES:
Compensation and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management contract buyout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash changes in fair value of estimated contingent
consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs. . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of borrowings . . . . . . . . . . . . . . . . . . . . . . . .
Other expense—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . .
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . . . .
Total other expense—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCOME (LOSS) BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . .
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
358,084
232,703
170,270
—
90,381
6,638
8,370
866,446
44,434
431,465
304,701
232,911
1,428
130,718
476,208
349,475
236,377
—
147,783
38,797
10,675
1,150,695
67,646
19,197
12,451
1,241,491
119,828
1,266
(56,448)
(3,498)
5,509
(21,071)
(2,350)
521
—
(76,071)
(31,637)
9,450
(41,087) $
40,497
1,164
(58,291)
(3,452)
—
—
(1,049)
755
(11,749)
(72,622)
(4,976)
7,049
(12,025) $
(847)
453
(41,658)
(2,909)
—
(6,094)
(214)
219
—
(50,203)
69,625
20,660
48,965
(20,920)
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(590) $
(12,872) $
28,045
Income (loss) per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.01) $
(0.01) $
(0.28) $
(0.28) $
0.58
0.57
Weighted average shares of Class A common stock outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,122,782
43,122,782
46,792,389
46,792,389
48,678,584
48,796,613
See notes to consolidated financial statements
F-6
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss), net of tax:
2018
(41,087) $
2019
(12,025) $
2020
48,965
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on interest rate swaps designated as cash flow hedges . .
Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(4,509)
—
(45,596) $
768
—
(11,257) $
7,555
(8,596)
47,924
Less: Comprehensive (income) loss attributable to noncontrolling
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss) attributable to common shareholders . . . $
43,182
(2,414) $
(1,090)
(12,347) $
(20,747)
27,177
See notes to consolidated financial statements
F-7
FOCUS FINANCIAL PARTNERS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (41,087) $ (12,025) $
48,965
2018
2019
2020
Adjustments to reconcile net income (loss) to net cash provided by
operating activities—net of effect of acquisitions:
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash equity compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash changes in fair value of estimated contingent consideration . . . . . .
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions received from equity method investments . . . . . . . . . . . . . . . . . .
Deferred taxes and other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in cash resulting from changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
90,381
8,370
3,498
44,468
6,638
(521)
—
1,118
6,655
19,001
130,718
10,675
3,452
18,329
38,797
(755)
11,749
751
3,555
—
147,783
12,451
2,909
22,285
19,197
(219)
—
231
2,618
6,094
(23,747)
(10,401)
2,341
4,302
6,706
(10,322)
(1,481)
105,919
(29,562)
3,796
(1,172)
8,276
18,989
(10,487)
(312)
194,774
(37,913)
74
606
10,876
7,650
(29,683)
(2,563)
211,361
Cash paid for acquisitions and contingent consideration—net of cash acquired .
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(413,044)
(9,106)
(24,300)
(446,450)
(532,513)
(25,472)
1,530
(556,455)
(348,674)
(19,349)
(4,950)
(372,973)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of borrowings under credit facilities . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments in connection with unit redemption, net . . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on finance lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions for unitholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS . .
CHANGE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS:
300,000
(461,026)
565,160
(61,539)
(12,554)
(4,612)
—
—
(198)
(2,744)
322,487
(198)
(18,242)
969,125
(529,796)
—
—
(22,040)
(3,743)
838
—
(176)
(20,641)
393,567
79
31,965
555,000
(326,566)
—
—
(49,891)
(634)
6,912
(386)
(147)
(22,457)
161,831
461
680
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
51,455
33,213 $
33,213
65,178 $
65,178
65,858
See Note 18 for Supplemental Cash Flow Disclosure
See notes to consolidated financial statements
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F-9
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
1. GENERAL
Organization
Focus Financial Partners Inc. (“Focus Inc.”) was formed as a Delaware corporation on July 29, 2015 for the
sole purpose of completing its initial public offering (the “IPO”) and related reorganization transactions (the
“Reorganization Transactions”) in order to carry on the business of Focus Financial Partners, LLC and its subsidiaries
(“Focus LLC”). On July 30, 2018, Focus Inc. became the managing member of Focus LLC and operates and controls the
businesses and affairs of Focus LLC.
Focus LLC is a Delaware limited liability company that was formed in November 2004. Focus LLC’s
subsidiaries commenced revenue generating and acquisition activities in January 2006. Focus LLC’s activities were
governed by its Third Amended and Restated Operating Agreement, as amended, through July 30, 2018 and then its
Fourth Amended and Restated Operating Agreement, as amended (the “Operating Agreement”), effective on July 30,
2018.
The consolidated financial statements for the year ended December 31, 2018 include the historical results of
operations of Focus LLC for the period prior to July 30, 2018. The consolidated financial statements for periods after
July 30, 2018 reflect the results of operations and financial position of Focus Inc. and its subsidiaries (the “Company”).
Business
The Company is in the business of acquiring and overseeing independent fiduciary wealth management and
related businesses. The Company typically acquires 100% of the net assets of the wealth management businesses on
terms that are generally consistent for each acquisition. To determine the acquisition price, the Company first estimates
the operating cash flow of the business to be acquired based on current and projected levels of revenue and expenses. For
this purpose, the Company defines operating cash flow as cash revenue of the business, less cash expenses, other than
compensation and benefits to the selling entrepreneurs or individuals who typically become principals of the
management entities discussed below. The Company refers to the estimated operating cash flow earnings before partner
compensation as target earnings (“Target Earnings”). The acquisition price is a multiple of a portion of the Target
Earnings, referred to as base earnings (“Base Earnings”).
At the date of each of the respective acquisitions, the Company typically enters into a management agreement
(“Management Agreement”) with a management company (“Management Company”) that is owned substantially by the
selling principals of the acquired businesses. The Management Company earns management fees to manage the daily
operations of the acquired business. The terms of the Management Agreements are generally six years with automatic
renewals for consecutive one-year terms, unless terminated by either the Management Company or the Company. Under
the Management Agreement, the Management Company is entitled to management fees typically consisting of all future
earnings of the acquired business in excess of the Base Earnings up to Target Earnings, plus a percentage of any earnings
in excess of Target Earnings. The Company, through its respective operating subsidiary, retains a cumulative preferred
position in the Base Earnings. To the extent earnings of an acquired business in any year are less than the Base Earnings,
in the following year the Company, through its respective operating subsidiary, is entitled to receive the Base Earnings
together with the prior years’ shortfall before any management fees are earned by the Management Company. Since each
Management Company is neither acquired nor consolidated, management fees are included in the Company’s
consolidated statements of operations as operating expenses. Estimated management fees due are included in due to
affiliates in the accompanying consolidated balance sheets.
F-10
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements
include the accounts of the Company and its subsidiaries. The Company consolidates Focus LLC and its subsidiaries’
financial statements and records the interests in Focus LLC consisting of common units, restricted common units and the
common unit equivalent of incentive units of Focus LLC that the Company does not own as non-controlling interests,
see Note 4. Non-controlling interests were measured initially at the proportionate share of Focus LLC’s identifiable net
assets at the date of the IPO. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Income (Loss) Per Share
Income (loss) per share is computed in accordance with Accounting Standards Codification (“ASC”) Topic
260, Earnings Per Share. Basic income (loss) per share is computed by dividing the net income (loss) attributable to
common shareholders by the weighted average number of shares outstanding for that period. Diluted income (loss) per
share is calculated by dividing the net income (loss) attributable to common shareholders by the weighted average
number of shares of Class A common stock outstanding during the same periods plus the effect, if any, of the potentially
dilutive shares of the Company’s Class A common stock from stock options, unvested Class A common stock, restricted
stock units and Focus LLC common, restricted common and incentive units as calculated using the treasury stock
method.
Revenue Recognition
Wealth Management Fees
The Company recognizes revenue from wealth management fees, which are primarily comprised of fees earned
for advising on the assets of clients, financial and tax planning fees, consulting fees, tax return preparation fees, fees for
family office services, and fees for wealth management and operational support services provided to third-party wealth
management firms. Client arrangements may contain one of the services or multiple services, resulting in either a single
or multiple performance obligations within the same client arrangement, each of which are separately identifiable and
priced, and accounted for as the related services are provided and consumed over time. Fees are primarily based either
on a contractual percentage of the client’s assets based on the market value of the client’s assets on the predetermined
billing date, a flat fee, an hourly rate based on predetermined billing rates or a combination of such fees and are billed
either in advance or arrears on a monthly, quarterly, or semiannual basis. Revenue is recognized over the respective
service period based on time elapsed or hours expended, as the case may be, which is deemed to be the most faithful
depiction of the transfer of services as clients benefit from services over the respective period. Revenue for wealth
management and operational support services provided to third party wealth management firms is presented net since
these services are performed in an agent capacity. Client agreements typically do not have a specified term and may be
terminated at any time by either party subject to the respective termination and notification provisions in each
agreement.
F-11
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
A majority of the Company’s wealth management fees are correlated to the markets, and therefore are
considered variable consideration. The Company’s market-correlated fees are dependent on the market and, thus, are
susceptible to factors outside the Company’s control. Therefore, at inception of the contractual service period for fees
which are based on the market values at the end of the service period, the Company cannot conclude that it is probable
that a reversal in the cumulative revenue recognized would not occur if the estimate was included in the transaction price
at that time. However, at each quarterly reporting date, the Company updates its estimate of the transaction price as the
market uncertainty is typically resolved. The Company can then reasonably conclude that a reversal of the variable
consideration will not occur for those services already provided.
Wealth management fees are recorded when: (i) an arrangement with a client has been identified; (ii) the
performance obligations have been identified; (iii) the fee or other transaction price has been determined; (iv) the fee or
other transaction price has been allocated to each performance obligation based on standalone fee rates; and (v) the
Company has satisfied the applicable performance obligation.
Other
Other revenue includes fees earned for recordkeeping and administration services provided to employee benefit
plans as well as commissions and distribution fees and outsourced services. Client arrangements may contain a single or
multiple performance obligations, each of which are separately identifiable and accounted for as the related services are
provided and consumed over time. Recordkeeping and administration and outsourced services revenue, in accordance
with the same five criteria above, are recognized over the period in which services are provided. Commissions and
distribution fees are recognized when earned.
The Company disaggregates revenue based on the above two categories. The Company does not allocate
revenue by the type of service provided in connection with providing holistic wealth management client services. The
Company generally manages its business based on the operating results of the enterprise taken as a whole, not by
geographic region. The following table disaggregates the revenues based on the location of the partner firm legal entities
that generate the revenues and therefore may not be reflective of the geography in which clients are located for the years
ended December 31, 2018, 2019 and 2020:
Domestic revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 889,166 $ 1,170,169 $ 1,291,630
69,689
International revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,714
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 910,880 $ 1,218,341 $ 1,361,319
48,172
2018
2019
2020
International revenue consists of revenue generated by partner firm legal entities in Australia, Canada and the
United Kingdom.
