Avoid acquisition pitfalls: Five key questions

Regulatory uncertainty shouldn’t deter planning businesses from pursuing an active growth-by-acquisition strategy. Answering five simple questions can help you avoid making the most common mistakes.

Making an acquisition can be a scary prospect for any financial planning business owner, especially now, given the increased uncertainty created by the various regulatory reforms underway. Making a good acquisition can add significant value to a business, substantially increasing its revenue and enhancing its profitability. On the flip side, a poor acquisition can cause stress to an otherwise healthy business, damaging its finances and in extreme cases even contributing to its collapse.

So how can you make a good acquisition and avoid the pitfalls? An adviser planning an acquisition should ask themselves these key questions:

What benefits do I hope to achieve?

It is important to have a clear understanding of your objectives.  Do you expect any cross-selling opportunities? Are you seeking development opportunities for your staff or are you lining up a potential successor? Are you looking for increased efficiency and scale?  Those business owners with a clear understanding of the objectives behind the acquisition are more likely to make good decisions. Clearly articulating the benefits also helps in focusing your due diligence investigations.

How will the acquisition be impacted by the industry changes?

Clients are more aware of the changes that are occurring in the industry and are asking more questions about the value they receive from a financial planning relationship. As a result, some of the most sought after information in recent transactions has been the split of revenue between adviser service fees and product-based commissions, and the nature of the product to which the payments relate. Savvy investors are also focussed on the types of commissions and their likely sustainability.

Do the new clients suit my business?

You need to make a targeted acquisition of clients who will pay for the value you can deliver and who fit with your client value proposition. Segmenting the client base along socio-economic and demographic measures may assist. Astute acquirers often undertake segmentation of an acquisition opportunity prior to committing themselves to the purchase. They also ask whether the clients are experienced in the financial planning process. What is the spread of income across the client base? What will it cost to service these clients? Do you want to work with these clients, and will these clients want to work with you?

Is the valuation fair?

Traditionally business valuations have been based on multiples of recurrent revenue. However, with less revenue expected to flow through to profit over time there is now an increasing trend to value businesses based on profitability measures directly. This has also been driven by bank lending requirements, which increasingly rely on analyses of profitability and loan servicing capacity. As you might expect, overall there has been a decline in business values although high quality businesses in sought-after regions are still commanding strong valuations.

If you are considering acquiring a portfolio of clients, an alternative may be to participate in a program that specifically buys and sells books of clients. The programs are designed to bring buyers and sellers together to transact for portfolios of clients at fair market value. These programs typically price assets at a client level based on key criteria in order to simplify the process and provide an equitable outcome for each party. The criteria may include: the level of fees that the client pays for advice, the age of the client, the location of the client, the availability of information about the client and the nature of the product to which the advice relates.

What scenarios should I test?

Acquirers should apply some scenario testing to consider the opportunities and risks inherent in the asset they plan to buy. The spread of income (or segmentation) is often the foundation of the scenario testing as an acquirer defines those clients that are core to the success of the transaction.

Acquiring a business can be a highly effective way to enhance your practice and with the impending regulatory changes causing many planners to consider selling up, there has perhaps never been a better time to make a purchase.

Nick Hilton is national manager of MLC Business Consulting.