Business has been good, and you’re itching to dive into a riveting chapter of growth. Now, take a moment and think about it. Are you scared?
Good, because you should be. Acquisitions are like walking through a minefield – they require a heady mix of courage, strategy, and meticulous attention to detail. There’s so much that can go wrong, and even a couple of successful acquisitions can lead to dangerous complacency. Overpaying, losing productivity during the process, mishandling the team transition – these are not just potential problems, but real nightmares that can transform your dream acquisition into a waking horror. We all know someone who made an acquisition and it turned out badly, and every one of those went into it thinking it would be a good idea.
In this blog, the first in a series covering mergers and acquisitions, we’ll be covering what to do to start getting your financial advice business ready to acquire.
In its simplest terms, any acquisition may boil down to purchasing a client book that you can plug in and get standard economies of scale. These might be shared office space, shared internal services (accounts, reception, etc), centralised leadership, etc. They’re to be expected and represent the initial free-kick towards the merged businesses being greater than the sum of their parts.
These modest gains, when weighed against the risk that comes with an acquisition, may not be enough to justify lenders or critical stakeholders.
With careful planning and investment in the existing business, a far more compelling case for acquisition can be made, and more importantly help you avoid stepping on a mine when you do acquire.
From here, we’ll dive deeper into projecting combined revenue. Once we lay this groundwork, we’ll look at increasing combined profitability beyond simple scale in our next blog on this topic.
To get more than 1+1=2 on the revenue side, we want to make sure we know how much revenue we get from each actively serviced client right now, in a way that would easily be extended to a client from a target acquisition.
If we know what we charge our clients right now, have a clear structure for what we would charge clients (as they may differ from our current clientele), and know what we deliver, we can approximate the revenue upside for an acquisition.
Check what you’re receiving right now
Firstly, a clear categorisation process is necessary here to get visibility of what currently happens in your existing business. It doesn’t need to be the most complex, but having clarity in your business around where revenue comes from is essential.
Here we’ll talk about your ‘mainstream’ clients. These are standard clientele, who receive your ongoing or recurring services and aren’t subject to exceptions. Your mainstream ongoing or recurring clients should be clearly demarked from your discounted clients, clients on legacy pricing, and insurance-only clients. Excluding these confounding clients is essential if we’re to have any chance at an apples-for-apples comparison.
If you’re interested in learning more about client segmentation, you can see our two-part series starting here.
With clear categorisations, you will hopefully be able to get the reporting you need to identify the total revenue you receive from your current mainstream clients. If you need some help getting your data integrity sorted in your business so you can start getting more efficient and have better visibility, just reach out.
This is the baseline, the provable and averageable amount you charge. Any estimates of what should or could happen can’t differ too far from this.
Be clear, so you know what you should receive
Whilst looking at your current clients is important, their dynamic may well differ from that of an acquired client list, so it’s important to have a forward-looking approach as well.
Pricing can, unfortunately, be completely opaque far too frequently. If your existing pricing is based too heavily on guesswork, it’s impossible to tell with confidence what you could charge clients who have been acquired. Your business case for your acquisition will depend on current revenue.
For you, some questions which should have clear answers are:
- What fixed fees do we charge?
- What Funds Under Advice (FUA) fees do we charge?
- How do we identify what is FUA and what is not? Is FUA only the amounts where we can easily have a % based fee deducted from a product monthly? If not:
- Are directly held shares that get considered in portfolio construction under advice?
- Is a property within an SMSF we advise under advice?
- Are term deposits recommended by us under advice?
- What else might be an exception in or out?
- Do we typically charge any additional ongoing service fees, such as SMSF support, Centrelink management, cashflow support, or tailored reporting.
- Do insurance clients receive claims management included?
If the answers to these questions are documented, simple, and implemented consistently: You’ve done very well. You’ll be in a position where you could look at another adviser’s client file and identify quickly what you would charge if that client were your own. Furthermore, you’ll be ready to make a repricing transition take place when the time comes.
This provides the basis required to estimate what you would charge acquired clients. The simpler it is, the easier it’ll be to make that estimate. (You may have noticed, we like simple.)
Note: Share of wallet is relevant here. In comprehensive contexts, different advisers have differing levels of effectiveness bringing higher proportions of advisable assets under advice. This is an easy way to make the same client measure differently when applying a pricing strategy, especially those with asset-based fees. A business being acquired that has done a poor job of this will present significantly greater upside if you can improve upon it.
If you need help with your next repricing project, let us know. We’d be keen to discuss how we can help get it done right, systematically, from the start.
Looking at these together
If you have clear categorisation in place, and clear pricing structures in place, you can compare these two right now. For a mainstream client, does your pricing model seem to stack up? If not, why not? If not, what actions at the onboarding, FDS, and review stages might need to change?
Assuming they do (or will get there in time), when you go to look at an acquisition you can also:
- Compare their existing revenue per client (excluding clients who would not be mainstream) against your own, and see how the two compare.
- Review a wide sample of their client SoAs, and look at what they charge. If your pricing model would have those clients paying more, calculate the average difference.
You’ll then have two methodologies for calculating the difference in fees those clients would pay in the new business.
Take your pick, or blend the two. Either way, once you have determined their average fee per mainstream client, you are ready to figure out your revenue upside.
(Your average fee per mainstream client – Their average fee per mainstream client )
* The number of mainstream clients acquired
* Estimated retention rate
= Revenue upside
Increasing the share of wallet, charging separately for additional services, or other options may improve this even further.
Further reading: We’ve written about maintaining a Lost Business Register here, which will be important now and even more important after an acquisition. Asking for a lost business register from a prospective vendor can also be insightful and help with any estimates.
Consider this: Do you have the ability to call upon the following data points easily:
- Number of clients per category?
- Total fees per category?
Furthermore, could you ask a paraplanner or junior adviser to price an example client’s fees and achieve a consistent result with the practice principal?
If you answered ‘no’ to any of these questions, consider addressing these issues before looking at acquisitions.
If you said yes to all of the above, you’re in good stead and ready for our next blog, which will cover increasing profitability beyond simple scale calculations.
Whether you need help addressing existing issues in this blog, or want to streamline your process and increase your EBIT generally, book in a virtual coffee chat with us and we’ll see where we might be able to take your business together.
For more on this topic, with a focus on operational excellence, read part 2 here.