Tim Lane (left), Steve Fine and Steve Prendeville

Advice practice transactions are seeing a trend towards succession work to retain talent and it is expected succession strategies will outdo sale strategies according to M&A brokers.

When it comes to succession planning, Forte Asset Solutions founder Steve Prendeville tells Professional Planner the only method for valuation is profitability because there generally aren’t any other changes to the business.

“This in response to retaining talent,” he says. “It’s not like you’re bringing in new revenue streams or reducing costs. In fact, you may be increasing costs. Therefore, the only valuation is profitability or adjusted EBIT.”

Accru partner Tim Lane says his firm has mostly been involved in supporting the valuation process and managing the parties through a succession or merger plan.

“We believe that as the industry matures succession strategies will far exceed sale strategies.”

Lane says the practices they deal with have “cleaned up” their revenue base either through the selling off uneconomic clients or through re-pricing strategies.

“There is a confidence in these practises now that the profitability is at the right levels and they have focused now on retaining and developing talent through participation in equity. This is what drives the increase in succession related activity.”

In the merger space, Growth Focus managing director Steven Fine says planning firms with young principals will seek out like-minded counterparts to merge with rather than be acquired.

“They’ve got a million-dollar revenue business but still want to maintain equity. They don’t want to sell and be employed the rest of their career.”

At the million-dollar revenue level, Fine says, they need to leverage themselves and they don’t have the infrastructure to do so.

“They could gain far better scale advantages if they merged with a significantly larger business.”

The biggest challenge, Fine says, is getting the culture right and it’s his job to ask “all the hard questions” to establish the best fit during the transaction.

“The chemistry needs to be there for all parties for it to work in a sustainable and work for everybody.”

Fee consents