According to Radar Results principal John Birt, advisers seeking to sell their practice are considering vendor finance as an alternative should they find it difficult to attract a suitable buyer who needs traditional finance.
“While not ideal for many sellers, it can provide the solution to receiving the capital over an agreed period and at a reasonable interest rate on the deferred payments,” Mr Birt said.
Additionally, he noted that traditional lenders to financial planners and accountants have raised their minimum loan requirement.
“The big four banks are now asking for any approved loan to be at least $1 million, which has stopped financial planners and accountants from expanding,” Mr Birt said.
“It has caused several non-traditional lenders to surface to accommodate loans of between $250,000 and $500,000 by merely using the equity in the business they are buying.
“Naturally, interest rates are higher due to the lender taking on a higher risk.”
The availability of credit is a driver of asset prices. If you look at margin lending from RBA statistics, it peaked at $40bn+ in 2007. Then the margin calls and FOFA hit. Twelve years later, margin lending is now $10bn in an economy which has grown over that period. It has taken a similar period of time for sharemarket prices to recover. Are we having a similar moment in practice values?
A bank would be reluctant to lend against these businesses – there are no hard assets as security. You have to trust that the departing adviser has been operating compliantly. Otherwise cashflows get turned off. Good luck managing this risk as buyer !
So, the availability of i) cheap debt from the likes of AMP Bank and ii) comfort in BOLR exit iii) compliance lite, allowing “fee for no service”, enabling purchaser to do no work for fee. The comfort of these settings has contributed to asset valuations rising. For us outside the AMP world, this has given a transaction multiple to be printed and used by business brokers. None of these factors exist anymore. In fact, the AMP market has disappeared completely.
I am sure there are come great businesses out there, but like the external equity markets, what are they really worth when % normalise, or in this case funding does not exist? Or, guess the direction? There is a real reason why these businesses are not selling.
It would be nice if the business brokers actually added some value, rather than tell me a transaction price.
Why would you finance someone into this business? Surely it fails the ethical test.
Only one of the big 4 are really in this and Macquarie don’t seem interested anymore as their risk areas have tightened and don’t seem to like the industry as much
I am a finance broker that specialises in sourcing funding for financial planning and accounting practices for acquisition and succession funding. John’s commentary has some truths to it however I am still finding appropriate funding solutions for <$1m business lending clients. You just need to know where to look and what the different lender requirements are is my experience
You certainly do Harold and I highly recommend anyone looking for finance options to speak to you as you are one of the few who really know what they are doing out there! Thanks for being so helpful and your customer service is outstanding!
Harold you are the best in the business and if you can’t do it no one can. Your customer service is magnificent and you do what you say which is rare in this field. Thank you and I couldn’t recommend you highly enough!
who are these non traditional lenders? I am in the market for one
Unless you can value your business at a couple of million and sell to a big company this is the only way to do it. I am in the market of buying but a lot of sellers cannot get their heads around this.
Providing there is a willing seller and a willing buyer, a little bit of creativity will help to get the job done.
I know FP businesses post 1 Jan 2020 had any value anymore to sell. Would they even be worth 1x revenue as thats not even guaranteed with annual opt-in coming soon..
They’re worth every bit as much as an accounting firm, which goes for .65c for ITR through to $1.50 for SMSF fees. I’d say the entrenched nature of the FP relationship is where the value is. I purchased a business in 2015 which was fee for service and opt in, nothing has changed, it’s just an extra bit of paper to get signed in the meeting. If you can buy a business with a 40-60% margin before borrowing costs, that’s a damned fine investment as long as you are prepared to work and not sit on trail.
Interesting that accounting firm multiples for SMSF fees are more than twice that of other tax returns fees. No wonder accountants have been so aggressive in giving illegal, inappropriate SMSF advice. One wonders when/if ASIC will start to do something about this.