It’s currently a seller’s market, but the M&A market for financial planning practices could be poised to start “normalising” by the end of 2023, according to Steve Prendeville, founder of Forte Asset Solutions.
He notes that the M&A market has been artificially suppressed on the supply side because of the number of changes required in the aftermath of the Hayne Royal Commission.
“Many business owners and principals deferred their retirements and have had to manage and change their businesses to fit the legislative environment,” Prendeville tells Professional Planner.
“They haven’t felt able to leave their businesses. They’ve had to look after their clients, staff and in some ways, their families by preserving or increasing the value of the practices.”
On the other hand, there’s been unprecedented M&A demand as practices look for synergistic benefits and to boost their economies of scale in the face of rising costs.
“Last year, we also had an extraordinary legislative requirement, the July 1 client annual engagement letters needed to be signed,” Prendeville says, referring to the fee consent regime.
“Both buyers and sellers just froze in the first half of 2022 because they had to look after and secure their revenue streams.”
Prendiville says for the first time in four years supply is returning the market.
“More advisers are looking to sell because it’s the first time that there’s been legislative certainty for a while – that impacts the confidence of both buyers and sellers,” Prendeville says.
Accru partner Tim Lane and Seaview Consulting director Bob Neill confirm demand for practices substantially exceeds supply.
Both firms work together closely on succession and M&A for financial services practices.
“We are constantly contacted about acquisitions,” they say. “This is largely due to the scale imperative whereby practices need to be well over $1.6 million in revenue to maximise profitability.
“In the first quarter of this year, we have seen a tick up in enquiries from potential sellers or merger parties. This is the first time in a while that we have seen a slight shift back to equilibrium.”
Prendeville believes some planners are looking to sell before the market is flooded, perhaps in 2025 in the lead-up to the 2026 education requirements.
“I expect significantly more M&A activity from here on in and that we’ll come back to a more normal market by the end of this calendar year,” he says, noting that the greater availability of both international and domestic capital in the market should support this.
Emergence of big players
Lane and Neill are seeing the emergence of larger financial planning practices with revenue above $10 million and say these firms are becoming the logical place for smaller practices to go to obtain scale benefits.
They note that financial planning firms are generally looking to merge with other planning firms, but they have also seen the emergence of the multi-discipline office where, for example, accountants and mortgage brokers are part of the same business as financial planners.
“We see this trend continuing,” they say. “The main trap with this style of merger is that it doesn’t solve the future succession issue for the key planner, so it is best done early so all parties have plenty of time to recruit future owners.”
In addition to mergers or takeovers, Lane and Neill expect future tie-ups to include co-operatives and perhaps co-habitation and resource sharing as these can solve the scale issue without a change of control.
“There’s still a reasonable amount of internal succession going but this is hard to quantify,” they say. “The main issue we see is that there is not enough planning for succession and sale.”
According to the pair, this process should start at least five years in advance.
“We have always said that with time on your side, you are a ‘deal maker’ and as time truncates, you become a ‘deal taker’.”
Lane and Neill add that the recent challenges in the planning industry have resulted in the quality of financial planning practices improving. “They tend to have exceptionally clean profit lines now and there is little if any normalisation of profit required to present them for sale. They are much more ‘what you see is what you get’.”
