Tough market conditions are making it hard for planning firms to grow organically – by increased overall customer base, output per customer and new sales – so more businesses are turning to business acquisitions.
Radar Results, a consultant firm for financial planning expansion, is involved in roughly 40-50 acquisitions a year. Director John Birt says the January-March quarter has been their busiest since Radar Results started in 2006.The biggest problem, he says, is the price expectations of the vendors.
Danny Adno, special counsel for M+K Lawyers, specialises in financial planning business acquisitions. He says his firm tapped into the market about a year and a half ago when they realised how active it was.
“There are always practices that are going to be looking to grow,” says Adno. “The current environment has made it very hard to grow organically, so in order to grow, the fastest and most efficient way is through acquisitions. But because an acquisition is so risky, parties are cautioned to make sure that they’ve done correct due diligence, they know what they’re buying, and they’re protected when they do buy these practices.”
He says that by acquiring these clients, businesses can instantly add 30% to their practice and increase their revenue, but they need to make sure they are getting the right clients. “The entity looking to acquire has to really have a strategy as to why they want to acquire. It wouldn’t make commercial sense buying a book that’s just going to be draining the practice or taking reserves away from the practice and not generating the revenue to justify the acquisition. So it really comes down to the purchaser doing proper due diligence.”
He says firms are starting the “cherry-pick” the clients that they will acquire, to make sure they fit the business’ strategy. Adno helps to make sure the businesses being acquired are FoFA compliant, but says this hasn’t been a big issue for most clients.
Other commercial terms practices need to take into account include:
Which clients they’re going to be taking/not taking
How much they’re going to pay for it
How to calculate the purchase price – a multiplication of recurring revenue, a multiplication of EBIT, or a fixed figure
Restraint of trade
The main terms, Adno says, are purchase price, restraints of trade, and warranties. “Warranties are usually a big part of the negotiations; that is what the vendor is warranting.”
If an acquisition is done correctly it’s fantastic because the purchasing practice grows instantaneously and can generate a lot of revenue, he says. But it has to be done in the confines of a well prepared sale agreement so the purchaser is protected and to ensure it is the right fit for their business and that it facilitates growth.
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