Operate a Financial Planning Practice and looking to access debt? Credit providers have become increasingly focused on customising their lending policies accordingly. The recent Government Guarantee Scheme has also extend the ability of many financiers to participate more aggressively in professional services on many cases.
Funding can be a necessary step for growth (acquisitions etc.) or to help in building succession planning.
Financial Planning Practices
SME's in the Financial Planning industry generally provide advice relating to a specific financial matter requested by a client; or a complete and holistic assessment of a their financial situation.
Accordingly to IBIS World data, there are around 11,400 businesses in the industry with combined Revenue over $2.2 Billion and over 22,000 staff. Not surprisingly the industry has undergone considerable transition in recent years.
The implementation of the Future of Financial Advice ("FOFA) legislation in 2013 led change, then the FSRC, and revenue declined drastically over the following years, as a number of operators exited the industry. There has also been increased competition from accountants over the past decade.
On a positive note, IBIS World expects Industry revenue is forecast to expand at an annualised 0.7% through 2025-26, despite there being less participants.
Like other professional service firms, these businesses are chasing a better recovery of fixed overhead costs, but they may have a need to acquire new people to meet growing demand for services.
With a changing business model and extra layers of compliance, many in the Financial Planning industry haven't been able to achieve their ideal profitability.
Michael Harrison, Executive Chairman at Peloton Partners, sees a wide range of operators in the Industry. "Building an optimal business model has become a sore spot for advisers as they struggle to balance the needs of their clients with their own profitability. In a post Royal Commission world, financial advisers have feared potentially significant changes amid forecasts that the industry may shrink and relatively quickly."
At a practice level this is playing out in a variety of ways, but as the numbers of advisers shrink, behaviours change and businesses reorganise the future will be an interesting one.
"We are optimistic about the future for the industry. Clients may advance their use of technology to make their financial lives easier; however, there will remain the need for customised advice to satisfy more complicated financial needs." says Mr Harrison.
Lender Appetite - Financial Planning
Banks have gone through some volatility in their appetite for lending to Financial Planning businesses. Historically, this was more straightforward given the nature of commission based recurring revenue, which built some confidence on the continued ability to service debt. In the new world, there is a enhanced focus on the "business" of which the strength of existing Revenue is still a key part, but not the only consideration.
As a starting point, some financiers will limit lending to certain Authorised Representatives “AR” of a Dealer Group, so you will need to confirm that lending to that licence holder will be supported.
To remove any concentration risk, the business generally needs to have two or more owners/advisers.
In terms of participants, ANZ Bank, Westpac, NAB, Macquarie Bank, Judo Bank have policies in the category.
Financial Planning as a rule have a fairly strong appetite for risk, especially in comparison with say the accounting industry. As a result, success in managing money and debt typically embraces the following strategies.
- Have a Realistic Loan Term
Planners often want an interest only term for as long as possible. However, with benefits from the funding unlikely to sustain forever, a longer term P&I facility is usually a better option than an initial interest only term, followed by aggressive amortisation.
- Consider the Security profile and its link to Credit terms.
One of the positive things about borrowing in Professional Services, is the ability to borrow without tangible security such as property or varying levels of guarantees etc. However, make sure the nature of the security provided fits the resultant impact on price and/or terms.
Lender philosophy is advancing in assessing professional services firm, including Financial Planning.
So what are these Worth?
Financial planning businesses are either valued as a multiple to the recurring income of the business, or a multiple to Earnings before Interest and Taxes (EBIT). These results are now across a much wider band, with higher amounts paid for quality assets.
According to Mr Harrison, "Unlike some professional services categories, there are quite a few sellers. However, there are still a number of well resourced buyers looking for the right opportunities".
How much can I borrow?
When it comes to talking with the bank, it is important to determine what the actual income is to use for loan servicing. Yes, most of us are familiar with EBITDA, but what about adjusting for a market salary for the owners? When putting in a market value of the Owners' contribution this can change this number materially. This is what we call "EBITDAO".
Once the income is normalised, borrowing limits are generally based on the following guides:
1) Maximum loan amount to be less than around 2.5 - 3.0 times EBITDAO.
2) Maximum loan amount to be less than 70% of valuation as above.
3) Maximum Loan Term of 10 Years.
Criteria does vary widely and will keep emerging as trends in the industry develop.