The failure of Queensland-based financial advice firm Financial Advice Matters to reach a performance target as part of its acquisition arrangement highlights to risks of incentive-laden M&A deals for advice firms.
Centrepoint’s deal, worth up to $10 million to acquire 100 per cent of FAM, agreed that 20 per cent of the deal would be subject to deferred incentives and performance hurdles over a 12-month period based on minimum earnings before interest and taxes (EBIT) contribution of $1.5 million.
Announced to the ASX on Wednesday morning, Centrepoint has calculated that after that 12-month period, the EBIT contribution is $1.1 million, significantly less than the required target, and therefore no further consideration will be paid to FAM shareholders.
Instead, Centrepoint will release the provisions of this payment previously reported in its financial statements for the year ending 30 June 2024 with a subsequent $1.3 million one-off increase on profit before tax during 1H25.
Asked by Professional Planner to expand on FAM’s failure to reach the contribution target, Centrepoint did not respond to requests for comment by deadline.
FAM’s failure to reach the $1.5 million Centrepoint minimum EBIT contribution raises questions as to whether certain acquisition arrangements present a risk for advice firms in succession planning.
It begs the question as to if, when advice firms enter into incentive-laden acquisitions, are they overlooking or ignoring potential financial loss to themselves.
Steve Fine, managing director of adviser M&A firm Growth Focus, says relying on EBIT over revenue can be a risk for financial advice practices looking to sell their business.
“While EBIT is often used for its alignment with profitability, it introduces complexities due to variables outside the seller’s control, such as changes to the cost structure post-sale,” he tells Professional Planner.
“In contrast, a revenue-based measurement tends to offer simplicity and clarity, as it reflects the top-line performance without being impacted by cost adjustments.”
Fine says in his experience most transactions are structured around revenue performance for these reasons, although he emphasised the importance of tailoring deal structures to suit the unique circumstances of each transaction.
“However, every deal is unique, and the choice of methodology ultimately depends on the specific circumstances and goals of the parties involved,” Fine says.
When Centrepoint entered into a deal in November 2023 to acquire 100 per cent of FAM, the aim was to expand its footprint in the salaried advice channel which CEO John Shuttleworth considered a profitable segment of the market.
Shuttleworth expressed interest in growing Centrepoint’s presence in the salaried advice channel via acquisitions rather than investment.
The original announcement about Centrepoint’s deal with FAM praised FAM’s range of financial planning and advice services to around 1450 clients with funds under advice over $1 billion.
It had eight offices in Queensland in total and generated revenue of $6.1 million in FY23.
FAM was also a corporate authorised representative of Centrepoint subsidiary Alliance Wealth since 2015 and its acquisition increased Centrepoint’s salaried adviser numbers from five to 19.
Part of the reason Shuttleworth had confidence in the acquisition of FAM was due to it being an authorised representative and therefore they were confident in its quality.
“It’s a corporatised business, so it’s got over 30 employees, 14 financial advisers, it’s got all the systems, processes, infrastructure to enable the business further,” Shuttleworth said at the time.
