The due diligence process a financial planning business has to undergo before a potential sale has increased threefold due to Hayne royal commission and FOFA reforms.
Copies of old and current due diligence checklists shared with Professional Planner show buyers have a dramatically increased focus on documentation with heavier reliance on copies of compliance audits, correspondence with regulators, results of any audit from the Financial Planning Association, ASIC, APRA or the ATO, proof of professional indemnity insurance and any potential litigation.
Beyond that, buyers are even interested to learn about descriptions of past marketing activities, the client relationship management systems used and leases on business equipment.
Radar Results chief executive John Birt says since 2012, before FoFA, the due diligence process has swollen from 16 stages to 47 today.
“These days everything is scrutinised,” Birt tells Professional Planner. “They go into every statement of advice in the business and it takes ages.”
Birt says new regulations have made due diligence “an exhaustive but necessary” process for both the vendor and the purchaser.
“Buyers are concerned these days about issues which might come up because of poor advice that might get them sued.”
Accru partner Tim Lane says he has found a similar experience with data requirements for buyers growing “exponentially”.
“It’s part of a theme in the industry,” Lane says. “The sellers and the buyers are becoming more sophisticated through the journey. They have a sharp focus because of FOFA and the Hayne royal commission.”
Lane says the level of detail for due diligence is significantly deeper and goes down to the client level.
“It’s very focused on where the risks are. If I had to contrast that to pre-royal commission, you would often not go to that client level and only the business level like commission statements.
“For the end adviser, if you want to do M&A you better make sure your data is good and solid because a high paying buyer won’t tolerate poor data.”
Recurring revenue still king
However, Growth Focus managing director Steve Fine says his firm’s due diligence process has not changed much over the years.
“It depends on the inquirer; some are very thorough,” he says. “We’ve just completed a transaction now where there’s been a list of eight key items and that was it.”
The biggest priorities during the potential acquisition, he says, is determining what constitutes recurring revenue and that client data is accurate.
“Getting a better understanding of how fees are charged and fixed-fee agreements is definitely a higher focus than it has been.”
Even for the M&A specialists who have seen an increase in due diligence requirements, identifying revenue streams is still the priority.