Whether it’s the purchase or sale of a financial planning business, the success of the transaction hinges on several critical areas. Ray Henderson explains.

The ageing of the population – including financial advisers and the broader community – is well documented; and the challenges are significant to ensure that the future is bright and indeed prosperous for everyone.

In recent years we have often been asked to assist a buyer or seller of a financial planning business to navigate their way through the process of a purchase or sale, which often feels like a journey through a maze – with various twists, turns and options. We have assisted in a number of ways, from helping with due diligence, to simply providing external input to help separate the wood from the trees.

There are many emotions that come into play and it’s important for a clear head to prevail in all circumstances. Whether you’re a potential buyer or seller, we hope the following pointers give you some food for thought now or in the future. This list is by no means exhaustive, but touches on some key areas we have found to be critical in this complex area.

Oh, and by the way, according to the latest stats derived from our consolidated HealthCheck database, while there has been some improvement in this crucial area in recent years, just 29 per cent of practices have a clearly documented succession plan, while just 8 per cent have an effective overall program in place (covering not only the plan itself but also identification of all possible successors and funding options).

1. It’s never too early to start planning for your exit

We have seen a number of situations where the seller is ready to sell but the business is not in a good position to be sold.

The best practices we have seen are “sale ready”, even if the principal has no plans to sell in the immediate future. Irrespective of the age of your business, start planning for your exit now.

Key considerations include:
• Your electronic database should contain current, comprehensive information on clients so that all client and other business information (financials, processes, staff management et cetera) are available electronically at any time.
• Make sure, or at least work towards ensuring, that the business is not largely dependent on one person. Could your business function effectively without you or someone else?
• Key systems and processes should be documented to ensure consistency.

Someone famous once said that you can only leave the business in one of two ways – vertically or horizontally! This article addresses the vertical – but do you have the horizontal covered?

And even if there is no immediate goal to sell, the planning exercise itself can produce a real return. In Australia, those with a documented succession plan (even if it’s not fully implemented) are 57 per cent more profitable than those without any plan.

2. Work out what the business is really worth

Have the business independently valued to determine its market value. So often the price set by the seller is based on their view of its worth, and on occasions there isn’t much science used to arrive at the “price”.

There are many factors that need to be taken into consideration: age and demographic of client base; systems and processes used; experience of staff et cetera. As a buyer, some aspects will be more important than others, so it’s important that a valuation is done regularly – we suggest every two years.

A good question to seriously ask yourself is: “Would I buy my business?” If so, why? If not, why not? How much would you
really pay for your business?

And remember, most buyers will be interested in sustainable, recurring revenue or EBIT, as opposed to “gross revenue”.

3. Decide what you are buying or selling

It sounds obvious, but it is important to establish upfront what is involved in the potential transaction. For example, are you buying or selling a revenue stream only or does it include office premises, furniture and equipment, hardware and software? And what about staff entitlements?
And don’t underestimate the value of your position/profile in your local market (goodwill).

We have seen instances where there appears to be a good fit between the buyer and the seller, but the understanding of what’s included in the transaction is completely different.

All this needs to be decided at the start and included in an overview document for potential buyers.

Why do some transactions fail

4. Is there a good strategic fit?

Just because two businesses have what appear to be similar operations (types of client, products, markets et cetera) this is no guarantee that the fit is right. A real danger is seeing all the areas that look right and glossing over others. Some key questions here include:
• How do both businesses charge for their services?
• Do client segmentation models operate in both businesses (buyers and sellers) – if they do, how aligned are they? What is their respective service offering – can the buyer match the seller’s current value proposition?
• Do the businesses use compatible computer systems?
• Do the businesses use compatible product platforms?
• What products are offered by both businesses?  What will be the impact of the purchaser’s research process/recommended approved product listings on the purchased client base?
• Will client ownership be an issue?
• Are there expectations on behalf of the vendor’s staff, in terms of entitlements, access to potential equity et cetera?
• Are both the vendor’s and purchaser’s businesses similar in size?  If not, how will any disparity be handled by the purchaser?
• And most importantly, how well will the other party work with your clients? Do they possess not only the capability, but also the empathy to work with them –  to allow them to complete the journey they began with you?

Ray has over 30 years experience in the financial services industry. He has held numerous senior positions in the corporate world focusing on the distribution of investment and life insurance products to independent advisors and brokers. As well as this, he has worked closely with leading advisors for over 20 years helping to improve and grow their practices. Ray is actively involved with a number of Australia's leading broker / dealer groups providing advice on growing and managing their advisor networks, and in particular, how to move advisors from "sales" people to "business" people. He is also a member of several high profile financial planning firms' advisory boards.
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