Deferred Revenue
Fees collected in advance are deferred and recognized in revenue over the period earned with the unrecognized
portion of fees collected in advance recorded as deferred revenue in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less when purchased to
be cash equivalents.
F-12
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Accounts Receivable
Accounts receivable are stated at their net realizable value. Allowances for uncollectible accounts are
maintained for estimated losses resulting from the inability of customers to make required payments. In determining
these estimates, historical write-offs, the aging of the receivables and other factors, such as overall economic conditions,
are considered.
Fixed Assets
Fixed assets are initially recorded at cost and are depreciated using the straight-line method over their estimated
useful lives. The estimated useful lives for fixed assets, primarily consisting of computers, equipment, and furniture and
fixtures, are generally between three to seven years. Leasehold improvements are amortized over the shorter of their
estimated economic useful lives or the terms of the leases. The costs of improvements that extend the life of a fixed asset
are capitalized, while the costs of repairs and maintenance are expensed as incurred.
Debt Financing Costs
Direct costs incurred with obtaining debt financing are capitalized or recorded as a reduction of the underlying
debt. The costs are amortized over the respective term of the underlying debt and are included in amortization of debt
financing costs in the accompanying consolidated statements of operations.
Business Acquisitions
Business acquisitions are accounted for in accordance with ASC Topic 805: Business Combinations. Business
acquisitions are accounted for by allocating the purchase price consideration to the fair value of assets acquired and
liabilities assumed. The purchase price allocations are based upon preliminary valuations, and the Company’s estimates
and assumptions are subject to change within the measurement period as valuations are finalized. Any change in the
estimated fair value of the net assets, prior to the finalization of the more detailed analyses, but not to exceed one year
from the dates of acquisition, will change the amount of the purchase price allocations. Goodwill is recognized as the
excess of the purchase price consideration over the fair value of net assets of the business acquired. All transaction costs
are expensed as incurred.
The Company has incorporated contingent consideration, or earn out provisions, into the structure of its
business acquisitions. These arrangements may result in the payment of additional purchase price consideration to the
sellers based on the growth of certain financial thresholds for periods following the closing of the respective acquisition.
The additional purchase price consideration is payable in the form of cash and, in some cases, equity.
The Company recognizes the fair value of estimated contingent consideration at the acquisition date as part of
the consideration transferred in exchange for the acquired business. The contingent consideration is remeasured to fair
value at each reporting date until the contingency is resolved. Any changes in fair value are recognized each reporting
period in non-cash changes in fair value of estimated contingent consideration in the accompanying consolidated
statements of operations.
The results of the acquired businesses have been included in the Company’s consolidated financial statements
from the respective dates of acquisition.
F-13
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Investments
The equity method of accounting is applied to investments where the Company has the ability to exercise
significant influence over operating and financial matters. In December 2020, the Company acquired a minority equity
interest in a wealth management firm for $4,950 in cash that is accounted for using the equity method of accounting.
The Company records other equity investments that do not have readily determinable fair values at cost less
impairment, if any, plus or minus changes resulting from observable price changes. Investments are periodically
reviewed for impairment.
The Company’s investments are included in prepaid expenses and other assets in the consolidated balance
sheets.
Goodwill, Intangible Assets and Other Long-Lived Assets
Goodwill is deemed to have an indefinite useful life and is not amortized. Intangible and other long-lived assets
are amortized over their respective estimated useful lives. The Company has no indefinite-lived intangible assets.
Goodwill is tested annually for impairment as of October 1, or more frequently if events and circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company
compares the fair value of the reporting unit to the carrying value of the net assets of the reporting unit. The fair value of
the reporting unit is determined using a market approach. If the fair value of the reporting unit exceeds the carrying value
of the net assets of the reporting unit no further consideration is necessary. If the carrying value exceeds the fair value of
the reporting unit, the Company would record an impairment charge for the amount that the carrying value exceeds the
fair value of the reporting unit.
Intangible assets and other long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the asset might be impaired or that the estimated useful life should be changed prospectively.
If impairment indicators are present, the recoverability of these assets is measured by a comparison of the carrying
amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the fair value of the asset, which is determined using a
discounted cash flow approach.
Fair Value of Financial Instruments
The carrying amounts of substantially all of the Company’s financial assets and liabilities are considered to
approximate their fair values because of their short-term nature. The carrying amount of revolver borrowings under the
Credit Facility (as defined below) approximates fair value, as the debt bears interest at selected short-term variable
market rates. The Company measures the implied fair value of its First Lien Term Loan (as defined below) using trading
levels obtained from a third-party service provider; accordingly, these borrowings are classified within Level 2 of the
valuation hierarchy. See Note 8 for further information regarding the Company’s fair value measurements.
Derivatives
The Company uses derivative instruments for purposes other than trading. Derivative instruments are accounted
for in accordance with ASC Topic No. 815, Derivatives and Hedging, which requires that all derivative instruments be
recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that qualify
as hedges and have been designated as part of a hedging relationship for accounting purposes do not impact earnings
F-14
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
until the hedged item is recognized in earnings. The Company uses interest rate swaps to manage its mix of fixed and
floating rate debt. These instruments have been designated as cash flow hedges at inception and are measured for
effectiveness both at inception and on an ongoing basis.
Income Taxes
In connection with the IPO and Reorganization Transactions, Focus Inc. became a holding company whose
most significant asset is a membership interest in Focus LLC, and, as a result, Focus Inc. became subject to U.S. federal,
state and local income taxes on Focus Inc.'s allocable portion of taxable income from Focus LLC. Focus LLC is treated
as a partnership for U.S. federal income tax purposes. Accordingly, Focus LLC is generally not and has not been subject
to U.S. federal and certain state income taxes at the entity level, although it has been subject to the New York City
Unincorporated Business Tax and certain of its subsidiaries have been subject to U.S. federal and certain state and local
or foreign income taxes. Instead, for U.S. federal and certain state income tax purposes, the income, deductions, losses
and credits of Focus LLC are passed through to its unitholders, which after the IPO includes Focus Inc. Focus LLC has
historically made tax distribution payments in accordance with its Third Amended and Restated Operating Agreement,
which was replaced by the Operating Agreement on July 30, 2018, and Focus Inc. intends to cause Focus LLC to
continue to make tax distribution payments, to the extent of available cash, in accordance with the Operating Agreement.
Focus Inc. files income tax returns with the U.S. federal government as well as various state and local jurisdictions.
The asset and liability method is applied for deferred income taxes. Deferred tax assets and liabilities are
recognized on a net basis for each tax paying component for future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using tax rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. Valuation allowances, if any, are recorded to reduce the deferred tax
assets to an amount that is more likely than not to be realized.
The Company reviews and evaluates tax positions in its major tax jurisdictions and determines whether or not
there are uncertain tax positions that require financial statement recognition. Based on this review, no reserves for
uncertain tax positions were recorded at December 31, 2019 and 2020.
Segment Reporting
Management has determined that the Company operates in one operating segment, as a wealth management
focused organization, which is consistent with its structure and how the Company manages the business. The Company’s
acquired businesses have similar economic and business characteristics. The services provided are wealth management
related and the Company’s businesses are subject to a similar regulatory framework. Furthermore, the Company’s Chief
Operating Decision Maker, which is the Company’s Chief Executive Officer, monitors and reviews financial
information at a consolidated level for assessing operating results and the allocation of resources.
Translation of Non-U.S. Currency Amounts
Assets and liabilities of non-U.S. subsidiaries that have a foreign currency as their functional currency are re-
measured to U.S. dollars at year-end exchange rates, and revenues and expenses are re-measured at average rates of
exchange prevailing during the year. The resulting translation adjustments are recorded in accumulated other
comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in other
expense—net in the consolidated statements of operations.
F-15
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Consolidation Considerations
ASC Topic 810, Consolidations, requires an entity to perform a qualitative analysis to determine whether its
variable interests give it a controlling financial interest in a variable interest entity (“VIE”). Under the standard, an
enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most
significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the entity or the right to
receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling
financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE.
The Company’s subsidiaries have Management Agreements with the respective Management Company, which
causes these Company subsidiaries to be VIEs. The Company has assessed whether or not it is the primary beneficiary
for these subsidiaries and has concluded that it is the primary beneficiary. Accordingly, the results of these subsidiaries
have been consolidated.
Certain of the Company’s subsidiaries have variable interests in certain investment funds that are deemed
voting interest entities. Due to substantive kick-out rights possessed by the limited partners of these funds, the Company
does not consolidate the investment funds.
From time to time, the Company enters into option agreements with wealth management businesses (the
“Optionee”). In exchange for payment of an option premium, the option agreement allows the Company, at its sole
discretion, to acquire the Optionee at a predetermined time and at a predetermined purchase price formula. If the
Company chooses to exercise its option to acquire the Optionee, the acquisition and the corresponding Management
Agreement would be executed in accordance with the Company’s typical acquisition structure as discussed in Note 1.
The Company has determined that the option agreements with the Optionees qualify the Optionees as VIEs. The
Company has determined that it is not the primary beneficiary of the Optionees and does not consolidate the results of
the Optionees. There were no option premiums outstanding as of December 31, 2019 and 2020.
Stock Based Compensation Costs
Compensation cost for Focus LLC incentive units and Focus Inc. stock option awards is measured based on the
fair value of awards determined by the Black-Scholes option pricing model or the Monte Carlo Simulation Model on the
date that the awards are granted or modified, and is adjusted for the estimated number of awards that are expected to be
forfeited. Compensation cost for unvested Class A common stock and restricted stock units, as well as Focus LLC
restricted common units, is measured based on the market value of the Company’s Class A common stock on the date
that the awards are granted and is adjusted for the estimated number of awards that are expected to be forfeited. The
compensation cost is recognized on a straight-line basis over the requisite service period. Non-cash equity compensation
expense, associated with employees and non-employees, including principals in the management companies, is included
in compensation and related expenses in the consolidated statements of operations. The Company estimates forfeitures at
the time of the respective grant and revises those estimates in subsequent periods if actual forfeitures differ materially
from those estimates. The Company uses historical data to estimate forfeitures and records non-cash equity
compensation expense only for those awards that are expected to vest.
F-16
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Leases
The Company leases office space in various locations under noncancelable lease agreements with various
expiration dates. The Company determines if a contract contains a lease at inception. The lease terms may include
options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Many
of these lease agreements provide for tenant improvement allowances, rent increases, and/or rent-free periods. Operating
lease expense is recognized on a straight-line basis commencing with the possession date of the property, which is
typically the earlier of the lease commencement date or the date when the Company takes possession of the property.
