Key challenges to overcome when selling an advice business today

In our second part on succession planning Amplifi Group managing director Fred Ohlsson looks at the options available to advisers.

Monday, September 18th 2023, 6:00AM

by Fred Ohlsson

Everyone knows that the backbone of the New Zealand economy is small to medium businesses. Just to put that into perspective, according to MBIE data, 97% of Kiwi businesses (546,000) employ fewer than 20 people, and they contribute over a quarter of our GDP and 42% of the economic value-add.

Thinking about the financial advice industry and drilling down to those that offer predominantly investment advice, it would be fair to say nearly all would be in this key group of New Zealand businesses.

And, like all small businesses when getting ready to sell their business, the challenge is getting the right price, at the right time and making sure their clients still get the independent advice and service they signed up for.

David Boyle highlighted in his article last month some of the softer themes that have impacted advisers thinking about getting ready to sell their business, which included:

Their day-to-day activity hasn’t really allowed them to plan and think too far ahead in the future
They haven’t been able to find new advisers to buy into the business
They are happy to just keep doing what they are doing and slowly wind-down their practice, mindful if a health event occurs then this would be a challenge

The one thing that we have identified, after talking to over 40 adviser businesses around New Zealand, is every owner is unique and at a different stage of this transition and a one size fits all approach is not going to work.

However, there are a range of key challenges that genuinely impact effective (and timely) sales of advice practices around the country. In this article we’re going to take a deeper dive into some of those key challenges, while highlighting some possible solutions Amplifi are providing today.

Advice businesses are generally thinly capitalised

As we know, many small businesses find it hard to survive in the early years. Getting started is tough and takes time. However, once things have improved and the business starts to grow and revenue starts to flow, salaries and administrative costs are often kept too low. And then when dividends grow, most, if not all, might be taken as income for the founder and not provisioned over time in the business to account for more resources and support, let alone succession planning.

The impact of the above is often an inflated annuity income stream that is not sustainable for a future purchaser since it doesn’t reflect the true costs of running the business when the owner decides to leave. Founder advisers can then be left with a harder-to-sell business where they are “The” business, instead of an easier-to-sell actual advice business.

You might be lucky that someone knocks on your door, indicates they want to buy your business and writes a cheque for you today.

Attracting and retaining new advisers is hard

The advice industry is not always seen as a profession. Barriers to entry are low because there are no tertiary qualification requirements, which means it is not necessarily an attractive place to work for graduates. To attract the next generation of advisers a salary model and increased qualifications of entry and ongoing development are required.

However, those seeking advice are not only looking for advisers with qualifications, but who also have life experience and can relate to their personal circumstances. Building experience for new advisers means an earlier investment of time and money: something many advisers often choose to do too late.

Equity has historically been offered to employees (once they are a good fit), however the allocations can be limited because the cost of entry into a mature practice can be quite high.

Add higher cost of living expenses and interest rates tripling and many staff are not able, or willing, to increase their exposure to higher levels of debt to buy equity.
This forces some business owners to reassess their succession and exit plans in the process and, in some cases, work a lot longer than they had expected.

Partnerships are hard work too

Unlike other professions, be it accountancy or legal firms where partnerships are the norm, advisers have found this approach challenging on a number of fronts. The model requires collaboration, an established shared services model and mutual respect between partners with different skill sets, and an aligned strategic objective.

If these fundamentals are not in place, over time individual owners can feel they have lost their identity and their independence, a reason that many started the business in the first place. In a number of cases this has led advisers to break up the partnership and go back to where they were before. Then they are back to square one and, again, they need to reassess succession and exit plans.

So, what are some of the solutions out there today?

Well, you might be lucky that someone knocks on your door, indicates they want to buy your business and writes a cheque for you today, so you can walk out of the business tomorrow. This is most likely to happen if the purchaser is a larger corporate. Under this scenario, your clients might be transitioned to the purchaser’s service model (and maybe even products) and will not get the service and advice they signed up for.

While this is an approach that might work for some, many investment advisers we have spoken to over the past 18 months, do not see this as their preferred option. Essentially it goes against everything they have believed in and worked for when providing trusted advice and investment products for their clients.

Instead, most advisers we have spoken to like the idea of remaining in the business for a while and being more focused on the provision of advice to clients rather than managing business and regulatory activities.

So, planning a phased business transition and adviser departure over time, not only helps protect their business value and the purchaser’s investment, but also ensures a smooth transition for clients to the next generation of advisers.

At Amplifi we discuss with the business owner what their long-term objectives are and how they feel most comfortable to transition out of their business.

There is no one size fits all approach and many things are taken into consideration. These can include, but are not limited to, the time they want to stay in the business (even after they sell it), the amount of capital they want to take either up front or over time in tranches, the continuation of independent advice for their clients, and ensuring that the current staff are looked after when the sale is complete.

Amplifi works with the owners to consider all of those priorities and offer a range of solutions that typically include:

Taking an initial equity stake into the business, thus releasing some capital to the owner on day one
Developing a phased approach to allow future capital releases while taking into account the employment of new advisers to help with the transition and growth of the company. This could be as short as a year, or up to five years, depending on individual circumstances
Amplifi brings expertise in risk and governance that helps advisers and their businesses navigate the new regulatory environment

As David mentioned in his last article, what is very important to advisers we have talked to, is making sure their clients still receive the same level of quality advice and service. This is particularly important for advisers who continue to live in the same community and want that comfort when continuing to bump into their old clients for years to come.

Planning and phasing the sale and resourcing of the business together with the purchaser is paramount to get this right. Only then can advisers be confident that their old clients are getting the advice and service they signed up for.

Disclaimer: The above article is intended to provide information and does not purport to give investment advice.
*Amplifi Group is a financial services provider that owns Mint Asset Management, Sage Wealth Management and Totara Wealth Management.

Fred Ohlsson is the Managing Director, Amplifi Group.

Tags: Amplifi Group