Guide to Selling a Financial Planning Practice

Selling your financial planning practice is a multi-faceted, often times emotional journey. Every business owner I’ve ever met has spent years toiling over their work, managing employees, servicing clients, managing licensee or self-licensing requirements, education, the list goes on. Often times, the hard work of business owners builds a sizeable asset which brings with it a gamut of other problems:

With the changes in the financial services industry and the need for scale, it’s never been a better time for financial planners looking to exit the industry to sell their financial planning practice. Despite the demand for books, we still hear of many advisers winding up their businesses and not maximizing their sale outcome. With time on your side and the right people on your team, you can understand the likely market outcome, the requirements on you and your business, and what you may need to prepare for.

To understand the basics of selling your practice read on below. The Team at Accru Hobart are happy to talk to you about your financial planning practice and a future sale whenever you’re ready.

As financial planners, you recommend your clients to understand their options and the consequences of them on their future financial goals. Preparing for sale is the first step towards this. Understanding the likely value, the inputs and how to improve your outcome, allows you to make informed decisions. Accurate and timely information is the key to success in most businesses, but particularly in business sales.

In any practice sale, a document detailing the business is prepared. This should include a breakdown of the client database and its demographics, analysis of the profitability of the business, key people, the client value proposition, what an acquiring party needs for success and what your expectations are of handover.

Understanding your business structure, future capital gains and your timing is important. If there are material benefits of selling your shares versus selling your client base, is there a way we need to consider this in a sale? Does the business need to be restructured? Separated from other assets? Do certain Capital Gains Tax concessions change the timing?

Your financial planning practice is likely one of your greatest assets, and built with plenty of blood, sweat and tears. Imagine having built a home and having a purchaser see the home and comment on the colour of paint not being to their liking, or them not seeing the value in your work. It’s no different in selling your business, and it is why a third party to be the intermediary is so important.

Whilst a full sale of your business can take six to twelve months, it is important to begin to consider what will fill your time post your business. Do you have a drive to travel, to join community groups, to finetune your golf game? A purchaser is going to want to understand your future post business to be sure of any restraints, and any contradictory comments here increase the risk exponentially to a purchaser, reducing the price, increasing the terms and conditions and sometimes even derailing the whole transaction.

As a broker, it is our job to prepare you for the likely market responses, coach you through your interactions with potential purchasers, listen to and mediate the issues on both sides of the transaction and essentially be the intermediary so you and the purchaser can maintain your relationship to ensure a good handover period can occur, and potentially employment beyond the initial handover. What we find in a lot of unrepresented transactions, for example where we’re advising the purchaser, is that an unrepresented vendor doesn’t cope well when the value of their business come in less than their expectation. Understanding your position and planning your future is critical to the success of your sale.

Knowing what your business looks like compared to those of your acquirer, and how this may benefit, or need to be managed, in a transaction will assist in positioning your business and maximizing the result for you, your clients and your team. No longer is it a simple recurring revenue multiple based solely on client size. These days, any sophisticated purchaser looks deeper. The profitability, or incremental profit, from an acquisition forms part of the basis for pricing any deal.

Understanding and documenting your business is critical in any sale. A well presented Information Memorandum means a buyer can make an informed decision on your practice, and you know that they’ve got all the information they need to price the transaction – most importantly that nothing will be left out.

Being able to report on this information in a timely manner means a more efficient business sale, reducing the risk for the purchaser with accurate and timely information, and likely increasing the outcome to you.

Whilst we act as a Broker for Financial Services firms, we don’t necessarily like the title. We see this more as a matchmaking process. Who are the like minded business professionals, who has the ability to execute the transaction, who will look after your team, who will be able to service your clients to your same level? A mass marketing of your business risks confidentiality, and can spook your team and clients. Tire-kickers can waste your time if they can’t execute on this size transaction, or even if they’re a cultural mismatch.

Having a matchmaker who knows the parties they’re putting your business in front of, with the right upfront documentation (Confidentiality Agreements etc.), means that your business details are more tightly held.

We never send bulk emails to parties that may be interested in your business. It’s not a bulk list of 100+ businesses getting a brief introduction. It’s a targeted list of up to 20 practices, that we know are going to be a likely fit, and can manage a transaction of this size. It’s likely even that we know which of the parties will be your buyer – but competition is healthy in any transaction.

Selling your financial planning business is similar to dating and getting married. Dating is meeting with potential purchasers who have reviewed your information. Having a phone call, zoom or face to face meeting, will progress any transaction faster than basing the deal solely on an information memorandum.