Operating lease costs are included in selling, general and administrative expenses in the consolidated statements of
operations.
Lease assets and liabilities are recognized at the present value of the future lease payments at the lease
commencement date. The interest rate used to determine the present value of the future lease payments is an estimated
incremental borrowing rate, because the interest rate implicit in the Company’s leases is not readily determinable. The
incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and
payments, and in economic environments where the leased asset is located. We generally use the base, non-cancelable,
lease term when determining the lease assets and liabilities. Lease assets also include any prepaid lease payments and
lease incentives. Leases with an initial term of 12 months or less, which are immaterial to the consolidated financial
statements, are not recorded on the balance sheet. The Company has a limited number of finance leases which are not
material to the consolidated financial statements.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) No. 2017-04, “Simplifying the Test for Goodwill Impairment,” which removes the second step of the goodwill
impairment test that requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by
which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU
No. 2017-04 was effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of
ASU No. 2017-04 on January 1, 2020 did not have a material effect on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes,” which
simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies
certain aspects of the current guidance to promote consistency among reporting entities. ASU No. 2019-12 is effective
for fiscal years beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard
are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or
modified retrospective basis. The adoption of ASU No. 2019-12 on January 1, 2021 did not have a material effect on the
Company's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on
Financial Reporting.” ASU No. 2020-04 provides optional expedients and exceptions for applying generally accepted
accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that
reference the London InterBank Offered Rate (“LIBOR”) or another rate that is expected to be discontinued. The
amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. The
adoption of ASU No. 2020-04 did not have a material impact on the Company’s consolidated financial statements;
however, the Company will continue to evaluate the impacts, if any, of the provisions of ASU No. 2020-04 on the
Company’s debt and hedging arrangements through December 31, 2022.
F-17
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
3. IPO, REORGANIZATION TRANSACTIONS AND USE OF PROCEEDS
Initial Public Offering
On July 30, 2018, the Company completed its IPO of 18,648,649 shares of its Class A common stock, par value
$0.01 per share, including 2,432,432 shares of Class A common stock sold in connection with the full exercise of the
option to purchase additional shares granted to the underwriters, at a price to the public of $33.00 per share. The shares
began trading on the NASDAQ Global Select Market on July 26, 2018 under the ticker symbol “FOCS.”
Reorganization Transactions
In connection with the IPO, Focus LLC completed the Reorganization Transactions. The equity interests in
Focus LLC at the date of the IPO consisted of convertible preferred units (the “Convertible Preferred Units”), common
units and incentive units, each incentive unit having a hurdle amount similar to the exercise price of a stock option. The
owners of Focus LLC units immediately prior to the IPO (“Existing Owners”) primarily included (i) affiliates of Focus
LLC’s private equity investors (“Private Equity Investors”), (ii) members of management of Focus LLC, (iii) current and
former principals of independent fiduciary wealth management and related businesses acquired by Focus LLC and (iv)
current and former employees of Focus LLC.
The following steps were implemented in connection with the Reorganization Transactions:
• Focus LLC purchased, utilizing existing working capital, all common units held by Existing Owners who
were non-accredited investors, as defined by Rule 501 of Regulation D, at a purchase price per unit equal
to 1.25 times the IPO price of $33.00 per share (“Gross IPO Price”). Focus LLC accelerated the vesting of
all unvested incentive units held by Existing Owners who were non-accredited investors and converted the
incentive units of each such holder into a number of common units equal to (i) the number of such
incentive units times the Gross IPO Price, minus the aggregate hurdle amount of such incentive units,
divided by (ii) the Gross IPO Price (the “Appropriate Conversion Number”). Focus LLC then purchased all
common units issued upon such conversion at a purchase price per unit equal to 1.25 times the Gross IPO
Price. Focus LLC paid a total of $26,001 to Existing Owners who were non-accredited investors.
• Existing Owners who were accredited investors and held fewer than 85,000 common units and incentive
units in the aggregate are referred to as “Mandatorily Exchanging Owners.” Focus LLC converted all
vested and unvested incentive units of Mandatorily Exchanging Owners into the Appropriate Conversion
Number of vested and unvested common units, respectively. Mandatorily Exchanging Owners were given
an election to sell up to 100% of their vested common units (after giving effect to such conversion) to the
Company at the Gross IPO Price less the underwriting discount (the “Net IPO Price”), subject to cut - backs
depending on the proceeds available from the IPO. The vested and unvested common units of a
Mandatorily Exchanging Owner not sold were exchanged for an equal number of shares of vested Class A
common stock and unvested Class A common stock of the Company. Mandatorily Exchanging Owners of
vested common units issued upon conversion of vested incentive units and not sold received (i) vested
non - compensatory stock options of the Company to purchase a number of shares of Class A common stock
of the Company equal to (A) the number of vested incentive units that were converted into such vested
common units minus (B) the number of shares of vested Class A common stock issued in such exchange
and (ii) cash in an amount equal to 65% of the fair market value of such non - compensatory stock options.
Mandatorily Exchanging Owners of unvested common units issued upon conversion of unvested incentive
units and not sold received unvested compensatory stock options of the Company to purchase a number of
shares of Class A common stock of the Company equal to (i) the number of unvested incentive units that
F-18
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
were converted into such unvested common units minus (ii) the number of shares of unvested Class A
common stock issued in such exchange.
• Existing Owners who were accredited investors and held 85,000 or more common units and incentive units
in the aggregate were given an election to sell up to 100% of their vested common units and vested
incentive units (after conversion into the Appropriate Conversion Number of common units) to the
Company at the Net IPO Price, subject to cut-backs depending on the proceeds available from the IPO.
These Existing Owners were also given an election to exchange all or a portion of their remaining common
units and incentive units for vested and unvested Class A common stock of the Company. These Existing
Owners continue to hold their common units and incentive units of Focus LLC remaining after any such
sale or exchange.
• All outstanding Convertible Preferred Units were converted into common units on a one-for-one basis. The
common units held by certain affiliates of the Private Equity Investors were distributed to their owners,
some of which were entities treated as corporations for U.S. federal income tax purposes, which are
referred to as “blockers.” Each blocker then merged with a separate newly formed subsidiary of Focus Inc.,
with the blocker as the surviving entity. Each owner of each blocker received consideration in the merger
equal to one share of Class A common stock for each common unit held. Certain of the common units not
held by blockers were exchanged for shares of Class A common stock of the Company.
Existing Owners who hold common units of Focus LLC after the Reorganization Transactions received shares
of Class B common stock of the Company. Shares of Class B common stock do not entitle their holders to any economic
rights. Holders of Class A common stock and Class B common stock of the Company vote together as a single class on
all matters presented to the shareholders of the Company for their vote or approval, except as otherwise required by
applicable law. Each share of Class B common stock entitles its holder to one vote.
In connection with the Reorganization Transactions, the Company issued an aggregate of 23,881,002 shares of
Class A common stock, non-compensatory stock options to purchase an aggregate of 386,832 shares of Class A common
stock, compensatory stock options to purchase an aggregate of 348,577 shares of Class A common stock and an
aggregate of 22,499,665 shares of Class B common stock. Due to certain post-closing adjustments, the Company
cancelled 240,457 shares of Class A common stock and issued 240,457 shares of Class B common stock effective as of
the closing date of the IPO.
Use of Proceeds
The Company received $565,160 of net proceeds from the sale of the Class A common stock in the IPO
including $74,651 in connection with the full exercise of the option to purchase additional shares granted to the
underwriters. The Company used $11,137 of the net proceeds to pay Mandatorily Exchanging Owners who elected to
sell their units of Focus LLC and $24,400 to pay other Existing Owners who elected to sell their units of Focus LLC.
The Company contributed $529,623 of the net proceeds from the IPO to Focus LLC in exchange for 17,583,947
common units of Focus LLC. Focus LLC used $392,535 of such contribution to reduce indebtedness under its Credit
Facility (as defined below). The remaining $137,088 of such contribution was used by Focus LLC for acquisitions and
general corporate business purposes.
4. NON-CONTROLLING INTERESTS AND INCOME (LOSS) PER SHARE
Historical loss per share information is not applicable for reporting periods prior to the consummation of the
IPO. Net income (loss) attributable to common shareholders includes net income (loss) recorded by the Company based
on its interest in Focus LLC during the respective period after the IPO.
F-19
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The calculation of controlling and non-controlling interest is as follows as of December 31, 2019 and 2020:
Focus LLC common units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,075,749
Focus LLC restricted common units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Common unit equivalents of outstanding vested and unvested Focus LLC incentive
2019
2020
20,661,595
73,276
units(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,731,995
7,614,473
Total common units, restricted common units and common unit equivalents
attributable to non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,807,744
28,349,344
Total common units, restricted common units and common unit equivalents of
incentive units outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company’s interest in Focus LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,229,059
79,508,056
37.0 %
63.0 %
35.7 %
64.3 %
(1)
Focus LLC common units issuable upon conversion of 19,754,450 and 17,234,497 (see Note 11) vested and
unvested Focus LLC incentive units outstanding as of December 31, 2019 and 2020, respectively, were
calculated using the common unit equivalent of vested and unvested Focus LLC incentive units based on the
closing price of the Company’s Class A common stock on the last trading day of the period.
The below table contains a reconciliation of net income (loss) to net income (loss) attributable to common
shareholders for the years ended December 31, 2018, 2019 and 2020:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to members of Focus LLC (for the
respective period through the IPO) . . . . . . . . . . . . . . . . . .
Non-controlling interest subsequent to the IPO . . . . . . . . .
Net income (loss) attributable to common shareholders . .
2018
2019
$ (41,087) $ (12,025) $ 48,965
2020
47,821
(7,324)
—
—
(20,920)
(847)
(590) $ (12,872) $ 28,045
$
Basic income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders
divided by the weighted average number of shares of Class A common stock outstanding during the same period:
Period July 30,
2018 through
Year Ended
Year Ended
December 31, 2018 December 31, 2019 December 31, 2020
Basic income (loss) per share:
Net income (loss) attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . . $
(590) $
(12,872) $
28,045
Weighted average shares of Class A
common stock outstanding . . . . . . . . . . .
Basic income (loss) per share . . . . . . . . . . . $
43,122,782
46,792,389
(0.01) $
(0.28) $
48,678,584
0.58
Diluted income (loss) per share is calculated utilizing net income (loss) attributable to common shareholders
divided by the weighted average number of shares of Class A common stock outstanding during the same periods plus
the effect, if any, of the potentially dilutive shares of the Company’s Class A common stock from stock options,
F-20
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
unvested Class A common stock, restricted stock units and Focus LLC common units, restricted common units and
incentive units as calculated using the treasury stock method.
