Advisers run the risk of limiting their sale options if they fail to incorporate organic succession into their plans, according to business valuation consultant Tim Lane.

Lane, a partner at Centurion Market Makers, reports seeing more and more older advisers wait until they are ready to retire before they consider sale options, which usually takes the option of organic succession off the table.

“If you start a succession plan in the early days, say at 55, and you’re going to retire at 65, you’ve got lots of time to get things in order,” Lane says. “The big mistake we see in the marketplace – in particular with regional practices – is they turn up at age 65 looking to sell, so potential buyers don’t have time to structure a vendor loan and pay it off.”

Lane explains that vendor loans are common ways for advisers to take ownership in a business. The buyer borrows money to purchase portions of the business – sometimes five or ten per cent at a time – and uses dividend payments to pay off the debt as they work in the business. “That way there’s an incentive for the person coming in and they pay it off over seven to nine years,” Lane continues.

But the process needs to be planned ahead, he warns. If not, the seller is limited to straight sale options in a buyer’s market with little available leverage – especially in regional areas.

“When they get to 65, or even 60, they ask what their options are and all they can do is try and sell it,” Lane says. “If you’re in a regional location you should be really focusing on that succession plan well in advance, because those businesses are much harder to sell.”

Lane adds that regional areas with a reasonable population base (“Ballarat, Bendigo”) have sale opportunities, but areas further from major cities might be “a harder problem to fix”.

He says the issue will become more prevalent as advisers seek to leave the industry instead of meeting education standards by the 2024 cut-off date, as mandated by the Financial Adviser Standards and Education Authority.

A likely end to grandfathered commissions and changes to the frequency of ongoing service agreements are also expected to be catalysts for an exodus of advisers in the next few years, which is depressing practice values across the country.

For those advisers considering an exit, Lane believes putting organic succession channels in place will be a challenge.

“The ability to laterally hire a successor is very limited. You might say that you want to find and adviser that looks like this, this and this… but you just don’t always find them easily and you don’t always get the right cultural fit.”

The view that advisers can do “succession off the street” is unrealistic and difficult to carry out, he believes. “That’s why you’ve got to focus much more on creating your own successors.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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