What’s driving the sale of financial planning practices: a look at the data that tells the story

There are five triggers for selling a financial services practice.

Financial services practice broker, Growth Focus, has compiled qualified data over the last three years looking at the reasons financial services practices sell.

“Over the last decade, the reasons for selling a financial planning business have been consistent in their frequency with some notable trends developing in the past three years,” says Steven Fine, managing director of Growth Focus.

“When firms approach us to facilitate the sale of their practice, one of the fundamental aspects we need to understand is their motivation for selling. As a result, we found ourselves with rich data, which tells an interesting story once it’s been collated,” says Mr Fine.

Growth Focus’ main findings paint a picture of an industry where medium and large practices are acquiring, and one-man bands are leaving the industry as a result of increased operational costs.

The data captured other motivations of sellers (both those who completed sales and those who were considering selling) over the last three years. A part of the sales process at Growth Focus is gaining a detailed understanding of vendor motivation to track trends. Growth Focus captures the motivation for selling during the qualifying process with vendors and prospective vendors who are seeking to sell their businesses either in part or full.^[1]

The five triggers for selling a financial services practice are:

1. Retirement
2. Illness; including the sale of deceased estate
3. Leaving the industry
4. Financial duress; including individual bankruptcy and business in receivership
5. Succession; including slow phase out i.e. selling to staff internally or bringing in a partner, as well as work out over a period longer than three years.

Growth Focus has been brokering the sale of practices for well over a decade, however they have found that an increasing number of financial services practices are choosing to leave the industry in recent years. Smaller businesses (turnover less than $500k) are selling and exiting the sector due to increased responsibilities brought on directly and indirectly by regulation and the associated costs, while medium (turnover $500k-1.5m) and large (turnover $1.5m-4m) practices are adapting to the changes by scaling up and acquiring additional businesses.

The data showed that while retirement is still the dominant catalyst for selling a business of any size, “leaving the industry” has become an increasingly prevalent reason over the last 15 months;  inline with a confluence of factors such as ASIC’s industry funding model, the Hayne Royal Commission and the establishment of Financial Adviser Standards and Ethics Authority (FASEA). The latter requires existing advisers to meet new education standards, including completing an exam. (Refer to graph below: Reasons For Sale by Practice Size).

“Some long-time planners have been deterred by the requirement to study basics after decades in the industry, and have chosen to exit in recent times. Owners of established small and medium businesses have communicated that – after 30 years in the profession – they’re not interested in requalifying. Fortunately, medium and large businesses are enthusiastic to acquire these small businesses.”

None of the large businesses that looked to sell in the past three years were influenced by the desire to “leave the industry”. Meanwhile, few medium businesses were motivated by this reason, suggesting larger businesses are better equipped to adapt to industry changes. (Refer to graph: Reasons For Sale by Practice Size).

The Growth Focus data compared sizes of businesses and ownership structure to reveal that smaller businesses are struggling with decreased margins, cost of compliance, insurance and licencing fees. Small businesses need to buy to have enough top line revenue to justify the existing cost structure. For most, scale is the only answer, however most are exiting instead of buying. On the other hand, larger businesses realise the importance of acquisition and scale at this time, so they are keen to absorb these smaller practices. (Refer to graph: FASEA Effect on Reason for Leaving).

“It’s logical that small planning practices were the most likely to leave the industry out of the three sizes. Large businesses are far better equipped to handle industry changes from education standards and licencing fees to compliance requirements and insurances. Smaller businesses are generally authorised representatives of dealer groups, who charge them a fee – that has increased – to operate under the dealer group license.”

“Licensees have been under increasing pressure to refocus their attention on compliance and the smaller operators are becoming a burden for them. From the perspective of those operators, the licencing fees have increased while the service levels from their dealer groups have decreased. Anecdotal evidence shows that some of these dealer groups are no longer interested in having the small operators in their networks because one bad apple can take out an entire dealer group.”  (Refer to graph: FASEA Effect on Reason for Leaving.)

Succession, partnerships and illness

“Retirement levels remain fairly consistent across all sizes of business, and while succession is a common reason for sales in larger businesses, it’s simply not part of the small business mindset,” Mr Fine says. (Refer to graph: Reasons for Sale – 1 Sept 2018 to 31 Aug 2020).

Sales related to succession occur more within partnerships over single owners; and large businesses over small operators.

“In partnerships, both partners have to be willing to retire at the same time for retirement to be the cause of a sale. It’s far more likely that a partner will retire, while the remaining partners will enact a succession plan. (Refer to graph: Reasons For Sale by Business Structure).

The data also showed additional risks related to illness for small and sole owners over larger businesses.

“Sole owners are more exposed to the risk of illness interfering with their business because there’s no one else to pick up the slack, resulting in more pressure to act decisively about a sale. The same thing applies when the single owner is under financial duress.” (Refer to graph: Reasons For Sale by Business Structure).

COVID

Unlike many other industries, the financial services sector has been bolstered by covid.

“During times of economic uncertainty, a financial planner becomes a necessity,” Mr Fine says.

“Generally, financial planning businesses are weathering covid well. We’re not getting feedback that covid is putting pressure on businesses. If anything, they’re busier than they were before. This is due to the fact that you need financial advice more so than you do during the good times.”

Exiting mistakes

Mr Fine says that achieving a premium price on a financial planning practice requires foresight.

“We speak to partners, business owners, boards, stakeholders and sole practitioners on a daily basis about exit options. Exit planning is generally poor because most act when they are forced to, which greatly reduces the optimum outcome and forces compromise.”

Mr Fine says many are unaware and often surprised at the number of options available.

“In between the full spectrum of options from walking away to the IPO, there are many avenues a strategic exit can take. The new acquirers or managers will either be internal or external, and the transaction will be either a full sale, part sale or full sale over time.”

A number of dangers can be encountered when selling with too little forethought.

To avoid these errors, Growth Focus uses a custom designed diagnostic tool with prospective Vendors called an Inflection questionnaire which uses the Net Promoter Score (NPS) methodology. The exercise has proven invaluable to those considering selling, as it brings up options that vendors would not have ordinarily considered.

“When owners don’t carefully plan their sale, they risk several things such as leaving too much money on the table by undervaluing the business with a friendly party, making assumptions about the internal parties’ current or future ability to fund the transaction, and not anticipating the succession parties’ personal and financial circumstances changing.”

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[1] Note: Data from larger businesses continuing on and consolidating by selling part of their client base for strategic reasons was not included in the dataset. This intent is for this report to be continuously updated and published annually.