Period July 30,
2018 through
Year Ended
Year Ended
December 31, 2018 December 31, 2019 December 31, 2020
Diluted income (loss) per share:
Net income (loss) attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . . $
(590) $
(12,872)
$
28,045
Weighted average shares of Class A
common stock outstanding . . . . . . . . . .
Effect of dilutive stock options . . . . . . . .
Effect of dilutive unvested Class A
common stock . . . . . . . . . . . . . . . . . . . .
Effect of dilutive restricted stock units . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income (loss) per share . . . . . . . . $
43,122,782
—
46,792,389
—
48,678,584
77,302
—
—
43,122,782
(0.01) $
—
—
46,792,389
(0.28)
23,822
16,905
48,796,613
0.57
$
Diluted loss per share for the period July 30, 2018 through December 31, 2018 excludes incremental shares of
52,555 related to time-based stock options and incremental shares of 49,994 related to unvested Class A common stock,
since the effect would be antidilutive. Diluted loss per share for the period July 30, 2018 through December 31, 2018
also excludes shares related to 155,000 market-based stock options that vest on the fifth anniversary of the pricing of the
IPO if the volume weighted average per share price for any ninety calendar day period within such five year period
immediately following the pricing of the IPO reaches at least $100. Such market-based criteria were not met at
December 31, 2018.
Diluted loss per share for the year ended December 31, 2019 excludes incremental shares of 373 related to
time-based stock options and incremental shares of 20,055 related to unvested Class A common, since the effect would
be antidilutive. Diluted loss per share for the year ended December 31, 2019 also excludes shares related to 155,000
market-based stock options that vest on the fifth anniversary of the pricing of the IPO if the volume weighted average
per share price for any ninety calendar day period within such five year period immediately following the pricing of the
IPO reaches at least $100. Such market-based criteria were not met at December 31, 2019.
Diluted income per share for the year ended December 31, 2020 excludes shares related to 155,000 market-
based stock options that vest on the fifth anniversary of the pricing of the IPO if the volume weighted average per share
price for any ninety calendar day period within such five year period immediately following the pricing of the IPO
reaches at least $100. Such market-based criteria were not met at December 31, 2020.
Focus LLC vested common units and vested incentive units may be exchanged for Class A common stock,
subject to certain limitations (see Note 11). In computing the dilutive effect, if any, that the exchange would have on net
income (loss) per share, net income (loss) attributable to Class A common shareholders would be adjusted due to the
elimination of the non-controlling interests (including any associated tax impact). For the years ended December 31,
2018, 2019 and 2020, such exchange is not reflected in diluted income (loss) per share as the assumed exchange is not
dilutive.
F-21
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
5. ACQUISITIONS
Business Acquisitions
The purchase price associated with business acquisitions and the allocation thereof during the years ended
December 31, 2018, 2019 and 2020, is summarized as follows:
Number of business acquisitions closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration:
2018
2019
2020
19
31
21
Cash and option premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 408,478 $ 507,498 $ 327,722
Cash due subsequent to closing at net present value and working capital
adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair market value of Focus LLC common units issued . . . . . . . . . . . . . . . . . .
Fair market value of Class A common stock issued . . . . . . . . . . . . . . . . . . . . .
Fair market value of estimated contingent consideration . . . . . . . . . . . . . . . . .
(174)
—
—
46,918
Total consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653,615 $ 594,620 $ 374,466
Allocation of purchase price:
39,134
51,456
112,461
42,086
4,341
—
—
82,781
Total tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,216
(31,680)
215,686
7,774
160,341
1,129
Total allocated consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 653,615 $ 594,620 $ 374,466
50,761 $
(53,394)
349,447
17,284
229,799
723
(34,411)
294,785
30,080
347,496
848
14,817 $
Management believes approximately $304,984 of tax goodwill and intangibles related to business acquisitions
completed during the year ended December 31, 2020 will be deductible for tax purposes over a 15 year period.
Additional tax goodwill may be deductible when estimated contingent consideration is earned and paid.
The accompanying consolidated statement of operations for the year ended December 31, 2020 includes
revenue and income from operations for business acquisitions that are new subsidiary partner firms from the date they
were acquired of $21,745 and $2,569, respectively.
Asset Acquisitions
The Company also separately purchases customer relationships and other intangible assets. These purchases are
accounted for as asset acquisitions as they do not qualify as business acquisitions pursuant to ASC Topic 805, Business
Combinations. The Company completed six, three and four asset acquisitions during the years ended December 31,
2018, 2019 and 2020, respectively. Total purchase consideration, inclusive of transaction costs, for asset acquisitions
during the year ended December 31, 2018 was $4,577 in cash and installment payments. Total purchase consideration,
inclusive of transaction costs, for asset acquisitions during the year ended December 31, 2019 was $850 in cash. Total
purchase consideration, inclusive of transaction costs, for asset acquisitions during the year ended December 31, 2020
was $26,159 in cash. Certain asset acquisitions include contingent consideration provisions. The Company records the
contingent consideration as additional purchase consideration when the outcome of the contingency is determinable.
During the years ended December 31, 2018, 2019 and 2020, the Company paid $2,007, $3,452 and $2,451, respectively,
of additional purchase price consideration related to asset acquisitions.
F-22
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Intangible assets acquired in asset acquisitions for the years ended December 31, 2018, 2019 and 2020 were as
follows:
2018
2019
2020
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,352 $ 808 $ 24,851
—
Management contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,308
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,577 $ 850 $ 26,159
—
225
12
30
The weighted-average useful life of intangibles acquired during the years ended December 31, 2018, 2019 and
2020 through business acquisitions and asset acquisitions are as follows:
Management contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average useful life of all intangibles acquired . . . . . . . . . . .
20
10
5
11
2018
2019
2020
18
9
5
9
18
9
5
9
From January 1, 2021 to February 19, 2021, the Company completed a wealth management business
acquisition for cash consideration of $2,029, plus contingent consideration.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the change in the goodwill balances for the years ended December 31, 2018,
2019 and 2020:
Balance beginning of period:
2018
2019
2020
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 538,113 $ 883,119 $ 1,112,855
(22,624)
Cumulative impairment losses . . . . . . . . . . . . . . . . . . .
1,090,231
160,341
4,987
165,328
Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(22,624)
515,489
347,496
(2,490)
345,006
(22,624)
860,495
229,799
(63)
229,736
Balance end of period:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative impairment losses . . . . . . . . . . . . . . . . . . .
883,119
(22,624)
1,278,183
(22,624)
$ 860,495 $ 1,090,231 $ 1,255,559
1,112,855
(22,624)
There were no goodwill impairment losses during the years ended December 31, 2018, 2019 and 2020.
F-23
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The following table summarizes the amortizing acquired intangible assets at December 31, 2019:
Gross Carry Accumulated
Amount
Amortization
Net Book
Value
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,362,104 $ (471,361) $ 890,743
110,576
Management contracts . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired intangibles . . . . . . . . . . . . . . . . . . . . . .
2,137
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,517,725 $ (514,269) $ 1,003,456
(39,888)
(3,020)
150,464
5,157
The following table summarizes the amortizing acquired intangible assets at December 31, 2020:
Gross Carry Accumulated Net Book
Amount
Amortization
Value
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,610,971 $ (612,037) $ 998,934
110,645
Management contracts . . . . . . . . . . . . . . . . . . . . . . . . .
Other acquired intangibles . . . . . . . . . . . . . . . . . . . . . .
3,888
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,777,230 $ (663,763) $ 1,113,467
158,526
7,733
(47,881)
(3,845)
Management contracts and other acquired intangibles are amortized on a straight-line basis over their estimated
useful lives ranging from 2 to 20 years. Customer relationships are amortized on a straight-line basis over their estimated
useful lives of 4 to 10 years.
Estimated amortization expense for each of the next five years is as follows:
Years Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 166,178
159,974
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
152,088
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,567
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126,701
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
7. FIXED ASSETS
Fixed assets consist of the following at December 31, 2019 and 2020:
Computers, software development and equipment . . . . . . . . . . . . . . . . . . $ 34,462 $ 41,219
44,865
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,339
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105,423
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(56,214)
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,634 $ 49,209
36,699
16,805
87,966
(46,332)
2019
2020
F-24
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
8. FAIR VALUE MEASUREMENTS
ASC Topic 820, Fair Value Measurement establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs reflect the assumptions market participants would use in
pricing the asset or liability, developed based on market data obtained from sources independent of the Company.
Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in
pricing the asset or liability, developed based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three
broad levels, as follows:
Level 1—Unadjusted price quotations in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, or other inputs that are observable or can be corroborated by observable market data for substantially
the full term of the assets or liabilities.
Level 3—Significant unobservable inputs that are not corroborated by market data.
The implied fair value of the Company’s First Lien Term Loan (as defined below) based on Level 2 inputs is as
follows as of December 31, 2019 and 2020:
First Lien Term Loan . . . . . . . . . . . . . $ 1,139,188 $ 1,146,307 $ 1,127,622 $ 1,120,574
December 31, 2019
December 31, 2020
Stated
Value
Fair
Value
Stated
Value
Fair
Value
Derivatives
At December 31, 2020, the fair value of the Company’s $850,000 notional amount interest rate swap
agreements was $(10,400). The fair value was based on Level 2 inputs which included the relevant interest rate forward
curves.
Business acquisitions
For business acquisitions, the Company recognizes the fair value of goodwill and other acquired intangible
assets, and estimated contingent consideration at the acquisition date as part of purchase price. This fair value
measurement is based on unobservable (Level 3) inputs.
F-25
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The following table represents changes in the fair value of estimated contingent consideration for business
acquisitions for the years ended December 31, 2019 and 2020:
2019
2020
Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,905 $ 183,568
46,918
(80,803)
Additions to estimated contingent consideration . . . . . . . . . . . . . . . . .
Payments of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash changes in fair value of estimated contingent
82,781
(36,862)
consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,197
790
Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183,568 $ 169,670
38,797
(53)
Estimated contingent consideration is included in other liabilities in the accompanying consolidated balance
sheets.
During the years ended December 31, 2019 and 2020, the Company paid cash of $36,862 and $80,803,
respectively, as contingent consideration associated with business acquisitions. In addition, during the years ended
December 31, 2019 and 2020, the Company paid cash of $3,452 and $2,451, respectively, as contingent consideration
associated with asset acquisitions.
In determining fair value of the estimated contingent consideration, the acquired business’s future performance
is estimated using financial projections for the acquired businesses. These financial projections, as well as alternative
scenarios of financial performance, are measured against the performance targets specified in each respective acquisition
agreement. In addition, discount rates are established based on the cost of debt and the cost of equity. The Company uses
the Monte Carlo Simulation Model to determine the fair value of the Company’s estimated contingent consideration.
