Andrew MoylanIn part one of a three-part webinar series, hosted by Professional Planner and sponsored by Commonwealth Bank, Andrew Moylan and Scott Brouwer discuss the process of getting a business ready for a sale. Simon Hoyle reports.

Identifying a potential buyer for your financial planning business – or identifying a target to buy – is only a small part of the succession planning process. And it’s not even the first part. There’s culture to consider, as well as legal and taxation issues – and, of course, the question of how to fund the transaction. With the amount of work and detail needed to ensure a transaction goes as smoothly as possible, it is never too early to start planning.

Finding a potential buyer for your business requires that you put the best possible face on it in the current financial environment, the buyer is most likely to come from outside your business, according to Andrew Moylan, a consultant with the Encore Group. Moylan says that “far and away the largest number of transactions” involve a party outside the business.

“However, secondly, you will see internal succession with key staff – largely advisers…practice managers and other key customer service staff,” he says. He says it’s not necessary when first developing a succession plan to know precisely who the staff or the external buyer will be. “It would be nice internally [to] know who, however…the beauty parade will come from those people that are looking to acquire practices and grow their own business,” Moylan says.

Scott Brouwer, a senior financial planner with Outlook Financial Solutions in Melbourne, says his firm considered “a whole range of different things” before choosing an appropriate path. “We narrowed it down – we probably spoke to about half a dozen different groups and we narrowed it down to three,” he says. “Culture is really important. We were actually going to be working within the business that we sold to. So if we weren’t going to be culturally aligned at an employee level, and also from the way we treat clients and the client experience, then it was going to be fraught with danger and would have been a far more high-risk strategy if the cultures weren’t matched.”

It’s never too early to start defining a succession plan, but it can be left too late. In practice, it’s at least a six-month process from go to whoa. Moylan says a rushed transaction can leave risks – for both buyer and seller – undiscovered. “Due diligence, from a purchaser’s perspective, is about going and finding all the risks and going in and establishing all of the facts,” he says. “The reality is you need to be able to provide all of those things openly.

If you can’t, then [what you are likely to do is increase] the volume of risk for the purchaser, and every time you actually increase risk in a transaction you know that the purchaser is going to try and drop the price.” Moylan says a seller should be able to provide a buyer or an incoming investor with full financial statements for at least two to four years. “The more detail I can produce as a vendor, the better the buyer will feel, the less risk, the higher the price,” he says. “There’s a whole lot of questions that the buyers will want to know. And if you can show that, and in essence build a data room, then you’ve actually got some real value.”

Staff expectations

Scott BrouwerIn addition to the expectations of vendor and purchaser, staff also must be taken into account. If their expectations aren’t met, then it could have implications for the business in the future. Brouwer says his firm notified staff of what was going on “fairly early in the process”. “We had staff that potentially would have wanted to buy into the business, but we didn’t necessarily think that they were suitable for that type of role,” he says.

“We were looking at the real risk that not all staff would be taken up by the purchaser, and so we had to confront that. And then we had one key staff member who – once it was announced that we’d actually sold and we had the purchaser – didn’t handle that at all well. And we actually lost that staff member at that point as well.” Brouwer says the task of getting the documentation in place and completed was more onerous, took longer and cost more than he expected.

“The legal documentation certainly slowed down the process and was a little bit more expensive than what I initially would have anticipated,” he says. “But the due diligence process was fairly intensive as well – on both sides. So it wasn’t so much just the paperwork side of it; it was the meetings and really trying to scratch below the surface to find out what was going on. “Obviously the purchaser wanted to see a lot of documentation, they wanted all of our accounts going back for a while, they wanted obviously evidence from fund managers and the like that the numbers that we said we were doing were real, and that there could actually be evidence that those things had happened.

They wanted to see things like what sort of outflows were occurring, rather than just looking at, well this is the inflows. Right down to sort of minutia, to see really what was happening.” Moylan says it’s important to remember there’s more than one party involved in a succession plan. “I think everybody who owns a business clearly thinks succession is about them,” he says.

