Advice practice owners able to show cash flow and prove they have a continuous disclosure culture can buck the expected downward trend in valuations over the months and years ahead, expert Tony McDonald says.
“Make no mistake, the final wash up from the Royal Commission will affect financial planning and other wealth management practice valuations…Practice owners who recognise, and act on, some of the emerging thematics driving future valuations will do well. Doing nothing, however, will inevitably lead to lower valuations,” said McDonald, who co-founded and led the advice aggregator Snowball Group (now SFG) from startup to ASX listing.
The ‘macro’ trends affecting the industry in the medium term are expected to put downward pressure on valuations, given that supply will probably outstrip demand, McDonald, a director of T&C Consulting, said.
The fallout from the Hayne inquiry is expected to bring an end to grandfathered commissions and that is what experts believe will have the most significant impact on valuations.
Well told is the story of owners planning to exit following the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry if “it all becomes too much”, McDonald pointed out. Institutional buyers will be on the wane, he said.
Further, the Financial Adviser Standards and Ethics Authority’s educational and training standards may have as much, if not more, effect on valuations by increasing supply as older owners potentially seek to exit rather than meet the standards, he explained.
Individual firms can buck the downward trend in valuations, however, McDonald said. He emphasised that the remaining buyers would become more discerning, something Paul Barrett and Sarah Abood, of acquisitive practices AZ Next Generation Advisory and Profile Financial Services, respectively, highlighted recently.
For business owners wanting to sell at the highest possible valuations, McDonald noted that the answer lies in giving discerning buyers more of wh-at they want, compared with other practices.
He has summarised what discerning buyers are looking for under three key headings:
- Fundamentals – such as demonstrable risk management, continuous compliance, effective governance, ‘real’ earnings before interest and tax, and a history of profit growth with sound prospects for more
- Sustainability – such as deep client relationships, sensible and commercially sound client offers and minimal exposure to, or a clear migration plan for, conflicted or sub-par remuneration
- Integrity – such as a culture of risk management and compliance, a willingness to transfer the value after the sale, deal structure around rise and fall consideration, and buyer protections, such as non-compete clauses.
Compliance culture key
Above all, creating robust risk management and continuous compliance culture and systems is where advice practices can maintain and increase their value going forward, McDonald said.
“Potential purchasers will insist on it,” he asserted. “Due diligence practitioners will look hard for it. The discount applied by purchasers for practices that exhibit weak risk management and compliance culture and systems will be palpable. In the current environment, a demonstrable and robust risk-management and continuous compliance culture and system goes to the heart of proving the sustainability of future cash flows.
“One thing’s for sure, doing nothing is not an option.”