The significant unobservable inputs used in the fair value measurement of the Company’s estimated contingent
consideration are the forecasted growth rates over the measurement period and discount rates. Significant increases or
decreases in the Company’s forecasted growth rates over the measurement period or discount rates would result in a
higher or lower fair value measurement.
Inputs used in the fair value measurement of estimated contingent consideration at December 31, 2019 and
2020 are summarized below:
183,568 Monte Carlo Simulation Model Forecasted growth rates
Quantitative Information About Level 3
Fair Value Measurements
Valuation
Techniques
Unobservable
Inputs
Discount rates
Quantitative Information About Level 3
Fair Value Measurements
Valuation
Techniques
Unobservable
Inputs
Fair Value at
December 31, 2019
$
Fair Value at
December 31, 2020
$
169,670 Monte Carlo Simulation Model Forecasted growth rates
Discount rates
F-26
Ranges
(10.7)% - 51.1 %
11.0% - 17.0 %
Ranges
(33.6)% - 20.9 %
10.0% - 18.0 %
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
9. CREDIT FACILITY
As of December 31, 2020, Focus LLC’s credit facility (the “Credit Facility”) consisted of a $1,128,000 first lien
term loan (the “First Lien Term Loan”) and a $650,000 first lien revolving credit facility (the “First Lien Revolver”).
In January 2020, Focus LLC amended its First Lien Term Loan to reduce the interest rates. As of December 31,
2020, the First Lien Term Loan bears interest (at Focus LLC’s option) at: (i) the London InterBank Offered Rate
(“LIBOR”) plus a margin of 2.00% or (ii) the lender’s Base Rate (as defined in the Credit Facility) plus a margin of
1.00%. As a result of the amendment, Focus LLC paid $634 in debt financing costs and recorded a loss on
extinguishment of borrowings of $6,094, representing the write off of $5,306 and $788 in deferred financing costs and
unamortized discount related to the First Lien Term Loan, respectively.
In January 2021, Focus LLC amended and expanded its First Lien Term Loan by $500,000 and incurred $2,700
in debt financing costs. The debt was issued at a discount of 0.125% or $625 which is being amortized to interest
expense over the remaining term of the First Lien Term Loan. The required quarterly installment repayments of $2,891
were increased to $4,173. The First Lien Term Loan has a maturity date of July 2024.
The First Lien Revolver has a maturity date of July 2023. Up to $30,000 of the First Lien Revolver is available
for the issuance of letters of credit, subject to certain limitations. The First Lien Revolver bears interest at LIBOR plus a
margin of 2.00% with step downs to 1.75%, 1.50% and 1.25% or the lender’s Base Rate plus a margin of 1.00% with
step downs to 0.75%, 0.50% and 0.25%, based on achievement of a specified First Lien Leverage Ratio. The First Lien
Revolver unused commitment fee is 0.50% with step downs to 0.375% and 0.25% based on achievement of a specified
First Lien Leverage Ratio.
Focus LLC’s obligations under the Credit Facility are collateralized by the majority of Focus LLC’s assets. The
Credit Facility contains various customary covenants, including, but not limited to: (i) incurring additional indebtedness
or guarantees, (ii) creating liens or other encumbrances on property or granting negative pledges, (iii) entering into a
merger or similar transaction, (iv) selling or transferring certain property and (v) declaring dividends or making other
restricted payments.
Focus LLC is required to maintain a First Lien Leverage Ratio (as defined in the Credit Facility) of not more
than 6.25:1.00 as of the last day of each fiscal quarter. At December 31, 2020, Focus LLC's First Lien Leverage Ratio
was 3.89:1.00, which satisfied the maximum ratio of 6.25:1.00. First Lien Leverage Ratio means the ratio of amounts
outstanding under the First Lien Term Loan and First Lien Revolver plus other outstanding debt obligations secured by a
lien on the assets of Focus LLC (excluding letters of credit other than unpaid drawings thereunder) minus unrestricted
cash and cash equivalents to Consolidated EBITDA (as defined in the Credit Facility). Consolidated EBITDA for
purposes of the Credit Facility was $370,494 at December 31, 2020. Focus LLC is also subject on an annual basis to
contingent principal payments based on an excess cash flow calculation (as defined in the Credit Facility) for any fiscal
year if the First Lien Leverage Ratio exceeds 3.75:1.00. No contingent principal payments were required to be made
during the years ended December 31, 2019 and 2020. Based on the excess cash flow calculation for the year ended
December 31, 2020, no contingent principal payments are required to be made during the year ending December 31,
2021.
The Company defers and amortizes its debt financing costs over the respective terms of the First Lien Term
Loan and First Lien Revolver. The debt financing costs related to the First Lien Term Loan are recorded as a reduction
of the carrying amount of the First Lien Term Loan in the consolidated balance sheets. The debt financing costs related
to the First Lien Revolver are recorded in debt financing costs-net in the consolidated balance sheets.
F-27
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The following is a reconciliation of principal amounts outstanding under the Credit Facility to borrowings under
the Credit Facility recorded in the consolidated balance sheets at December 31, 2019 and 2020:
First Lien Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,139,188 $ 1,127,622
380,000
First Lien Revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
(503)
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,272,999 $ 1,507,119
140,000
(5,389)
(800)
2019
2020
At December 31, 2019 and 2020, unamortized debt financing costs associated with the First Lien Revolver of
$9,645 and $6,950, respectively, were recorded in debt financing costs-net in the consolidated balance sheets.
Weighted - average interest rates for borrowings were approximately 5% for the year ended December 31, 2019
and 3% for the year ended December 31, 2020.
As of December 31, 2019 and 2020, the First Lien Revolver available unused commitment line was $502,962
and $262,413 respectively.
As of December 31, 2019 and 2020, Focus LLC was contingently obligated for letters of credit in the amount of
$7,038 and $7,587, respectively, each bearing interest at an annual rate of approximately 2%.
In connection with a January 2018 amendment to the First Lien Term Loan to reduce its interest rate and the
repayment of the $207,000 Second Lien Term Loan in July 2018, the Company recognized an aggregate loss on
extinguishment of borrowings of $21,071 during the year ended December 31, 2018.
10. DERIVATIVES
In March 2020, the Company entered into a 4 year floating to fixed interest rate swap with a notional amount of
$400,000. The interest rate swap effectively fixes the variable interest rate applicable to $400,000 of borrowings
outstanding on the First Lien Term Loan. The terms of the interest rate swap provide that the Company pays interest to
the counterparty each month at a rate of 0.713% and receives interest from the counterparty each month at the 1 month
USD LIBOR rate, subject to a 0% floor. In April 2020, the Company entered into two additional 4 year floating to fixed
interest rate swap agreements with notional amounts of $250,000 and $200,000, respectively. These swaps effectively
fix the variable interest rate applicable to $450,000 of borrowings outstanding on the First Lien Term Loan. The terms of
these swaps provide that the Company pays interest to the counterparties each month at a rate of 0.537% and 0.5315%,
respectively, and receives interest from the counterparties each month at the 1 month USD LIBOR rate, subject to a 0%
floor. The Company designated these swaps as cash flow hedges of the Company’s exposure to the variability of the
payment of interest on these portions of its First Lien Term Loan borrowings.
At December 31, 2020, the fair value of the interest rate swaps was $(10,400), which is included in other
liabilities in the accompanying consolidated balance sheet. The interest rate swaps continue to be effective hedges, and
as such, the offsetting adjustment to the fair value is recorded in accumulated other comprehensive loss, net of tax of
$1,804.
11. EQUITY
The following is a summary of the capital stock of the Company:
F-28
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Class A Common Stock
Voting Rights
Holders of shares of the Company’s Class A common stock are entitled to one vote per share held of record on
all matters to be voted upon by the shareholders. The holders of Class A common stock do not have cumulative voting
rights in the election of directors.
Dividend Rights
Holders of shares of the Company’s Class A common stock are entitled to ratably receive dividends when and
if declared by the Company’s Board of Directors (the “Board”) out of funds legally available for that purpose, subject to
any statutory or contractual restrictions on the payment of dividends and to any prior rights and preferences that may be
applicable to any outstanding preferred stock.
Liquidation Rights
Upon the Company’s liquidation, dissolution, distribution of assets or other winding up, the holders of Class A
common stock are entitled to receive ratably the assets available for distribution to the shareholders after payment of
liabilities and the liquidation preference of any of the Company’s outstanding shares of preferred stock.
Other Matters
The shares of the Company’s Class A common stock have no preemptive or conversion rights and are not
subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to
the Class A common stock. All outstanding shares of the Company’s Class A common stock are fully paid and
non - assessable.
Class B Common Stock
Voting Rights
Holders of shares of the Company’s Class B common stock are entitled to one vote per share held of record on
all matters to be voted upon by the shareholders. Holders of shares of the Company’s Class A common stock and
Class B common stock vote together as a single class on all matters presented to the Company’s shareholders for their
vote or approval, except the amendment of certain provisions of the Company’s certificate of incorporation that would
alter or change the powers, preferences or special rights of the Class B common stock so as to affect them adversely
must be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment,
voting as a single class, or as otherwise required by applicable law.
Dividend and Liquidation Rights
Holders of the Company’s Class B common stock do not have any right to receive dividends, unless the
dividend consists of shares of the Company’s Class B common stock or of rights, options, warrants or other securities
convertible or exercisable into or exchangeable for shares of Class B common stock paid proportionally with respect to
each outstanding share of our Class B common stock and a dividend consisting of shares of Class A common stock or of
rights, options, warrants or other securities convertible or exercisable into or exchangeable for shares of Class A
common stock on equivalent terms is simultaneously paid to the holders of Class A common stock. Holders of the
F-29
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Company’s Class B common stock do not have any right to receive a distribution upon a liquidation, dissolution or
winding up of the Company.
Preferred Stock
The Company’s certificate of incorporation authorizes the Board, subject to any limitations prescribed by law,
without further shareholder approval, to establish and to issue from time to time one or more classes or series of
preferred stock, par value $0.01 per share, covering up to an aggregate of 500,000,000 shares of preferred stock. Each
class or series of preferred stock will cover the number of shares and will have the powers, preferences, rights,
qualifications, limitations and restrictions determined by the Board, which may include, among others, dividend rights,
liquidation preferences, voting rights, conversion rights, preemptive rights and redemption rights. Except as provided by
law or in a preferred stock designation, the holders of preferred stock will not be entitled to vote at or receive notice of
any meeting of shareholders.