“However, succession actually incorporates also the staff that are within the business and, clearly, the clients. And it’s about being able to transition; and hopefully you can do it quite seamlessly, but there are those three parties [that] have an interest in the business and clearly have an interest in succession. “But integration and transition is clearly, both from a seller’s perspective – the vendor – as well as the purchaser’s, an interesting thing to try and manage.” When it comes to a successful transaction – whether it’s selling a business as a going concern, seeking staff internally to buy into the business, or looking for external investors as a potential source of capital – it’s clear that the better that both sides understand what is being bought or sold, the better the transaction goes.


Moylan says that some issues are pretty much non-negotiable; but in general terms, both sides of the transaction have to be prepared to accommodate the other, to some degree. “In my experience there’s got to be a lot of give and take,” he says. “But generally I guess the key components within it, within the transaction, are verification of revenue, system capacity, system use, organisational structure – so has the staff got job roles – how does it function, what’s the cycles, et cetera.

“One of the keys is the demographic of the client base that’s being sold. And I actually spend a lot of time – and if we’re acting for a vendor, we actually make them spend a reasonable amount of time – displaying the qualities of their client base [in terms of ] the demographic. “Where is the revenue coming from? From the clients, is the 80/20 rule in place with regard to revenue? What is the defined service offer? And again, some of these things will strike back straight to the culture of the organisation.

“And the due diligence has to be on both sides. Normally we think about the purchaser coming in and doing the assessment; but the vendor is also doing the assessment. Does the business that I’m looking at selling this to have the capacity to deliver to my…clients what I’ve delivered over the years? “And then if they can, then do I trust them to actually maintain the relationships that I’ve built and therefore deliver a quality service to those clients over time?” Brouwer says that when he went through the process of selling his business to Snowball there were relatively few things that the purchaser wanted to know that Brouwer and his partners hadn’t anticipated.

“That was more as a result of the communications all the way through [being] very open, and we sort of knew in advance what was going to be required,” he says. “So they really kept the surprises to a minimum. I think the thing that did catch us a little bit by surprise was just the depth of information that they were actually trying to get.

“So anything that was just surface level numbers or surface level information was not acceptable. They really wanted to drill down further into all elements of what they were actually going to be buying. “And by the same token, we wanted to do a fair bit, and we didn’t go anywhere near the same depth that they did, but we really wanted to experience what was the client experience going to be like, what sort of treatment would clients get. Who does what within the business? Is that dramatically different?

If there were big differences, were they improvements or were they things that could actually detract from the client experience?” Snowball operated on different IT systems from Outlook, so the process of migrating to a new technology platform had to be tackled. “That actually had to completely change,” Brouwer says. “Because now it’s all Xplan, Snowball uses Xplan, so that was one significant change.

But also to give you improvement, might I say as well. “And the other big thing was that the going from a paper office to a paperless office was also another big job that had to take place. We were really lacking in that side, whereas the Snowball Group had been running a paperless office for quite some time. “And that meant that all the data, all the client files had to somehow be turned into electronic files and uploaded.” Brouwer says the work involved in “going paperless” didn’t ultimately affect the sale price of the business.

“The price was affected by a whole lot of things, and I don’t really think that was one of the things that affected the price,” he says. “At the time, and we’re going back four or five years, at that time there weren’t a lot of mediumsized practices that were paperless. So I think anyone they were looking at, they would have had the same problem with any business as well.”

But now, even four or five years down the track, the move from one IT system to another still has ramifications. “There are still data fields that are left blank and it’s four years after the event,” Brouwer says. “That project was managed by people within the IT team, so it wasn’t something we had to get bogged down in. But it’s a never-ending process and we’re still actually chasing bits of data right to this day.”


Eventually, Snowball valued Outlook on an earnings-before-interest-and-tax (EBIT) measurement. That was not the same basis on which Brouwer and his partners valued their own business. “We’d been looking at it, and what we thought it was worth was based on a multiple of recurring revenue, and their valuation was on an EBIT, so we were actually talking completely different things,” Brouwer says.

