Increased compliance benchmarks imposed by the licensees of acquisitive advice firms is holding back deals according to a broker of advice and accounting businesses, who says the businesses involved need to get licensees involved early and often to head off potential roadblocks in mergers and acquisitions.

According to Steven Fine from Growth Focus, licensees on the buying side of potential deals are increasingly becoming the reason deals don’t go through, even if the buying advice firm is happy with the seller’s position.

“I’m definitely seeing that once a transaction is agreed between a buyer and seller the involvement of the licensee for the buyer is significantly more involved than it has been,” Fine tells Professional Planner.

Broker Steven Fine

After the Hayne royal commission put pressure on ASIC to ramp up its ‘lookback’ program on licensees, the broker says licensees are applying more scrutiny to acquisitions being made by their licensed entities than ever.

“I’ve had two recent transactions that didn’t proceed but not because the buyer didn’t want to do it, he says. “It was all agreed, the due diligence was done and everything, but the licensee said no,” he says.

Fine explains that in both these deals there weren’t any significant compliance breaches identified, “it was just the licensee putting on onerous requirements that made it impossible to complete.” The licensees in these cases, he adds, refused to “rubber stamp” the deal and agree to take on the new client book until additional steps were taken. “And the additional stuff made the deals unworkable,” he says.

Fine’s observations are a reminder that while licensing entities are in a race to build scale to combat operational costs, they are still extremely wary of taking on advice businesses that don’t have their books in order. If client files and advice notes aren’t well documented most licensees will be extremely reluctant to facilitate a deal, which forces the adviser to either rethink their licensee relationship or abandon the acquisition.

“When we see a business that’s messy it really puts off the buyer,” Fine says. “It doesn’t matter how great the business is.”

The broker reveals the increased role of licensees in the acquisition has forced him to change the way he operates, with dealer groups now being brought into the process much earlier.

One of Fine’s clients, Celest Long, says the buyer’s licensee played a significant role in the deal when she recently sold her Sydney advice practice.

“When you get the deal done you can’t expect it to be finalised in the first instance,” she says, explaining that in her case the licensee was keen to segregate liability between themselves and the business they were taking on board. “It’s just further scrutiny being brought in,” she says.

Low-value clients

Fine reckons buyers themselves are also much more focussed on profitability after the Hayne royal commission, with acquirers “not that keen on low-value clients”.

“When we produce data in an MOU we do a chart that pins the average value per client on a graph and in a lot of cases they cut the tail off at a certain point and offer very low multiples for low-value clients,” he says. “In some cases they won’t even include those low-value clients.”

Each acquirer has their own view on low-value clients, he continues, with some having hard benchmarks on profitability and others willing to assess client books on a case-by-case basis.

“Some acquirers are happy with $1000 or $1500 if they’re confident they can do something with that client, they’ll still look at what they can do with them,” he says. “You know, how has the book been serviced? What is the potential growth in a PF acquisition? It’s not an absolute deal breaker.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at tahn.sharpe@conexusfinancial.com.au
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