2018 Omnibus Incentive Plan
On July 30, 2018, the Board adopted the Focus Financial Partners Inc. 2018 Omnibus Incentive Plan (the
“Omnibus Plan”) for the employees, consultants and the directors of the Company and its affiliates who perform services
for it. The Omnibus Plan provides for potential grants of the following awards with respect to shares of the Company’s
Class A common stock, to the extent applicable: (i) incentive stock options qualified as such under U.S. federal income
tax laws; (ii) non-qualified stock options or any other form of stock options; (iii) restricted stock awards; (iv) phantom
stock awards; (v) restricted stock units; (vi) bonus stock; (vii) performance awards; (viii) annual cash incentive awards;
(ix) any of the foregoing award types (other than incentive stock options) as awards related to Focus LLC’s units; and
(x) incentive units in Focus LLC.
The maximum aggregate number of shares of the Company’s Class A common stock that may be issued
pursuant to awards under the Omnibus Plan shall not exceed 6,000,000 shares (including such number of Focus LLC’s
units or other securities which can be exchanged or converted into shares of Class A common stock). The reserve pool is
subject to adjustment due to recapitalization or reorganization, or related to forfeitures or the expiration of awards, as
provided under the Omnibus Plan. If the shares or units subject to any award are not issued or transferred, or cease to be
issuable or transferable for any reason, including (but not exclusively) because shares or units are withheld or
surrendered in payment of taxes or any exercise or purchase price relating to an award or because an award is forfeited,
terminated, expires unexercised, is settled in cash or is otherwise terminated without a delivery of shares or units, those
shares or units will again be available for issue, transfer or exercise pursuant to awards under the Omnibus Plan to the
extent allowable by law. The Omnibus Plan also contains a provision that will add an additional number of shares of
Class A common stock equal to the lesser of (a) 3,000,000 shares, (b) 5% of the outstanding (vested and unvested)
shares of Class A common stock and Focus LLC units on the last day of the previous year, and (c) an amount determined
by the Board, each year between 2019 and 2028.
In connection with the IPO and Reorganization Transactions described in Note 3, the Company granted: (i)
fully vested non-compensatory stock options to purchase an aggregate of 386,832 shares of Class A common stock, (ii)
compensatory stock options to purchase an aggregate of 348,577 shares of Class A common stock which vest in three
equal installments on December 31, 2018, 2019 and 2020, (iii) 178,608 shares of unvested Class A common stock
valued at $33.00 per share which vest in three equal installments on December 31, 2018, 2019 and 2020 and (iv) market-
based stock options to purchase an aggregate of 155,000 shares of Class A common stock that vest on the fifth
anniversary of the pricing of the IPO if the volume weighted average per share price for any ninety calendar day period
within such five year period immediately following the pricing of the IPO reaches at least $100.
F-30
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The following table provides information relating to the status of, and changes in, the Company’s stock options
granted during years ended December 31, 2018, 2019 and 2020:
Stock
Options
Weighted Average
Outstanding—January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,276
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,401,276
503,014
Vested—December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
558,021
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(25,575)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(100,756)
1,832,966
Outstanding—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . .
698,805
Vested—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
286,081
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(251,913)
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(21,817)
1,845,317
Outstanding—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
785,257
Vested—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise Price
—
31.34
—
—
31.34
33.00
28.19
32.75
30.31
30.42
32.01
44.71
30.97
29.27
32.57
31.36
For the purpose of calculating equity-based compensation expense for time-based stock option awards, the
grant date fair value was determined using the Black-Scholes model with the following weighted average assumptions
for the years ended December 31, 2018, 2019 and 2020:
2018
2019
2020
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . .
Weighted average grant date fair value . . . . . . $ 12.56
7.3 years
32 %
2.81 %
— %
6.2 years
29 %
1.76 %
— %
6.3 years
34 %
0.54 %
— %
$ 9.03
$ 15.37
Stock options generally vest ratably over a four-year period commencing on the grant date.
For the purpose of calculating equity-based compensation expense for market condition-based awards granted
during the year ended December 31, 2018, the grant date fair value was determined through the application of the Monte
Carlo Simulation Model with the following weighted average assumptions:
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5.0 years
30 %
2.78 %
— %
3.97
F-31
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The following table provides information relating to the status of, and changes in, the Company’s unvested
Class A common stock during the years ended December 31, 2018, 2019 and 2020:
Weighted
Average
Unvested Class A
Grant Date
Common Stock Fair Value
Outstanding—January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . .
— $
178,608
—
(59,530)
119,078
—
(12,500)
(53,285)
53,293
—
(834)
(52,459)
—
—
33.00
—
33.00
33.00
—
33.00
33.00
33.00
—
33.00
33.00
—
The following table provides information relating to the status of, and changes in, the Company’s restricted
stock units granted during the year ended December 31, 2019 and 2020:
Outstanding—January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . .
Restricted
Stock
Units
Weighted
Average
Grant Date
Fair Value
— $
98,061
—
—
98,061
73,310
(7,707)
(22,569)
141,095
—
27.90
—
—
27.90
44.71
27.90
27.90
36.63
Restricted stock units generally vest ratably over a four-year period commencing on the grant date.
The Company recognized $7,725 of non-cash equity compensation expense in relation to stock options and
unvested Class A common stock during the year ended December 31, 2018 inclusive of a one-time non-cash equity
compensation expense of $4,504 in connection with the IPO and Reorganization Transactions.
F-32
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
The Company recognized $4,247 and $5,485 of non-cash equity compensation expense in relation to stock
options, unvested Class A common stock and restricted stock units during the years ended December 31, 2019 and 2020,
respectively.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested stock options at
December 31, 2020 was $9,711 and is expected to be recognized over a weighted-average period of 3.1 years.
Total unrecognized expense, adjusted for estimated forfeitures, related to restricted stock units at December 31,
2020 was $4,853, and is expected to be recognized over a period of 3.6 years.
Focus LLC Common Units
As of December 31, 2020, Focus LLC had 20,661,595 common units that had a corresponding share of the
Company’s Class B common stock outstanding.
Each common unit holder and incentive unitholder of Focus LLC (other than the Company), subject to certain
limitations, has the right to cause Focus LLC to redeem all or a portion of their vested common units and vested
incentive units (“Exchange Right”). Upon an exercise of an Exchange Right with respect to vested incentive units, such
incentive units will first be converted into a number of common units that takes into account the then - current value of
the common units and such incentive units’ aggregate hurdle amount. Upon an exercise of an Exchange Right with
respect to vested common units, and immediately after the conversion of vested incentive units into common units,
Focus LLC will acquire each tendered common unit for, at its election, (i) one share of Class A common stock, subject
to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions, or (ii) an
equivalent amount of cash. In addition, in connection with any redemption of vested common units (other than common
units received upon a conversion of incentive units as described in this paragraph), the corresponding shares of Class B
common stock will be cancelled. Alternatively, upon the exercise of any Exchange Right, the Company (instead of
Focus LLC) will have the right to acquire each tendered common unit (and corresponding share of Class B common
stock, as applicable) from the exchanging unitholder for, at its election, (i) one share of Class A common stock, subject
to conversion rate adjustments for stock splits, stock dividends, reclassification and other similar transactions, or (ii) an
equivalent amount of cash. The Exchange Rights are subject to certain limitations and restrictions intended to ensure that
Focus LLC will continue to be treated as a partnership for U.S. federal income tax purposes.
In March 2020, the Company issued an aggregate of 383,001 shares of Class A common stock and retired
316,370 shares of Class B common stock and 162,871 incentive units in Focus LLC and acquired 383,001 common units
in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
In June 2020, the Company issued an aggregate of 282,347 shares of Class A common stock and retired
263,276 shares of Class B common stock and 35,000 incentive units in Focus LLC and acquired 282,347 common units
in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
In September 2020, the Company issued an aggregate of 2,458,858 shares of Class A common stock and retired
600,722 shares of Class B common stock and 2,706,350 incentive units in Focus LLC and acquired 2,458,858 common
units in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
In November 2020, the Company issued an aggregate of 348,094 shares of Class A common stock and retired
233,786 shares of Class B common stock and 249,087 incentive units in Focus LLC and acquired 348,094 common units
in Focus LLC, in each case as part of the regular quarterly exchanges offered to holders of units in Focus LLC.
F-33
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Focus LLC Restricted Common Units
During the year ended December 31, 2020, Focus LLC issued 73,276 restricted common units with a grant date
fair value of $44.71 per unit that vest ratably over a four year period commencing on the grant date.
The Company has recorded $54 of non-cash equity compensation expense for restricted common units during
the year ended December 31, 2020.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested incentive units at
December 31, 2020, was $3,069 and is expected to be recognized over a weighted-average period of 3.9 years.
Focus LLC Incentive Units
Focus LLC’s Operating Agreement provides for the granting of incentive units. Grants are designed as profits
interests, which entitle a holder to receive distributions in excess of a specific hurdle amount, subject to the provisions of
Focus LLC’s Operating Agreement. Incentive unit vesting provisions are either time-based or market-based.
The Company uses the Black-Scholes option-pricing model to determine the fair value of time-based incentive
units. The determination of the fair value using the Black-Scholes option-pricing model is affected by the Company’s
estimated common unit price, as well as by assumptions regarding a number of complex and subjective variables. These
variables include the Company’s expected unit price volatility over the term of the incentive unit, expected term, risk-
free interest rates and expected dividend yield.
The estimated grant-date fair values of the 2018, 2019 and 2020 time-based incentive unit grants were
calculated based on the following weighted-average assumptions:
4.0 years
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected unit price volatility . . . . . . . . . . . . . . . . . . . . . .
31 %
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.53 %
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . .
— %
Weighted average grant date fair value . . . . . . . . . . . . . . $ 7.71
2018
2019
4.0 years
29 %
1.64 %
— %
2020
5.0 years
35 %
0.39 %
— %
$ 7.15
$ 13.72
Incentive units generally vest ratably over a four-year period commencing on the grant date.
In connection with IPO and Reorganization Transactions described in Note 3, Focus LLC (i) granted 3,845,000
market-based incentive units with a hurdle rate of $33.00 that vest on the fifth anniversary of the pricing of the IPO if the
average per share price for any ninety calendar day period within such five year period immediately following the
pricing of the IPO reaches at least $100, (ii) amended, effective on pricing of the IPO, 3,000,000 incentive units with a
hurdle rate of $21.00 such that the first fifty percent vest if the Company’s weighted average price per share is at least
$35.00 for the first ninety days following the pricing of the IPO. Following that ninety day period, all incentive units that
remain unvested will be eligible to vest on the three year anniversary of the IPO if the weighted average per share price
for the ninety day period immediately preceding the third anniversary of the IPO is: (i) less than $42.00, then no
remaining unvested incentive units will vest; (ii) greater than $63.00, then all remaining unvested incentive units will
become vested; and (iii) if between $42.00 and $63.00, then (x) fifty percent of the remaining unvested incentive units
will vest and (y) the remaining fifty percent of the remaining unvested incentive units will vest linearly based on where
the price falls within the range of $42.00 and $63.00. The weighted average price of the Company’s Class A common
stock for the ninety days following the pricing of the IPO exceeded the $35.00 threshold, accordingly, the first fifty
percent or 1,500,000 incentive units vested in October 2018.
