Clockwise from top left: Fran Hughes, Steve Prendeville, Tim Lane and Paul Black.

If you’re contemplating taking on an investor in your advice firm, bolstering the value is critical.

Whether you’re looking to sell your business, take on equity partners or you perhaps want to implement a succession plan, there are steps you can take to making an advice firm more attractive to other investors.

Firstly, bear in mind that a well-run business will attract a higher valuation and new investors, Fran Hughes of Nexia Perth says.

To get your advice firm ready for sale, make sure you have clear systems and processes in place that are documented to create efficiencies. This in turn should reflect in a high quality compliance rating, Hughes says.

New investors are looking for a return on investment and willing to pay a higher multiple on profitable businesses. A benchmark to strive for of earnings before tax is upwards of 30 per cent, she adds.

“Seek the right buyer that will fit your business – individual, strategy or professional buyers,” Hughes tells Professional Planner.

“Individual buyers may be other financial buyers seeking a client book to bulk up their existing advisory firm. Strategic buyers may be existing shareholders within the advice firm that you may wish to acquire your shares. Professional buyers are private equity groups or aggregators driven by strong financial returns.”

Investing in advice practices has become an attractive proposition since the fallout of the Hayne royal commission has simmered.

Overseas investors are looking to get into Australia’s advice market, either directly as in the case of Koda Capital or via proxy as is the case with Italian-backed AZ NGA which holds capital in almost 100 advice and accounting practices.

Even domestically, licensees like Count, Diverger and Sequoia have all started taking stakes in advice practices.

Accru partner Tim Lane says all investors are looking for low-risk transactions, with cultural fit and important element ahead of a sale.

“A well-articulated client value proposition that links to a well-developed pricing policy focused on profitability at the client level is crucial,” he says.

A firm with low people dependency that has revenue supported by systems is crucial. “You want to be in a position that the loss of a person won’t impact profitability,” Lane says.

The things that lower risks for an investor include culture fit. “No one purchases from someone they know don’t like and trust.”

The quality of management reporting is of key importance so that an educated purchaser can quickly make an assessment on the business, adds Steve Prendeville, founder and director of Forte Asset Solutions.

Buyer confidence promotes premiums to market average pricing, he says.

Ideally, three years’ worth of financials with appropriate add backs that establish real profit is critical.

“Profit is the key to any valuation,” Prendeville says. “Three-year history shows if the business is growing, flatlining or diminishing. The financials should also show clear segmentation of revenue type.”

Management reporting should also provide insights into the client base, detailing age, demographics, location, Funds Under Management, average FUM per client, average fee per client and the service provided.

Prendeville says that management reporting also should showcase the staff experience, education and salary. Talent is now an additional acquisition motivation. There should also be commentary on technology used and compliance history, he says.

“The data presented in an information memorandum profiles the business accurately but also provides the reader confidence on what the business, clients and staff looks like,” he says.

“The more data the better impression of management competency and therefore the overall quality of the business.”

Documented processes for the office, that service and fees charged and consistent, and that you’ve reduced the number of platforms and complexities in the business is also crucial, Paul Black from HPH Solutions says.

A smaller number of higher fee-paying clients and the maintenance of a consistent investment process is crucial, while taking a team approach to client service shouldn’t fall onto the shoulders of one person, he says.

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