investor daily logo

Succession plans on the agenda

By Reporter
3 minute read

Financial advisers should re-evaluate their succession plans to include a long-term strategy.

Financial advisers have been urged to re-evaluate their succession plans to include long-term strategies rather than one-off plans, following suggestions the industry's good run of high selling practices won't last.

MLC succession & acquisition services manager Bob Neill said many principals of financial practices have delayed exiting or selling their businesses because the market has been exceptionally good.

"I think the prices of financial planning businesses at the moment are pretty high. And they're going to come back," Neill said.

"It does worry me a little bit because we see prices in the market at the moment where you look at it at earnings before interest and taxation(EBIT) valuation model, on these businesses they're being sold and priced at 8 to 9 times EBIT.

"And if you look at organisations like the banks in the financial sector they're trading on 14 - 18 price earnings (P/E) which is about 10 to 13 times EBIT. So I think that's going to come back."
Neill said this trend wouldn't last and predicted there will be a significant shift in the next three to five years, from the practice ownership model where practices are 100 per cent owned by the founding principal to multiple ownership.

"I think a lot of people have delayed going out," Neill said. "Conditions have been exceptionally good for adviser businesses I don't think anyone could point to a better set of circumstances for growing great profitable businesses that we've had in the last three to four years.

"So a lot of people have stayed in as a consequence of that. Inevitably that cycle is going to diminish and it's going to trigger even a further acceleration of people getting out as the growth comes out of those businesses. So this whole issue of having a lot of people arriving, if you like, on the exit doorstep at the one time means that the process by which you position your business and plan around it is going to be far more challenging."

Another challenge facing principals is the nature of how advice businesses valued equity, Neill said. Stakeholders will need to plan their strategy far more carefully in conjunction with potential successors, he said.

"When we start looking at that sort of model, it means there's going to be far more sell down stakes in succession planning," Neill said. "So we're going to see people selling pieces of equity to different people for different values at different times. That brings a lot of challenges."