F-34
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
For the purpose of calculating equity-based compensation expense for these market condition-based incentive
units, the grant date fair value during the year ended December 31, 2018 was determined through the application of the
Monte Carlo Simulation Model with the following weighted average assumptions:
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected unit price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average grant date fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.05
4.1 years
30 %
2.74 %
— %
The Company has recorded $36,743, $14,082 and $16,746 of non-cash equity compensation expense for
incentive units during the years ended December 31, 2018, 2019 and 2020, respectively.
Non-cash equity compensation expense for the year ended December 31, 2018 includes one-time non-cash
equity compensation expense of $14,756 related to certain time-based incentive units that were modified and vested or
exchanged for Focus LLC common units in connection with the IPO and Reorganization Transactions described in
Note 3.
Total unrecognized expense, adjusted for estimated forfeitures, related to unvested incentive units at
December 31, 2020, was $39,488 and is expected to be recognized over a weighted-average period of 2.7 years.
The following table provides information relating to the status of, and changes in, Focus LLC incentive units
granted during the years ended December 31, 2018, 2019 and 2020:
Incentive Units
Hurdle Price
Weighted Average
Outstanding—January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . .
Vested—December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . .
Vested—December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exchanged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,229,039 $
6,426,715
(311,625)
(2,746,655)
18,597,474
9,910,399
2,106,131
(618,117)
(331,038)
19,754,450
10,288,263
855,006
(3,153,308)
(221,651)
Outstanding—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . 17,234,497
8,509,652
Vested—December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.53
30.73
22.26
15.79
20.63
14.19
28.01
11.24
27.80
21.59
15.37
44.21
12.51
24.67
24.34
18.31
F-35
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Incentive units outstanding and vested at December 31, 2020 were as follows:
Hurdle Rates
$1.42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26.26. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.90. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.50. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.48. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33.00. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36.64. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44.71. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested
Incentive
Units
Number
Outstanding
421
798
386
1,081
841,706
520,000
558,611
17,848
45,191
22,500
570,965
421
798
386
1,081
1,323,708 1,323,708
841,706
520,000
558,611
17,848
45,191
22,500
570,965
3,548,129 2,048,129
740,200
1,037,304
393,621
524,828
—
18,750
14,742
29,484
550,640
2,051,131
789,105
1,566,650
—
30,000
60,000
3,670,000
10,000
30,000
—
825,006
8,509,652
17,234,497
Focus LLC Convertible Preferred Units
In connection with the Reorganization Transactions described in Note 3, on July 30, 2018, outstanding
Convertible Preferred Units were converted into common units on a one-for-one basis.
Cash compensation expense
In connection with the payment of cash of 25% in excess of the Gross IPO Price to Existing Owners who were
not accredited investors and the payment of cash of 65% of the fair market value of non-compensatory stock options to
Mandatorily Exchanging Owners in the Reorganization Transactions described in Note 3, the Company recognized a
one-time cash compensation expense of $5,926 during the year ended December 31, 2018.
12. INCOME TAXES
In connection with the IPO and Reorganization Transactions, Focus Inc. became a holding company whose
most significant asset is a membership interest in Focus LLC, and, as a result, Focus Inc. became subject to U.S. federal,
state and local income taxes on Focus Inc.’s allocable portion of taxable income from Focus LLC. Focus LLC is treated
as a partnership for U.S. federal income tax purposes. Accordingly, Focus LLC is generally not and has not been subject
to U.S. federal and certain state income taxes at the entity level, although it has been subject to the New York City
F-36
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Unincorporated Business Tax, and certain of its subsidiaries have been subject to U.S. federal, state and local or foreign
income taxes. Instead, for U.S. federal and certain state income tax purposes, the income, deductions, losses and credits
of Focus LLC are passed through to its unitholders, which after the IPO includes Focus Inc. Focus LLC has historically
made tax distribution payments in accordance with its Third Amended and Restated Operating Agreement, which was
replaced by the Operating Agreement on July 30, 2018, and Focus Inc. intends to cause Focus LLC to continue to make
tax distribution payments, to the extent of available cash, in accordance with the Operating Agreement.
Income tax expense for year ended December 31, 2020 is primarily related to U.S. federal, state and local
income taxes imposed on Focus Inc.'s allocable portion of taxable income from Focus LLC. The allocable portion of
taxable income primarily differs from the net income (loss) attributable to Focus Inc. due to permanent differences such
as non-deductible equity-based compensation expense of Focus LLC.
The following represents the U.S. and foreign components of income (loss) before income tax for the years
ended December 31, 2018, 2019 and 2020:
Income (loss) before income tax:
2018
2019
2020
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (41,636) $ (7,828) $ 65,472
4,153
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income (loss) before income tax . . . . . . . . . . . . . . . . . . $ (31,637) $ (4,976) $ 69,625
2,852
9,999
The following represents the U.S. and foreign components of income tax expense for the years ended
December 31, 2018, 2019 and 2020:
Current provision:
2018
2019
2020
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,511 $ 1,201 $ 10,363
5,355
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,169
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,887
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,579
2,419
5,199
1,080
2,132
4,723
Deferred provision (benefit):
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,854
580
(1,661)
773
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,450 $ 7,049 $ 20,660
2,293
435
(878)
1,850
3,932
954
(159)
4,727
F-37
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
At December 31, 2019 and 2020, tax effects of book/tax temporary differences give rise to deferred tax assets
(liabilities) as follows:
Deferred tax assets:
Investment in Focus LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,415 $ 106,553
Deferred rent and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,444
107,997
Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,644
76,059
2019
2020
Deferred tax liabilities:
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(27,084)
(359)
(27,443)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,605 $ 80,554
(13,184)
(270)
(13,454)
At December 31, 2019, $12,848 of deferred tax liabilities were recorded as other liabilities in the consolidated
balance sheets. At December 31, 2020, $26,735 of deferred tax liabilities were recorded as other liabilities in the
consolidated balance sheets.
A reconciliation of the differences between the U.S. federal statutory tax rate and the effective tax rate for the
years ended December 31, 2018, 2019 and 2020 is as follows:
2018
21.0 %
U.S. federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income passed through to individual members . . . . . . . . . . . . . . . . (31.9)
(6.2)
Foreign income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5.8)
Non-cash equity compensation expense . . . . . . . . . . . . . . . . . . . . .
—
Impairment of equity method investment . . . . . . . . . . . . . . . . . . . .
(1.6)
Other non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.1)
State and local income taxes, net of U.S. federal tax benefit . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.7
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29.9)% (141.7) % 29.7 %
2019
21.0 % 21.0 %
(11.3)
(31.0)
(41.8)
(31.0)
(19.2)
(32.6)
4.2
(7.6)
3.6
3.5
—
0.9
7.0
1.3
2020
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. Based on this assessment, no valuation allowances were
recorded at December 31, 2019 and 2020, respectively.
The Company files tax returns in U.S. federal, local and state jurisdictions and certain of the Company’s
subsidiaries file income tax returns in foreign jurisdictions. The Company is no longer subject to income tax
examinations for years prior to 2017. In addition, open tax years related to local, state and foreign jurisdictions remain
subject to examination, but are not considered material to the Company’s consolidated financial position, results of
operations or cash flows. The Company is not aware of any tax position for which it is reasonably possible that the total
amount of unrecognized benefits will change materially in the next 12 months.
13. TAX RECEIVABLE AGREEMENTS
In connection with the Reorganization Transactions and the closing of the IPO, the Company entered into two
Tax Receivable Agreements ( the “Tax Receivable Agreement(s)”): one with certain entities affiliated with the Private
F-38
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Equity Investors and the other with certain other continuing and former owners of Focus LLC. In March 2020 the
Company entered into an additional Tax Receivable Agreement for Tax Receivable Agreement holders that join Focus
LLC as members after the closing of the IPO (the parties to the three agreements, collectively, the “TRA holders”). New
Focus LLC owners in the future may also become party to this additional Tax Receivable Agreement. The Tax
Receivable Agreements generally provide for the payment by the Company to each TRA holder of 85% of the net cash
savings, if any, in U.S. federal, state and local income and franchise tax that the Company actually realizes (computed
using simplifying assumptions to address the impact of state and local taxes) or is deemed to realize in certain
circumstances in connection with the Reorganization Transactions and in periods after the IPO or after entering into the
Tax Receivable Agreement, as applicable, as a result of certain increases in tax bases and certain tax benefits attributable
to imputed interest. The Company will retain the benefit of the remaining 15% of these cash savings.
The Company had a liability of $48,399 and $81,563 relating to its obligations under the Tax Receivable
Agreements as of December 31, 2019 and 2020, respectively. In February 2021, payments totaling $4,112 were made
under the Tax Receivable Agreements.
14. LEASES
The future minimum lease payments under operating leases in place as of December 31, 2020 were as follows:
Year ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,678
43,112
39,247
36,724
31,291
122,481
321,533
Less: present value discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(68,238)
Operating lease liabilities at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 253,295
Amount
The weighted average discount rate used to determine the Company’s operating lease liabilities was
approximately 7% at December 31, 2019 and 6% at December 31, 2020. The weighted average remaining lease term at
December 31, 2019 was approximately seven years and at December 31, 2020 was approximately eight years.
Other information pertaining to leases consists of the following:
Year Ended
Year Ended
December 31, 2019 December 31, 2020
Operating lease costs included in selling, general
and administrative expenses . . . . . . . . . . . . . . . . . . . $
Operating cash flows from operating leases . . . . . . . .
Operating lease assets obtained in exchange for
operating lease obligations . . . . . . . . . . . . . . . . . . . .
44,213
41,333
$
68,891
50,123
47,798
87,699
F-39
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
15. COMMITMENTS AND CONTINGENCIES
Credit Risk
The Company’s broker - dealer subsidiaries clear all transactions through clearing brokers on a fully disclosed
basis. Pursuant to the terms of the agreements between the Company’s broker - dealer subsidiaries and their clearing
brokers, the clearing brokers have the right to charge the Company’s broker - dealer subsidiaries for losses that result
from a counterparty’s failure to fulfill its contractual obligations. This right applies to all trades executed through its
clearing brokers, and therefore, the Company believes there is no maximum amount assignable to the right of the
clearing brokers. Accordingly, at December 31, 2019 and 2020, the Company had recorded no liabilities in connection
with this right.
