You may have heard about a supposed flood of investment capital heading towards the financial advice profession, with private equity investors and licensees queuing up to acquire equity in well-run, high-quality advice businesses with strong growth potential.
It’s real, it’s happening, and it’s going to get bigger. We’re aware of licensees with access to funding running into the tens of millions of dollars gearing up for just such activities, joining the list of those already doing this. And it’s impossible to quantify the potential investment from private equity and other investors.
Clearly, not all advice practices have the characteristics that investors are looking for. But when they do, investors are said to be willing to value businesses at six to seven times EBITDA, and sometimes more. What the seller of a business ultimately gets often differs from this figure depending on how the acquisition is structured, including the timing of payments and the like, but those are the headline figures.
This sort of anecdotal evidence reinforces just how good the fundamentals are for financial advice as a business, and why it’s an increasingly attractive home for investment capital. Rising demand from an ageing and increasingly wealthy population, and shrinking supply of advice as advisers leave the industry, are two obvious factors. But there’s more to it than that and, increasingly, the mindset and attitude of the owner or owners is a major influence on the valuation of a firm.
This rising tide of capital will not float all advice businesses. Some advice practices are great advice practices but are pretty ordinary businesses. The capital heading this way can afford to be discerning, and ordinary businesses are likely to be left behind even as the extraordinary ones find opportunities to tap funding to underpin growth and development.
So, advice practice owners face a choice. There’s no right or wrong in this; it’s a simple matter of preference. Does the owner want to run the advice practice as – essentially – a lifestyle asset, to be sold off when they retire? Or does the owner want to create a sustainable, ongoing entity that will continue to look after its clients and employ its staff well after the adviser has ceased day-to-day involvement?
It’s fair to say that none of the capital currently eyeing the advice market, and virtually none that has flowed in so far, is looking for opportunities among businesses of the former type. They want businesses with a well-documented plan and a vision, a corporatised structure, and an owner (or owners) looking for long-term growth options.
The Professional Planner Advice Practitioner Summit in February will focus on best practice in structuring and managing advice businesses, as well as addressing for which firms obtaining their own AFSL is the best way forward. It has been carefully put together to appeal to advice practice owners and managers who are thinking positively about the future and actively exploring opportunities to make their businesses better and to grow them.
If you view the provision of financial advice as river that connects a client to an investment product or service, the activity most upstream – closest to the client – has the greatest relative value. That activity is advice, and the businesses which deliver that advice.
Downstream activities – the licensee, platforms, product manufacturers, and so on – are less valuable because of their remove from the client. It’s really only because of an aggregation effect that entities such as platforms, product manufacturers and asset managers have greater absolute values.
The margin pressures these entities are under is in part reflected in the mergers taking place – think Pendal and Perpetual, for example – as key clients such as industry superannuation funds in-source a growing proportion of their asset management capabilities.
On the other hand, the best advice practices are well placed to not only protect their margins but to expand them, and to drive healthy revenue growth to boot. That’s why they’re attractive targets. And what this tells us is, apart from the likelihood of a growing valuation divide between the best and the ordinary businesses, that in the bigger scheme of things the impact of regulation on advice as a business will be less important than these fundamentals. Irrespective of what regulatory changes are thrown up in future, life will go on and in the long term, for the best firms in the country at least, that life will be good.
Thanks Simon, you are right about the preference when it comes to a Practice or a Business. Its the owners choice. For those wanting to transform to a business, a business system needs to be built to add efficiencies, decrease overheads and to better use the data that sits within each practice. Once you have your head around data as an active asset, you get more interested in using Xplan better, which means you can write procedures and coded documents that actually work (no data gaps) and create real efficiencies for your staff. Finally with procedures, Xplan and coded documents you outsource menial and repetitive tasks offshore. This creates time savings for each Team member & you chosse to grow the business or better engage with existing clients. The outcome : a higher enterprise value. The question remains, how good is your business system?
Any investor should bring more than simply money to the table. As stated, clarity on your emotional and personal objectives is as essential as the financial outcome. Growth brings complexity, complexity in systems, people, tools, opinions, risk management, governance etc. Moving from an advisor to a professional manager requires a different set of skills, interest and desires. This is why the ideal investment partner should bring skills in marketing, administration, accounting, technology, research, presentations and people management. Each individual is different (as is each investor), and the right answer is whatever is best for that individual in 5, 10, 20 years and delivers both personal satisfaction as well as financial reward.