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What key lessons can we take onboard from the last decade?

As the Australian market shows early signs of a recovery, lending to the financial planning industry has picked up in the second half of the year. Jamie Melville, national head of financial services and accounting (banking) at Macquarie Bank in Australia takes a look at the key lessons learned from more than a decade of trading planning practices and funding acquisitions.

Like most high value transactions in life, trading planning practices and funding acquisitions can be a stressful time for both the buyer and the vendor and the more experience you have dealing with the situation, the more comfortable you feel managing the process. When it comes to trading planning practices the process varies greatly between more experienced operators and first-timers.

You can often see why more experienced operators are successful when engaging with them on the funding of the deal. They usually have a long thought out strategy and are very clear on what they will and will not accept in a deal.

They will have good infrastructure in place in the form of technology, frontline and back office staff, as well as an experienced M&A team to complete the transaction. They will also have a compelling story to tell the potential vendor and are not relying solely on the colour of their money to win the deal.

Critically, they understand the psyche of the financial planning principal. Having had the benefit of negotiating a number of these deals, they know what keeps the vendors awake at night in respect to the sale of their business and recognise the process is about more than just agreeing on the right price.

The key to negotiating these transactions is to ensure there is clarity on what is being acquired. Retention of clients, employment agreements, premises and how the business will be integrated are all important. Good tax advice is also essential, particularly where there are issues around whether to acquire the company or just the assets.

Once these elements have been agreed, a good lawyer can execute an agreement and the buyer has a clear method of measuring the return on investment from a potential acquisition and can put forward a compelling financial offer to the vendor. While this is not always at the highest level, combined with all the other elements, they can often win the deal based on the complete story.

Depending on the model, acquisitions can include the transfer of key frontline staff. This may be in the form of offering them equity in the business or perhaps in the structure of their employment agreement Macquarie Planner Services Smart solutions made simple What key lessons can we take onboard from the last decade? moving forward, but it is an integral part of securing client relationships which remain the most important asset.

Relationships, not only with clients but with advisers on the transaction, play a vital role in the acquisition process. While first timers usually have to rely on asking around to make the best judgement, frequent acquirers have established relationships with groups they can trust and know will act of their instruction. Although having the right deal structure is the owner’s role, having the right lawyers and accountants who understand the financial planning business can be a definite advantage.

It is a lack of understanding about the industry and how the acquisition process works that can often lead to inexperienced buyers making mistakes, such as:

• The apparent need to do a deal for the sake of getting scale and ignoring the fundamentals: We see this a lot in first timers wanting to participate in the industry. Often they do not have an existing operation and therefore lack a compelling case for the vendor. As a result, they will offer a high price as this is all they have to lead with.
• Poor structure of a deal: Given the acquisition involves acquiring client relationships, the job of securing these clients is often underestimated. Key areas where this is overlooked include:



	Term payments that are deferred for a period of 12 months and adjusted for client run off
	Where 100% is paid up front, too much reliance on a watered down non-compete clause in exchange for reasonable payment terms
	A lack of understanding around the client dynamic and who has the greatest influence over the client. Appropriate employment agreements are often not considered in the acquisition of key client facing staff
	Impact on clients and staff when relocating the operation of the business geographically
	An overestimation of growth potential in the client base and how much cross sell will occur (i.e. with life insurance)
	An underestimation of the staff and systems needed to run the operation effectively
	An underestimation by the acquirer on the management time involved in bedding down the acquisition

Once the transaction is complete, it is important to have a post transaction business plan in place which forces both the buyer and the vendor to look ahead at what is needed to make the process a success. This should ideally include lessons learned from previous deals and having contingencies in place if things do not go according to plan.

Over the years we have seen a lot of cases, some where these deals have worked very well and others which have not been so successful. What is important to take into account is the amount of resources that need to be committed to give these deals the best chance of success. Financial planners need to be mindful of the time and effort that is required, utilise the relationships they have and continue to keep their most important asset - their clients - at the top of mind.

BOX OUT: An insight into some past examples of trading financial planning practices:

Firm A: Acquisition of Firm A parcel. Total recurring income was $373,000 and agreed purchase price was $746,000. The deal was done on the basis of 50% upfront payment and 50% in 12 months. The deal was a borderline distressed sale and parties were known to each other. The business being sold was part of a larger group and the purpose of the sale was to free up capital. This was the second acquisition for Firm A and given the circumstance, a lot of the risk was already covered. Macquarie funded the first deal and provided a lot of support through the process. Key observations from this transaction were:

• Price was very appropriate for the purchaser
• Terms were such that it went a long way to de-risk the deal
• Since then, we have been given feedback that the integration has gone well, with the exception that the purchaser still overestimated new business he expected to automatically write with virtually nothing being done in the first six months.

 

Firm B: Acquisition of Firm B. This deal was originally negotiated on terms with a multiple of 3.3 times being agreed on recurring income of $930,000 (total purchase price $3.07m). The vendor then requested 100% upfront on the payment as he wanted to permanently move overseas. Based on this our client negotiated a reduced multiple of 2.7 times and an amount of $2.5m was paid. Macquarie was heavily involved in the due diligence and identified $80k in fees that were associated with various accounting firm joint ventures. Within a space of an afternoon, our client's lawyers had drawn up new contracts that included a tight non-compete clause that would see the vendor pay back any amount that ran off from these fees. About 18 months later, the original owner of the business (sold to the vendor about 12 years ago), returned to the area and started calling on clients. He ended up taking $150,000 out of the fee base until they issued some stern warnings and he ceased. The main lesson learned from this one was that no matter how good your due diligence is on the recent history of the business, you should always be prepared for the unexpected.

This information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 for general information purposes only, without taking into account your specific goals or financial situation. This is not a financial promotion. Whilst we have taken all reasonable care in producing this information, subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. The case studies in this article are provided for illustrative purposes only. Loans are subject to Macquarie's usual due diligence and credit approval process. Before acting on this information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. You should obtain financial, legal and taxation advice before making any financial investment decision.