“As it turned out we weren’t miles apart, which was positive, I guess. And then it was really just a process of negotiation, where we were able to meet somewhere in the middle of what their initial EBIT pricing determined and what we thought we could get as a recurring-revenue multiple.” Moylan says it’s most common for financial planning businesses’ transactions to occur on a multiple of recurring revenue.

“If you said to me, ‘What’s the cut over?’, it would be recurring revenue somewhere [around] the $1.4 million mark – [that] is where the EBIT multiple and the recurring revenue [multiple] actually meet. If your revenue is much above $1.5 million or $1.75 million, then generally the business will be more valuable for its profitability than not.” When it came to the hard negotiations between vendor and purchaser, Brouwer says the Outlook partners handled things themselves.

“I don’t necessarily think that’s always the right way to do it,” he says. “But in our case it was – it worked well and it was appropriate for us, because we had the partner who had health issues, who’d had experience in negotiating business sales in the past, albeit in different industries. So it was I think reasonable to allow him to sort of run with that negotiation. “Obviously, everything that was negotiated was bounced off the other two partners, but we knew broadly what we wanted; it was just a matter of carrying out there and getting it.

“If I was doing it now, I think I’d get somebody in to represent me. I think that the distraction of trying to do it yourself, and the [potential] to get it wrong, the fact that you’re emotionally involved in it, I think there’s a whole lot of reasons why it would be better to get somebody who specialises in that to do the job for you.” Moylan says most sellers overestimate the value of their business, and it can be helpful to have an independent third party involved in the negotiations.

“I haven’t met a vendor yet that doesn’t think they’ve got a goldmine,” he says. “And the reality is that they know of somebody’s transaction that had a revenue multiple that was always close to four, and the assumption is that all financial planning practices are the same. “They are extremely unique, they are very different and so you need to really remove the emotion—as a vendor.

“And I guess if you’re the purchaser…at the end of the day you’re going to actually transition the practice and you’re reliant upon the vendor. So to get them too angry too early may actually work against you in the long run. “To have somebody who’s independent do the negotiations and then never be seen again is actually quite a smart idea. So the buyer can drive the price down, and not be held responsible [for] the words and the exchange and the meetings and the anger, and can always point to the third party.”

Differences of opinion

Whether negotiations are handled internally or by a third party, care needs to be taken to make sure all partners – on both sides of the transaction – are clear on what they want, and can sort out any differences of opinion as the transaction progresses. “There were times when we did have to discuss things in more detail – internal negotiation as distinct from external negotiation – and we would then just discuss why I thought it was better or worse or why they thought it was better or worse,” Brouwer says.

“And at the end of the day, everything was done on a majority rules. Because there were three of us, it was always if two were going one way and one was going the other, the two would always reign, no matter what the issue was.” Moylan says the key thing for a planning practice to bear in mind before its sale to another organisation is to “get ready, and be able to produce an information memorandum so that you can actually show that the beauty is beyond your own thoughts”.

“Because when due diligence is undertaken, clearly they’re about the substance not the outside appearance,” he says. “So you have to be ready to be able to verify all of the things that are the key components of the business. Who are the clients? What is the revenue? What is the attachment between the clients and the revenue? What has been your service offer? What can you offer in terms of reducing the risk for a purchaser? “And therefore you want to start early to be able to create the data room that has the detail.”

“And the devil is in the detail; and the more detail and the better the picture you paint and the capacity to remove risk would suggest that you’ll get a higher price. “And I think you also need to remember as the vendor that you are responsible for ensuring that the culture of the organisation to which you’re selling ultimately matches the demands and the needs of your clients.” Brouwer says the key is to “keep surprises to a minimum”. “Start to prepare the business as if you were going to sell it as early as you can,” he says.

“Remember that shocks do occur. People get crook or…people might die, but in our case it was a health issue. Try and remain unemotional – which is very difficult to do, obviously – but try and remain unemotional and be realistic in what you want and what you think the business is worth. “And don’t jump into the first firm [that] talks to you. Really go in with an open mind and, you know, be as broad as you can and start to narrow it down as you get closer and closer to the final purchase or sale.”

Join the discussion