Diverger will prioritise equity stakes in $1 million to $3 million revenue practices within its network as the licensee seeks to imbed itself closer to parts of the advice value chain with higher profit margins.
Posting its financial year results to the ASX on Thursday morning, Diverger reported licensee services revenue grew 19 per cent year on year to $13.27 million. But with two equity stakes in advice practices having been completed, and more in the works, the firm wants to leverage more income directly from the practice part of the value chain.
Diverger announced a 55 per cent stake in Paragem-licensed firm Atkinson Saynor Private Wealth last month, after senior principal retired and the employed adviser didn’t have the capital for a succession plan.
The deal followed a 35 per cent equity stake in Queensland-based GPS Wealth licensee McGregor Wealth Management a year earlier.
“The minority position was because that’s what was needed in McGregor and the majority was because that what was needed in Atkinson,” Diverger CEO Nathan Jacobsen tells Professional Planner.
“In Atkinson’s case in particular the incoming employed adviser was moving into a principal role, and they simply couldn’t afford to buy more than that.”
The organisation prefers majority stakes but is content with taking minority positions if the situation calls for it.
“It obviously needs to meet our investment criteria [and] return objectives,” Jacobsen says.
He adds the firm is open to looking outside the network for practices to investment but the priority is established businesses within the network that has $1 million to $3 million in revenue.
“We would really only look at smaller than that if it was part of bringing that business into something else.”
With licensee margins tightening, but advice practices becoming more profitable, licensees have sought greater equity stakes in aligned practices to facilitate further growth in exchange for a bigger slice of the advice margin pie.
“Organically we continue to see good opportunity in the advice margin, investment opportunity as we talked about at the Licensee Summit,” Jacobsen says.
“We’ve done two deals, we’ve got another couple of transactions that are in the advanced stages. Whether we chose to invest will depend on whether it meets our appetite but they’re certainly in very advanced negotiations.”
Jacobsen says those are the two focuses – leveraging the investments they have made and continuing to explore “opportunistic accelerators” in the advice margin space.
“The opportunity to work with those businesses to build a cornerstone business in partnership where we helped to accelerate that business through further M&A is becoming a key part of our strategy,” Jacobsen says.
Off the back of two recent practice acquisitions, Diverger is in a position to add more in the coming financial year, Jacobsen anticipates.
He says the most important part is working with advisers who are shareholders which is critical to future growth.
“We definitely prefer majority positions, but we’re flexible as long as the return meets the objectives,” Jacobsen says.
“It’s also choosing the right practice, one that does want to grow the business and isn’t just there to have a passive relationship.”
Overall revenue increased to $37.6 million from $31.6 million in the previous financial year, with the largest contributor being licensee services business which covers a third of revenue.
Statutory net profit after tax is down by 24 per cent to $2.83 million, from $3.75 million in FY23, primarily due to M&A related activity.
The company now has over 90 per cent recurring revenue across five core business areas – licensee services, investment management, membership services, training services, and IT services.