Australian advice practices are grappling with succession planning and are not ready to present their businesses in the most attractive manner to potential buyers and merger partners, according to consultancy firm Business Health.
Among key challenges is the ability to “paint a richer picture” of their business and to be “sale ready” when the right opportunity comes up, and the group believes fewer than one in four firms have a documented business or succession plan.
In particular, advice practices need to have ready information on their client base, revenue levels, range of services, and staff competency, Business Health partner Terry Bell tells Professional Planner.
“It is a difficult area to plan for succession or to plan to sell your business – it is an emotional challenge,” Bell says, stressing that the whole process requires answers “to a lot of personal questions” about the owners’ intentions and plans after they sell their business.
“The real point we have to continue to emphasise is that most businesses are unprepared and when the time comes that they decide they want to move on…they don’t present the business in the best possible light.”
According to data from Business Health, the average Australian practice has six staff (including 1.5 advisers), with annual revenue just under $1.2 million and fund under management at approximately $127 million.
The average revenue per full time employee is $214,286, the average revenue per client is $3852, and the average profit margin is 28.4 per cent.
The data also reveals that 70 per cent of practices are single owned.
According to Bell, every business should have – what he calls – an information memorandum, a document that describes their business comprehensively.
This document should cover everything in the business, which covers the client base, financials and compliance record.
“That should be a full document that describes what my business is all about,” Bell says.
This document should also provide a “richer presentation” of the practice’s client base, with a particular focus on how long clients have been with the business, how satisfied they are, the level of fees they pay and whether they have referred the business to others.
“These are all the things that can present a business in a positive light, but too often it is taken for granted,” he says.
“In the end of the day, and we do a lot of surveys with clients, and with staff for practices – and clients have very strong connections to the staff of practice.”
Australian financial planning groups have increasingly become a target in recent years, attracting growing interest from overseas purchasers such as overseas-based venture capitalists looking to buy multiple businesses to consolidated them into a larger entity to create scale.
Bell also notes that advice practices have always been attractive due to their “very stable flow of revenue”, a stable workforce, satisfied client base paying fees, and a significant number of practice owners and ageing advisers who are looking to exit.
“You’ve got not a perfect storm but there is pretty close to it – you’ve got a very established client base paying fees, you’ve got a lot of buyers who are considering or will be considering in the near future exiting their business,” Bell says.
“I really think people need to plan really way ahead of time because a planning business is a very valuable asset. They can be eroded in value over time if you don’t look after them.”
For those practices that are unlikely to be targeted – or do not want to be sold to – foreign investors, merging with another practice – possibly within the same licensee network – may be an option.
Bell says gaining scale by merging with a similar business can be an alternative method of finding growth.
“And maybe then being able to afford to bring in junior advisers or to have equity plans over time to encourage the staff to buy the business out,” Bell says.