In this meeting, you may identify that you aren’t culturally aligned to the party and therefore have no interest in progressing the transaction with the purchaser. You may identify the perfect fit for your business, your clients and your staff and want to ensure the party knows your interest so that they are encouraged to put in an offer. Whilst we’ve already weeded out parties we don’t think are culturally aligned, it’s always worth the conversation with interested parties.

Now, let’s get to the marriage (and the prenup).

Entering into any sales process you should have a reasonable expectation of the market price of your business. By being informed you manage your expectations and can then respond appropriately to the offers received. If you aren’t prepared, it’s easy to be offended by an offer that’s actually market value, and conversely believe an offer is reasonable that is under market.

Selling your financial planning business isn’t just about the sale price, and it often comes down to terms over price. We’ve said it before, but regardless of the price you simply won’t sell your business to a party you don’t know, like or trust. Your business often has employees and clients that you have strong relationships with, and you want to see these people looked after. Oftentimes we see a minority equity holder that needs to be offered equity in the purchaser, a paraplanner or administrator who has strong relationships with your clients, by being upfront about these in the information memorandum process, and setting expectations that these people transfer with the business and be offered employment on similar terms, it sets the tone. With any terms you set, you have to understand the corresponding impact on sale proceeds.

By requesting, or demanding, that employees transfer over, you’re lowering the incremental profit that comes from the transaction, and as such, the sale proceeds may drop. If maximizing your sale proceeds is your number one priority, offering a lean transaction is one of the best ways to obtain the higher price.

Having a skilled negotiator on your team, who understands the industry, likely terms, payment period and pricing, you’ll maximise your desired outcome.

A terms sheet agrees the crux of the transaction, documenting the intentions of both parties. A standard financial services terms sheet would include information such as:

By agreeing to a terms sheet before proceeding to due diligence and contract stage, it ensures both parties understand the transaction and each parties expectations. Often times, when we quiz a potential client on a business they’re buying they often believe these are implied. In a business sale, implied or a party’s understanding can be dangerous – all terms should be agreed in writing, and discussed to ensure understanding and consent.

The terms sheet then goes to the solicitor drafting the sales agreement. This often saves time and ensures there is less back and forth between solicitors acting for the vendor and purchaser.

Due Diligence is an activity undertaken by a potential purchaser to verify that what they are buying exists – it matches up. Due Diligence is not a full audit, but verifies the existence of income, and the correctness of material expenses – think staffing, leases, licensing etc. Due Diligence these days also considers compliance, and you can expect file reviews, requests to see audit reports, and often licensee involvement.

There are providers out there that specialize in compliance due diligence, and can review client files and alert you to any red flags. It’s important to note that you’re not just checking for compliance in a typical sense, but also verifying that you align to the advice given.

Financial Due Diligence verifies that the income reported in the information memorandum exists. This crosschecks data in the IM to Business Activity Statements and Licensee Reports. Where there is data that doesn’t line up, it can dig further. Due Diligence also considers the licensee requirements regarding transfer of clients, and provides an understanding of the work required to transfer ownership of the clients – foundation SOAs, licensee forms etc.

Often when selling a financial planning business the contracts are drawn up in line with the execution of due diligence. We regularly see contract stage taking significant time between the purchaser and vendors going back and forth, and the involvement of licensee groups. In a recent transaction, forms had to have a wet signature and be posted from capital city lawyers to dealer groups in another capital city, via a financier.

At the contracting stage, it is critical to use a lawyer versed in financial services businesses as otherwise it can prolong the transaction and end up costing thousands more. Having worked alongside parties on hundreds of transactions, we have a few reputable lawyers to refer you to.

In the final steps of the transaction communication is key. Largely, the success of any transaction comes down to the intent of the parties. Having a good broker throughout the process allows an intermediary to be the bad guy, allowing your relationship with the purchaser to thrive. Focusing on a handover conversation throughout the sales process means you have a clear understanding of your timeframe, role and responsibility in the handover. It is common for a financial services sale to include a transition agreement, documenting a timeline for communications, and client introductions. It is likely that the purchaser may have transacted before, or either party may know of other transactions where they can ask what has gone right and wrong, to reduce the risk and maximise the outcome of your transaction – it’s worth talking to your broker, your licensee and your colleagues when the time is right.

If you’re just doing initial research, you may have scrolled the article. In short, to maximise your sale, and meet your sale goals – be they financial or cultural, consider:

To understand how to get started selling your financial planning practice, contact Accru Hobart today.