Over recent years many Australian Financial Planning Businesses have executed growth strategies via a combination of organic business development and acquisition activity. I am a firm believer that for the right financial planning business, leverage or debt can play a vital role in its longer term growth and succession aspirations. Correct execution of a debt strategy can result in significant economies of scale for a business of all sizes. Since the GFC, credit for financial planning firms has been relatively accessible via a majority of the major banks and second tier financial institutions. Often support is provided by a firm’s licensee (in the form of a Tripartite Agreement) to assist a financier in proceeding with a funding proposal. Many of these licensees are currently owned by the major banks. With the well published intentions of the majors now to divest their financial planning arms, the question needs to be asked; Will this divestment have an impact on lending appetite into the industry? I don’t think you need to be Einstein to work this one out…..
With regards to access to credit, I don’t believe we will witness a “one size fits all” approach as the majors implement these divestment strategies. Whilst its fair to say the planning industry has had its share of ups and downs in recent times, a professional industry with strong third party players implementing the advice component, remains vital to the Australian SME business community. For this reason, coupled with the strong and regular cash flows of planning businesses, I believe financiers will view the industry, as a whole, as a growth opportunity for the right players.
“For the right players” is my big caveat here. Gone are the days of lending policy at x times recurring revenue or x times and adjusted EBIT and the deal is done. Those financiers left in the market will likely have similar gearing guidelines however will look to partner with firms that are positioning themselves for longer term sustainable growth. These firms will often exhibit the following characteristics:
– Multiple shareholders or Partners; whilst this often brings a level of complexity to the table it does provide a financier with additional comfort in a secondary exit scenario. Should cash flow become an issue, there are multiple resources to call on to keep a business trading whilst a turnaround or exit strategy is implemented.
– Hybrid style firms; these financial planning businesses are often wound up into a firm offering alternative sources of revenue including accounting, planning, mortgage broking, general insurance, consulting and sometimes legal advice. Given the nature of a these styles of business, multiple shareholders or partners is a key.
– Financially sound and reputable licensees; a key component of lending to the industry is often the strength of the underlying licensee. For example, in the event that a firm is experiencing difficulties do they have the capacity and are they willing to assist whilst an alternative arrangement is negotiated? This is highlighted when negotiating the terms within a Tripartite Agreement which details obligations on all parties (the financier, the licensee and the borrower) during the term of a loan.
– Strong historical and projected trading results; this goes without saying however it is vital for a firm to show an ability to absorb unforeseen shocks to cash flow via strong profitability, retained earnings or access to alternative equity via shareholders (especially in an environment of consistent regulatory change). This will also mean that a financier may walk away from a proposal if they feel the shareholders are over leveraged in the own right (personal names).
– Quality client base; a potential financier is likely to dig deeper into a firms client base demographics to firm up their risk assessment. A financier will be looking for a quality and engaged client base with a clear and compliant serve offering being implemented by a firm. Some common issues in this filed a financier may have include client concentration, aging demographics (without a clear strategy to replace clients as they draw down on their investments into retirement), and splits between different segments to name a few.
– Strong compliance history; With the Royal Commission in progress this should really be at the top of the list. Compliance indiscretions have a significant impact on a firms ability to raise debt in the current environment.
– Sound return for the financier; this one is often forgotten however is very important. Major banks and other financiers need an appropriate return on their time and capital investment. For this reason minimum turnover and debt levels are appearing within lending parameters which can have a significant impact on smaller players.
Taking the above into consideration, smaller planning businesses or sole partner firms, with revenue less than say $750k are likely to be the group who are most impacted when attempting to access credit. I don’t believe there is a need for business with existing debt to panic however they will likely find negotiating with financiers very different to what they have experienced in the 10 years proceeding. When looking to increase, restructure or refinance existing debt, it is really important for these business to present a strong business case to potential financiers, with detailed information in an easily digestible format, have a strong relationship with a quality licensee, be prepared to support an application with personal assets and also be willing to stomach some increased costs or interest rates (at least in the medium term). New sole practitioner firms may find it increasingly difficult to raise initial acquisition debt in the current environment with traditional financiers without the inclusion of additional personal security.
There is however some good news for these smaller planning businesses as a number of non-bank financial institutions (including peer to peer lenders) are developing debt offerings to fill this projected gap in the market. The downside is that these offerings are in their infancy, often with rates and terms more restrictive than those offered by the more traditional players. But hey, if it still makes commercial sense to make an acquisition at a higher financing cost then there are plenty of providers out there that are willing to accommodate.
It should be noted that this article has not taken into consideration firms that hold their own AFSL. In the past these businesses have represented higher risk profiles for financiers simply given the absence of potential support from a corporate licensee. With increased cost associated with operating under a self-licensed structure, these business are often larger and exhibit a number of the characteristics mentioned in this article as being a positive for finance proposals. Outside of normal lending and financial metrics, financiers will continue to look closely at internal compliance histories and processes, along with detailed analysis of a firms Approved Product List. A strong performing AFSL business should to continue to have access to multiple sources of finance in the current environment noting there will likely be an increased level of scrutiny throughout an application process.
It remains very difficult to predict how traditional financiers will react to the financial planning industry and, as such, all firms with a reliance of debt need to remain up to date with different lender parameters and requirements. It is also essential that business owners maintain multiple and viable sources of debt exit and repayment during this period of uncertainty including refinance, asset sale, succession planning, merger activity and / or access to personal equity and cash injection strategies.
To support a strategy of maintaining multiple debt options, my advice is that a business needs to put their head down and stay on top of the simple things. I think a famous footy coach once said “control the controllables” and that is exactly what planning business need to do in the current environment. I am a firm believer in a financier looking at a proposal on a case by case basis regardless of the noise surrounding an industry. Therefore planners, keep your transaction accounts in order, maintain a strong and open form of communication with your financier and licensee, provide all information when requested, keep your nose clean with the ATO, stay on top of compliance requirements, and be aware that the market is changing and flexibility from all sides is needed.
I hope those that read this far can take something away from this article. I love nothing more than sinking my teeth into complex lending scenarios and negotiating finance agreements where multiple stakeholders are impacted. If you are a financial planner or shareholder in a professional services business and would like to discuss in more detail with your specific needs in mind don’t hesitate to get in contact.
Would also like to hear your thoughts on the article.