In addition, the Company has the right to pursue collection or performance from the counterparties who do not
perform under their contractual obligations. The Company monitors the credit standing of the clearing brokers and
counterparties with which they conduct business.
The Company is exposed to credit risk for accounts receivable from clients. Such credit risk is limited to the
amount of accounts receivable. The Company is also exposed to credit risk for changes in the benchmark interest rate
(LIBOR or base rate) in connection with its Credit Facility. The Company intends to monitor the developments with
respect to the planned phasing out of LIBOR and work with its lenders to ensure such transition away from LIBOR will
have minimal impact on its financial condition, but can provide no assurances regarding the impact of the
discontinuation of LIBOR.
The Company maintains its cash in bank depository accounts, which, at times, may exceed federally insured
limits. The Company selects depository institutions based, in part, upon management’s review of the financial stability
of the institution. At December 31, 2019 and 2020, a significant portion of cash and cash equivalents were held at a
single institution.
Contingent Consideration Arrangements
As discussed in Notes 2 and 8, contingent consideration is payable in the form of cash, and in some cases,
equity. Since the contingent consideration to be paid is based on forecasted growth rates over the measurement period,
the Company cannot calculate the maximum contingent consideration that may be payable under these arrangements.
Legal and Regulatory Matters
In the ordinary course of business, the Company is involved in lawsuits and other claims. The Company has
insurance to cover certain losses that arise in such matters; however, this insurance may not be sufficient to cover these
losses. Management, after consultation with legal counsel, currently does not anticipate that the aggregate liability, if
any, arising out of any existing legal matters will have a material effect on the Company’s consolidated financial
position, results of operations or cash flows.
From time to time, the Company’s subsidiaries receive requests for information from governmental authorities
regarding business activities. The Company has cooperated and will continue to cooperate with all governmental
agencies. The Company continues to believe that the resolution of any governmental inquiry will not have a material
impact on the Company’s consolidated financial position, results of operations or cash flows.
F-40
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
Indemnifications
In the ordinary course of business, the Company enters into contracts pursuant to which it may agree to
indemnify third parties in certain circumstances. The terms of these indemnities vary from contract to contract and the
amount of indemnification liability, if any, cannot be determined.
Management believes that the likelihood of any liability arising under these indemnification provisions is
remote. Management cannot estimate any potential maximum exposure due to both the remoteness of any potential
claims and the fact that items that would be included within any such calculated claim would be beyond the control of
the Company. Consequently, no liability has been recorded in the consolidated balance sheets.
16. EMPLOYEE BENEFIT PLANS
The Company and its subsidiaries have defined contribution retirement plans, including 401(k) and profit-
sharing plans covering eligible employees. During the years ended December 31, 2018, 2019 and 2020, the amounts
recorded in expense relating to these plans were $8,329, $10,235 and $9,357, respectively, and are included in
compensation and related expenses in the consolidated statements of operations.
17. NET CAPITAL REQUIREMENTS
Certain of the Company’s regulated subsidiaries are subject to minimum net capital requirements. As of
December 31, 2019 and 2020, all regulated subsidiaries subject to minimum net capital requirements individually had
net capital in excess of minimum net capital requirements. As of December 31, 2019, these subsidiaries had aggregate
net capital of $14,142, which was $11,439 in excess of aggregate minimum net capital requirements of $2,703. As of
December 31, 2020, these subsidiaries had aggregate net capital of $12,253, which was $9,516 in excess of aggregate
minimum net capital requirements of $2,737.
18. CASH FLOW INFORMATION
Year Ended
December 31,
2019
2018
2020
Supplemental disclosures of cash flow information—cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,584 $ 57,344 $ 41,352
6,149 $ 7,775 $ 18,927
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental non-cash cash flow information:
Fair market value of estimated contingent consideration in connection with
acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,086 $ 82,781 $ 46,918
Fair market value of Focus LLC common units in connection with acquisitions
and contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,877 $
Fair market value of Class A common stock in connection with acquisitions . . . . $ 112,461 $
Purchase price installments related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,134 $
— $
— $
— $
—
—
—
19. RELATED PARTIES
The Company’s Chief Executive Officer, through an entity owned and controlled by him, owns a personal
aircraft that was acquired without Company resources that he uses for business travel. The Company reimburses the
Company’s Chief Executive Officer for certain costs and third - party payments associated with the use of his personal
F-41
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
aircraft for Company - related business travel. The Company also pays pilot fees for such business travel flights. During
the years ended December 31, 2018, 2019 and 2020, the Company recognized expenses of $1,712, $1,906 and $1,280,
respectively, related to these reimbursements. Given the geography of the Company’s partner firms and prospects, the
Company believes that the use of private aircraft creates efficiencies to enhance the productivity of the Company’s Chief
Executive Officer and certain other authorized personnel.
Affiliates of certain holders of the Company’s Class A common stock and Class B common stock received
underwriting fees of $6,244 in connection with the Company’s IPO during the year ended December 31, 2018.
Affiliates of certain holders of the Company’s Class A common stock and Class B common stock are lenders
under the First Lien Term Loan. In July 2019, affiliates of certain holders of the Company’s Class A common stock and
Class B common stock received $135 in fees in connection with the amendment and expansion of the Company’s First
Lien Term Loan. In January 2021, affiliates of certain holders of the Company’s Class A common stock and Class B
common stock received $394 in fees in connection with the amended and expanded First Lien Term Loan.
20. OTHER
In March 2018, the Company recognized a gain on sale of investment of $5,509 related to an investment in a
financial service company previously carried at cost. The gain on sale of investment is presented in other income
(expense) in the Company’s consolidated statement of operations for the year ended December 31, 2018.
In February 2019, the Company recorded a management contract buyout expense of $1,428 related to cash
consideration for the buyout of a management agreement with one of the Company’s retiring principals whereby the
business operations of the relevant partner firm were transitioned to one of the Company’s other partner firms.
In December 2019, the Company evaluated a minority interest investment in a financial services company
accounted for using the equity method for impairment and determined that the impairment was an other-than temporary
loss in fair value. The Company recognized an impairment in the fair value of the equity method investment of $11,749.
The impairment is presented within other income (expense) in the Company’s consolidated statement of operations for
the year ended December 31, 2019.
F-42
FOCUS FINANCIAL PARTNERS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020
(In thousands, except unit data, share and per share amounts)
21. SUPPLEMENTAL FINANCIAL INFORMATION
Consolidated Quarterly Results of Operations (Unaudited):
For the Three Months Ended
March 31,
2019
June 30,
2019
September 30, December 31,
2019
2019
(in thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259,924 $
250,607
9,317
301,545 $
282,012
19,533
316,641 $
303,736
12,905
340,231
314,340
25,891
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Common Shareholders . . . $
Income (loss) per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,828)
(114)
(2,942) $
3,102
(2,306)
796 $
392
881
1,273 $
(12,691)
692
(11,999)
(0.06) $
(0.06) $
0.02 $
0.02 $
0.03 $
0.03 $
(0.25)
(0.25)
For the Three Months Ended
March 31,
2020
June 30,
2020
September 30, December 31,
2020
2020
(in thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
337,054 $
271,464
65,590
313,109 $
299,166
13,943
331,483 $
312,977
18,506
379,673
357,884
21,789
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Common Shareholders . . . . . . . . $
Income per share of Class A common stock:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
34,019
(13,623)
20,396 $
3,328
(919)
2,409 $
3,944
(2,302)
1,642 $
7,674
(4,076)
3,598
0.43 $
0.43 $
0.05 $
0.03 $
0.03 $
0.03 $
0.07
0.07
Income (loss) per share of Class A common stock for the quarterly periods may not sum to Income (loss) per
share of Class A common stock for the respective annual period due to rounding.
F-43
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Common Stock Performance
The graph and table below compare the cumulative total return on an investment in Focus’ Class A
common stock with that of the Standard & Poor’s 500 Index (“S&P 500”), the Russell 2000 Index
(“Russell 2000”) and an equal-weighted peer index (“Peer Index”) between July 25, 2018 (the pricing
date of Focus’ initial public offering) and December 31, 2020. The graph and table assume that $100
was invested on July 25, 2018 in each of Focus’ Class A common stock, the S&P 500, the Russell 2000
and the Peer Index, and that all dividends were reinvested on the date of payment without payment of
commissions. The graph and table show past performance, which should not be considered an indication
of future performance.
$200
$150
$100
$ 50
$ 0
Jul
2018
Oct
2018
Jan
2019
Apr
2019
Jul
2019
Oct
2019
Jan
2020
Apr
2020
Jul
2020
Oct
2020
Dec
2020
Focus S&P 500 Index Russell 2000 Index Peer Index
AS OF
Jul 25, 2018 Dec 31, 2018 Dec 31, 2019 Dec 31, 2020
Focus
$100.00 $79.79 $ 89.30 $131.82
S&P 500 Index
$100.00 $88.88 $116.86 $138.36
Russell 2000 Index $100.00 $80.55 $101.11 $121.30
Peer Index1
$100.00 $78.13 $100.29 $108.41
1 The Peer Index is an equal weighted index comprised of Affiliated Managers Group (AMG), TD Ameritrade Holding (AMTD) until delisted on 10/06/2020, Envestnet (ENV),
LPL Financial Holdings (LPLA), Raymond James Financial (RJF), Charles Schwab (SCHW), SEI Investments (SEIC), CI Financial (CIXX) from its initial trading on the NYSE on
11/17/2020 and AssetMark Financial from its IPO on 07/17/2019.
Executive Offices
Focus Financial Partners Inc.
875 Third Avenue, 28th Floor
New York, NY 10022
+1 646 519 2456
www.focusfinancialpartners.com
Common Stock
The common stock of Focus Financial Partners
Inc. is listed on the NASDAQ stock exchange
and trades under the ticker symbol “FOCS”.
Stockholder Questions
Information about Focus Financial Partners
Inc., including all quarterly earnings releases
and financial filings with the U.S. Securities and
Exchange Commission, can be accessed via the
investor relations section of Focus’ website,
www.focusfinancialpartners.com.
Stockholders may also contact Tina Madon,
Head of Investor Relations & Corporate
Communications for Focus Financial Partners,
via email tmadon@focuspartners.com or
by calling +1 646 813 2909.
2020 Annual Report on Form 10-K
Focus’ 2020 Annual Report on Form 10-K as
filed with the U.S. Securities and Exchange
Commission can be accessed via the investor
relations section of Focus’ website
www.focusfinancialpartners.com.
Transfer Agent and Registrar
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
www.amstock.com
+1 800 937 5449 (callers inside the U.S.)
+1 718 921 8124 (callers outside the U.S.)
Focus Financial Partners Inc.
875 Third Avenue, 28th Floor
New York, NY 10022
+1 646 519 2456
www.focusfinancialpartners.com