The adviser M&A market has picked up over the past year with demand for practices way outstripping supply.
Steve Prendeville, founder and director of Forte Asset Solutions, says he currently has a minimum of 30 genuine buyers for every asset for sale in metropolitan areas.
“For regional areas, we would have five to 20 depending on the population of the catchment area,” he tells Professional Planner.
Prendeville says a reason for the uptick is that both buyers and sellers currently see little or no legislative risk in the market.
“The market has been artificially suppressed over the past five years due to the [Hayne] royal commission, passing down of the Hayne report, new legislation, removal of grandfathered revenue, Covid-19 and the need to charge fee and service propositions,” Prendeville says.
“Many owners have had to delay their exit timelines to steer their businesses through these times of change.”
Darren Smith, a business coach at Slipstream, agrees that some business owners who delayed retirement may now feel more confident to make the move.
“We’ve never had more inquiries from business owners starting to plan for retirement rather than just talk about it,” Smith says.
Similarly, Steven Fine, managing director of Growth Focus, says a recent analysis by his firm confirms that retirement is the number one motivator for sales, followed by leaving the industry, but this wasn’t the case five years ago.
“Succession, including a slow phase-out, would have been the second most common reason for a sale then, but now it places third,” Fine says.
“Other triggers are illness, including the sale of a deceased estate, and financial duress such as individual bankruptcy and business in receivership.”
The influences
Smith believes the Covid-19 pandemic may have also had an impact. “It’s forced some advisers to look at what they really want to do in life and reprioritize,” Smith says.
That said, he believes the economics of running a practice has probably had the biggest impact.
“Most businesses have experienced increasing costs in delivering their service, especially rising people costs,” Smith says.
“For a typical business, it wouldn’t be unheard of for people costs to be 60 or 70 per cent of their costs. That’s forcing advisers to scale up.”
A lack of capacity for advice practices and not having time to deal with clients may be another reason for upscaling, he adds.
Important too, he says, is staff retention. “The competition for advice talent and support staff has definitely increased over the past 12 months.”
And, as Practice Exchange managing director and founder Mark Witt points out, a strong appetite among funders like banks and private equity to invest in the industry is also fuelling demand.
Meanwhile, Tim Lane, partner at FinConnect Advisory Group, is finding that some advisers want to stay in the business but are tired of all compliance and complexities.
“Those looking to merge are traditionally sole practitioners who are tired of managing systems and processes,” he says.
“They love sitting in front of a client but are growing to hate the behind-the-scenes of running the business.”
The nuts and bolts
Lane says firms are largely looking to acquire because, in contrast to a merger, they know buying allows them to carry on their operations and shape the business themselves.
“A merger is always a more complex transaction so they tend to take longer and happen less often,” he says.
Fine agrees. “Vendors primarily are looking for a complete guaranteed exit and most mergers we do are more a workout over a defined period than a traditional merger,” he says.
Prendeville says the demand is for all sizes of firms. Buyers of small businesses are often looking for a “tuck in” – to completely absorb them and integrate them onto their platforms.
Meanwhile, large firms with capital investors are looking to make material growth acquisitions. “This is also evident in the licensee consolidation we have witnessed over the past 12 months and 24 months and into 2024,” he says.
As a result of multiple M&A activity, Witt says we are seeing a growth in “super firms” – larger, more diversified firms capable of offering a broader range of services and benefiting from economies of scale.
“This consolidation trend is not only altering the competitive landscape but also raising the bar for professional standards [for example, the creation of the Professional Year] and compliance, in line with the heightened regulatory scrutiny that the industry has faced in recent years,” Witt says.
Merger partners
Witt has seen a notable rise in planners interested in merging with similar planning firms.
He says smaller, single-operator businesses are more inclined towards selling while firms with two or more partners are showing a greater interest in mergers.
He adds that there is also some interest in expanding service offerings such as accounting, often orchestrated by the planning firm taking an equity interest in an accounting firm.
Conversely, Lane says accounting firms are looking at buying financial planners.
“They know they can refer a significant number of clients and that in the long term, a financial planning arm will add material value to their overall valuation,” Lane says.
“Most of the time, they would like the financial planner to own equity to ‘secure them’.”
However, Fine cautions that when it comes to potential M&A between accounting and financial planning firms, the differences in methodology, valuation approaches and future contributions can pose large obstacles to completing a deal.
“Accounting firms and financial planning firms have distinct business models, client bases, revenue streams and regulatory requirements. Aligning these aspects can be quite challenging and disagreements over valuation and future strategy often stall or derail merger negotiations,” Fine says.
“In contrast, full acquisitions, where one firm acquires the other outright, are more common and easier to execute.”
The dealbreakers
Lane says there is currently significant investment in due diligence and assessment of cultural fit.
“More and more, we are seeing parties investigating a transaction and then stalling because ‘it doesn’t feel right’,” he says.
“We’ve often seen the gut feel work for the acquirer and an event causes the transaction to fall over, such as a key adviser leaving.”
