It’s a seller’s market for owners of financial planning practices with demand far outstripping supply.
“Hundreds of firms are looking to make acquisitions of varying sizes and there isn’t enough to go around,” says Tim Lane, a partner of the FinConnect Advisory Group. “We would talk to 20 or 30 buyers to every seller.”
Forte Asset Solutions founder and director Stephen Prendeville is experiencing similar demand.
“If I take a capital city practice to market, we will have at least 30 buyers for that one asset,” he says.
Who’s buying
Both Lane and Prendeville say there are two types of buyers currently in the market.
Firstly, there are mega-firms or private equity groups such as Apt Wealth, Invest Blue, AZNGA, Merchant and Count which run large-scale businesses.
Indeed, Invest Blue announced it had acquired wealth protection and estate planning provider Lambert Group in December.
“These buyers are sophisticated and often have teams to run a mergers and acquisitions program,” Lane says.
“They have streamlined criteria of transactions to consider. Often, the larger they get, the more hoops they will have to jump through as an acquisition. For example, it may need a higher level of board approval.”
Prendeville estimates that there are probably around 12 large buyers backed by significant capital in the market emanating from countries such as the United States and United Kingdom.
“With the exit of the banks, there’s been a vacuum and we’re now seeing the creation of super ‘boutiques’,” he says.
He says buyers are much more sophisticated and educated than they used to be leading to less time spent on due diligence. “They know exactly what they’re looking for and how they can grow businesses.”
Then there are the smaller firms looking to acquire and build scale.
“Smaller firms are owned by a smaller group of people and can often make decisions more quickly,” Lane says.
“However, they are burdened by financing needs and by the process of applying for finance or the time taken. Without support, smaller firms looking to buy practices can miss out on transactions due to inexperience.”
The attraction
Prendeville says planning businesses are a lot more profitable these days.
“The average business is now enjoying 28 per cent adjusted EBIT [earnings before interest and taxes],” Prendeville says.
“That’s been a significant increase over the last three years. It’s primarily due to the fee increases.”
The other element Prendeville notes is that politically and legislatively, we are in a more stable environment with a significant amount of governance and oversight.
“We are also not getting the sort of disasters we had when the industry was predominantly 70 to 80 per cent institutionally owned industry,” Prendeville says.
“The other attraction is the low Australian dollar. Plus, there’s the growth of advice which is somewhat more accelerated in Australia because of our superannuation system.”
Further fuelling M&A is the shortage of advisers and rising costs of doing business.
“One of the newer incentives is to buy the human capital to deal with new clients and onboarding,” Prendeville says.
“The vast majority of businesses are at full capacity, but when you bring two businesses together of similar sizes, you start to get those synergy benefits. You free up capacity and you get more efficient back offices.”
Lane adds that some players have had successful acquisitions that have generated good returns and want to replicate this. “The financial outcomes from growth by acquisition are very obvious now.”
Who’s selling
Prendeville says around 60 per cent of his clients are would-be retirees, many of whom held off selling during the Covid-19 pandemic.
“About 40 per cent are single principals that are just tired of running the business and want to hand over all the HR, compliance and marketing responsibilities to someone else and just be an adviser,” he says.
“Buyers used to get rid of the principles relatively quickly. Now they want to harness their experience and capacity. They want them to be coaches and mentors to the next generation of advisers.”
Lane finds that would-be retirees often look to fully exit the industry in one to two years and understand that it takes time to exit.
“For example, transaction times are often up to six months, plus handover periods,” he says.
“Where there is a good cultural fit, we are seeing more and more advisers offered some form of ongoing work – such as a mentoring role or client adviser to a select few clients, all while being backed by stronger admin than they may have had in a smaller business. This is often appealing to vendors.
“These parties are often sub $2 million revenue businesses, with the larger firms often having internal successors to transact with, carrying on the business instead of selling the business or being acquired externally.”
However, Lane says a major challenge is some vendors’ readiness when it comes to sale documentation.
“We see vendors ready to go to market with outdated client data,” he says.
“This signifies system issues or risks to a sophisticated purchaser and can have a negative impact on price. Sale preparation is a significant missed opportunity with many advisory firms.”
Succession still on the table
Prendeville says several buyers are assisting in succession strategies given that younger planners often have large mortgages and small kids, so they can’t afford to acquire the business.
“Some buyers are looking for ways to hook the younger members with percentages,” he says.
“It used to be that they only were looking at owning 100 per cent, but now they realise they need people to manage these and grow these businesses.”
Elsewhere, Lane finds owners are increasingly focused on internal succession planning rather than external market sales – that is, they are selling smaller pieces of equity to key employees over time.
“This has reduced the number of businesses hitting the market than may have occurred 10 to 5 years ago,” he says.
“We are seeing vendors able to extract the same kind of numbers that they would have in a full market sale, all while seeing the business carry on in its current form – staff and ongoing client relationships are retained without the risk of the transaction disturbing clients and clawbacks occurring.”
Looking ahead
Lane expects the heightened demand to continue in 2025.
“Supply won’t grow enough to invert the current market situation,” he says.
“Interest rates may slow some deals, but there is some comfort in the expectation of interest rates dropping later in 2025.”
Lane expects the presence of large equity-driven buyers and private equity to continue and strengthen in 2025.
“This makes some parties feel like selling to a ‘corporate’ is the only option, which is not necessarily the case,” he says.
“The ongoing trend of internal succession will also remain a focus, with businesses needing to build their own pool of successors, particularly in more regional areas.”