Strategi has been privileged to be at the forefront of this exciting landscape, and in recent months we have been actively engaged in numerous merger and acquisition discussions. In this article we want to share some valuable insights and guidance to help FAPs navigate these transformative opportunities successfully.

Exploring the FAP landscape: mergers and acquisitions 

The decision to buy a FAP business or a book of clients versus a merger is dependent on the buyer/seller situation and we are seeing FAPs doing both. 

Acquisitions: Smart FAPs are sorting out their balance sheet and/or loan facilities beforehand because prime deals often arise and conclude rapidly. By being prepared in advance, these FAPS are positioning themselves to seize opportunities swiftly and decisively. 

Another reason for doing this is due to the changing landscape. In the past, businesses could easily find affordable funding and identify deals before securing funds. However, today, the scenario has shifted. FAPs face funding costs of 10% or more, requiring significant profits to cover interest and repay capital within 3-5 years. 

Mergers: Where businesses are aligned, they have the same ethics and all the advisers want to remain providing financial advice, then merging of multiple businesses is usually a good option. Well executed mergers can launch the combined business into a whole new stratosphere when it comes to profit and value accretion. However, the transaction must be a win/win for both parties – if there is a winner and a loser then the merger will inevitability cause friction and disappointment.

Common M&A mistakes: our observations

Thinking it is all about reducing costs. Many businesses undertake acquisitions or mergers thinking that operating costs will plummet and that this will result in substantial profitability and shareholder value. However, our experience reveals that it might take up to 12 months for sustainable cost savings to become evident and they could only amount to 10%. 

Insufficient due diligence. Some purchasers only focus on the revenue stream they are acquiring and neglect to conduct adequate due diligence to assess the compliance status of client files. After purchasing a book of clients, a FAP must ensure that the client files are current and meet regulatory requirements. Unfortunately, we still encounter instances where acquired client books are little more than a database of names, contacts, and commission payment schedules. Bringing each client file up to date can sometimes cost more than two years of ongoing trail revenue. 

Insufficient capacity to service acquired clients. This is most common when a book of business is obtained from a retiring adviser. The purchaser may be acquiring over 1000 clients but doesn’t bring in new advisers to support them. They mistakenly think they can receive trail commission without actively servicing the clients. However, this outdated approach no longer aligns with the regulatory environment. The crucial lesson here is not to acquire more clients than you can professionally serve at once. Prioritise increasing staff levels before adding additional clients to your business. 

Positive M&A outcomes: our observations

Becoming centralised under one management or governance structure. Traditionally, small FAPs are founded and lead by skilled advisers who are passionate about client interactions rather than business management. By combining businesses, a professional management and governance team can introduce efficiencies, set a clear strategic direction, improve marketing, recruit new advisers and remove business operation hassles from the original owners. This frees up the original owner/s to win new clients and better service them. The benefit of professional management is often overlooked but is often the largest contributor to increased value.

Enhanced technology and processes: Upgrading technology and refining processes play a crucial role in achieving exponential gains following a merger or acquisition. Successful businesses in this sphere typically conduct a comprehensive review of their operations to ensure efficiency and effectiveness. 

As an example, Strategi recently worked with a newly merged business comprising 11 financial advisers. Embracing change, they implemented AI, process engineering, and database enhancements to streamline the advice process and elevate the customer experience. Within 12 months remarkable results were achieved:

• Advisers could take on 30% more clients.
• The initial client interaction and business processing time was reduced by 50%.
• Client satisfaction increased by 60%.
• Drafting of 30-page statements of advice, which used to take a day, was streamlined to 11-page statements in just 30 minutes.
• The business’s EBITDA* increased from 17% to 28%.

Valuation multiple increased. The large businesses are usually valued on a multiple of EBITDA. If the business doubles in size and the business develops a track record of good sustainable EBITDAs (e.g., over $1m) then their multiple can increase from around 4-5x to 5-6x and for larger businesses, it can be 7x EBITDA. However, scale is key to getting the higher multiples.

How Strategi can assist with mergers and acquisitions

If you are thinking of purchasing a book of clients or undertaking a merger and want practical advice around the pros and cons, then give the team at Strategi a call. From a no-obligation conversation right through to the services listed below we are here to help.

• Valuation of the goodwill/ ‘book value’ for either the buyer or seller.
• Undertaking a compliance assurance review so the purchaser has a good understanding of the compliance status of the business they are proposing to buy or the business planning to merge.
• Providing consultancy on the pros and cons of acquisitions and mergers.
• Undertaking a whole of business review of how to streamline processes and better use technology to increase business efficiency, productivity and shareholder value.

* Earnings before interest, taxes, depreciation, and amortization (EBITDA) is a widely used measure of core corporate profitability.