Brokers Steven Fine, Steve Prendeville and Tim Lane

The squeeze is on for smaller practices in 2021 according to advice business brokers, who say larger practices are pushing to fold more revenue into their business and build by acquisition.

As businesses fight for scale, advice firms with small yet healthy client books are becoming highly sough after, with practices that bring in $1 million or less in client revenue remaining attractive for acquisitive players like CountPlus and AZ NGA who will either take the business outright, buy a significant slice of it or fold it into one of their established practices.

“The large practices running heavily focussed bolt-on integration games are going to be the dominant players in the marketplace in 2021,” says Tim Lane from Centurian Market Makers.

Increased compliance costs have made it tough for smaller outfits to remain profitable, Lane says. While some have the ability to carry out their own acquisition, increased competition among buyers is making the option of selling to a larger party more and more attractive.

“The guys who have around $1 million in fees are often coming to a realisation that they’ve got to double that or get out” he says. “Good profitability is really about $1.6 million to $1.8 million now, it’s gotten progressively harder.”

Lane reveals 85 per cent of the phone calls he’s had in the last six months have been from smaller forms looking to “resource up”.

Decision point

According to Growth Focus managing director Steven Fine, principals at smaller practices are at a “decision point” because margins have been eroded by increasing costs and excised commissions.

“If you’re a one-man show you’re not making the money you were two or three years ago,” Fine says. “Some of the smaller guys have been able make an acquisition but they’re up against the bigger guys so it’s tough.”

When acquirers are looking at the value of client books they aren’t necessarily put off by low-paying clients, Fine says. Some firms are better equipped to service these clients at a lower cost or willing to risk the arbitrage and increase fees.

“There’s no real cut-off point,” he says. “Some people say that clients paying under $2,500 are not profitable but we’re finding that’s not true. It depends on the acquirer’s structure and their processes and their ability to serve the client.”

It’s not only well-capitalised, high-profile acquirers that are on the hunt, Lane says, with firms at the $3 million to $6 million revenue mark just as keen to grow. “All the guys around that size are ready to roll,” he says. “A lot of them are also looking to run a more converged model by acquiring accounting and broking businesses.”

While the high-profile acquirers are often reticent to take on practices with less than $1 million in revenue, Lane reckons growing  medium-sized advice businesses are more than willing to kick the tyres on firms with as little as $500,000 coming in. “Absolutely, there’s a market for them,” he says.

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