Succession planning will exceed sale strategies: M&A brokers

Tim Lane (left), Steve Fine and Steve Prendeville

Advice practice transactions are seeing a trend towards succession work to retain talent and it is expected succession strategies will outdo sale strategies according to M&A brokers.

When it comes to succession planning, Forte Asset Solutions founder Steve Prendeville tells Professional Planner the only method for valuation is profitability because there generally aren’t any other changes to the business.

“This in response to retaining talent,” he says. “It’s not like you’re bringing in new revenue streams or reducing costs. In fact, you may be increasing costs. Therefore, the only valuation is profitability or adjusted EBIT.”

Accru partner Tim Lane says his firm has mostly been involved in supporting the valuation process and managing the parties through a succession or merger plan.

“We believe that as the industry matures succession strategies will far exceed sale strategies.”

Lane says the practices they deal with have “cleaned up” their revenue base either through the selling off uneconomic clients or through re-pricing strategies.

“There is a confidence in these practises now that the profitability is at the right levels and they have focused now on retaining and developing talent through participation in equity. This is what drives the increase in succession related activity.”

In the merger space, Growth Focus managing director Steven Fine says planning firms with young principals will seek out like-minded counterparts to merge with rather than be acquired.

“They’ve got a million-dollar revenue business but still want to maintain equity. They don’t want to sell and be employed the rest of their career.”

At the million-dollar revenue level, Fine says, they need to leverage themselves and they don’t have the infrastructure to do so.

“They could gain far better scale advantages if they merged with a significantly larger business.”

The biggest challenge, Fine says, is getting the culture right and it’s his job to ask “all the hard questions” to establish the best fit during the transaction.

“The chemistry needs to be there for all parties for it to work in a sustainable and work for everybody.”

Fee consents

Issues caused by the fee consent and ongoing fee renewals regimes have been well-documented and practices looking to sell must make sure their book is in order.

Prendeville says annual client engagement has been a focus because it difficult to sell an asset without securing revenue and profitability.

“It’s galvanised and paralysed the industry because of this administrative burden. [BT platform] Asgard has 11 different forms depending on products. Clients aren’t happy about it either because they’ve entered an agreement to pay but to then duplicate those multiple times with every trustee that’s involved has grounded everything to a halt.”

Lane says the practices he has dealt with have a high focus on getting the compliance regime right particularly around fee revenue.

“They obviously don’t feel comfortable to go to the market with these things unresolved.”

Demand remains strong

Earlier this year the inequality between supply and demand was highlighted with demand for advice businesses greatly outweighing supply, but buyers are still selective and require detailed information.

Lane says there is still significant demand for practices to be acquired but no corresponding activity in terms of sellers.

“The caveat to this statement is that we don’t see a lot of depth with recent transactions narrowing from multiple offers to a small number entering due diligence and then moving to completion. Buyers are very discerning.”

Prendeville says in the last quarter he hasn’t listed any new businesses to the market.

“I normally have 10-12 businesses for sale at any one time; at the moment I have four.”

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