The Australian population of financial planners is ageing, meaning many will be looking at retirement in the next five to 10 years.

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1 How are financial planning practices valued? This article originally appeared in the September 2005 edition of Financial Planner under the title Planning Ahead and was accessed from the Money Management website on 30 April It is an excellent summary of the issues connected to valuing and selling a financial planning practice. With the increasing importance of multiple of recurring profits, ie the NBIT approach to valuing a practice, the article in effect emphasizes the importance of minimizing the practices ASFL costs and training costs and increasing the practices share of commission income. This is how MCA helps increase your practice s market value and hence your net wealth. The Australian population of financial planners is ageing, meaning many will be looking at retirement in the next five to 10 years. As a result, numerous practices will be looking at some sort of succession plan for senior members of the business. This might take the form of selling part or all of the business to the younger members of staff, or selling the entire business to an outside party. Both options have their advantages and disadvantages, but before any succession planning action can be implemented, the business has to be in good shape. Brisbane-based Deacons head of corporate commercial, technology and business unit Paul Paxton-Hall says the first priority for a prospective vendor is to do a due diligence on their own business before selling. You need to make sure that everything is in order before doing a valuation on the business, he says. Minimise these issues before the purchaser raises them. As part of the preparation process, the owners of the business need to make sure all paperwork is in order before any sale. The next thing is to make sure the documentation is in place so there is a good, clear document trail, such as agreements with outside service suppliers and leases. The owners should also make sure the agreements are current. First Capital Financial Planning managing director Richard Tasich says to maximise the potential value of a financial planning practice, the owners need to focus on increasing the multiple (of earnings) and bottom lines.

2 In order to increase the multiple and business efficiencies, the owners need to take the time and effort to design and implement the systems, structures and processes that are relevant to their business, he says. Tasich says most planners are not great at setting up and implementing efficient business systems and procedures. One option is bringing in a business coach to help design the corporate structure and systems. However, he warns the owner still has to do a certain amount of the work. There aren t many options out there for planners who want to corporatise and transform their business without having to take their eye off the ball and their clients, he says. In our business, we underwent the process of corporatising, designing and implementing efficient business systems ourselves and it totally transformed our business. Tasich says having undertaken this process, as part of a succession plan, he noticed the practice s earnings before interest and tax (EBIT) almost doubled, client service levels improved and profits also doubled. The practice s original owner still holds 20 per cent of the company, but now only spends about six months advising clients and doesn t have to worry about the administration of the practice, Tasich says. Guardian Financial Planning national manager advice Steven Browning says even if the owners are not selling immediately, it is good practice to look at what shape the business is in. The owners have got to build the business with the end in mind, he says. So when they get to the point of succession planning, the business is already in good shape. It is a continual process. Paxton-Hall says financial planning practice owners should be looking at agreements they have with their partners in the business. There should be shareholder agreements detailing the obligations of the holders and Paxton-Hall says it is important to watch out for any pre-emptive conditions about selling in the agreements.

3 If there is no shareholder agreement in place, one will have to be created before considering a sale. If the financial planning practice is structured in a discretionary trust using a partnership, there might be some issues that arise, he says. If run as a company, there needs to be a constitution and what is in that needs to be considered. Structure Paxton-Hall says part of getting the company in order is about finding out what the obligations are for disposal. If the owners are considering an external sale to a third party, there are some tax and legal issues to be considered before making a move. The choice is to sell the company or sell shares in the company and this is usually driven by tax and liabilities, he says. It is more tax-effective to sell shares in the company. It is also cleaner as the owners don t get the hassle of winding up the company. Paxton-Hall says if the company is being sold, the vendor would need to make sure the business was structured effectively to take advantage of the small business CGT scheme. For the purchaser, there is the risk of buying accrued liabilities in the company. A buyer would want to know the professional indemnity (PI) history of the business they were buying, Paxton-Hall says. I would recommend to a vendor that they run their PI cover for seven years to allow claims to work out. You can get run-off insurance for PI cover. Another area that vendors of a practice need to consider are ASIC licences. The vendor will need to make sure the purchaser can satisfy the conditions of the licence, he says. If selling, make the deal conditional on the buyer taking over the licence. If any of the requirements of the buyer to meet these conditions are not met, then the vendor would retain the licence.

4 If the practice is part of a dealer group, and the licence is held by the group, then they need to be involved in any potential sale. Again, if the licence is held by the practice, all shareholders and partners will have to give consent for the transfer to a new owner. It could be that the acquisition was conditional on the buyer being suitable to take over the licence, Paxton-Hall says. Australian Financial Services Licence issues would vary obligations on the business being sold and being sold to an authorised representative. Tasich says most practices for sale, either internally or externally, are just offering client registers; fewer are good businesses with recurring revenue and profits. There are many practices out there that are not saleable assets, he says. When the bulk of planners start retiring, it will only be the well-structured, profitable business that will sell easily. The rest will struggle. Tasich says another decision that principals will have to make is their level of involvement in the business after sale. There can be potential handover issues if the principal stays involved and there could be problems finding quality staff to hand over parts of the business. A planner that is planning to sell in three to five years should start planning for it now and not leave it until it is too late, Tasich says. Valuing The challenge of valuing a business is another area where there seems to be a widening gulf. There have been some spectacular prices paid for dealer groups in recent years. Everybody can quote how much Challenger paid for Associated Planners and how much AXA paid for Ipac. But those prices were during the heady days of a few years ago, and Browning says advisers have become a little more realistic and practical when valuing their businesses.

5 In the past, sellers have been focused on multiples of recurring revenue, he says. When a principal gets a professional valuation it might take into account multiples of recurring revenue, but more likely the profitability of the business. A lot of advisers would be surprised to learn valuations are a lot less about multiples of recurring revenue. Browning says while a practice might still be valued on two or three times recurring revenue, the valuation is looking more at the client base and type of business to justify that multiple. The professional valuers of practices, such as Kenyon Prendeville or Mann Judd, base their valuations more on the profitability of the business, he says. I think advisers haven t been following that move. Principals tend to think valuations are only necessary if the business is being sold externally, but Browning says it is just as relevant for an internal equity transfer. Most advisers want to see the potential in the equity being offered, he says. The buyers want to see the true value in the practice, what the licence can do and what practice management support there is in the shape of the business structure and financials. When the two are moulded together, then you are looking at profitability. Seller s market Tasich says although everybody is talking about succession planning, the numbers of planners retiring has slowed down. There are simply not that many good businesses available for sale at the moment, he says. It is definitely a seller s market right now, with a lot more buyers of quality businesses than sellers out there. This has tended to push the price up beyond what we would consider fair value, but not to the extent where life offices were paying ridiculous multiples for registers. This imbalance in supply and demand has pushed the multiples up by two to three times, but Tasich says this is still short of what some principals expect.

6 We strongly believe that this demand/supply imbalance will shift within a couple of years, he says. As planners become more serious about retiring, there will be a flood of businesses on the market and multiples will drop, possibly below fair value. Tasich says currently fair value for a planning practice is between 3.5 to 6.5 times EBIT depending on the quality of the business. But most practices, however, fall somewhere between 4.5 to 5.7 times EBIT, he says. A multiple over six is usually only given for a totally systemised operation that does not depend on any one adviser or staff member. Practices preparing for succession planning can also on-sell their expertise, which is what First Capital Financial Planning is now doing. After going through the process ourselves and seeing first-hand the rewards, we now want to use our experience to help other advisers achieve the same, Tasich says. Our aim is to help planners renovate and transform their practices into a saleable asset. 20 September 2005