In this article written by our wealth practice broking joint venture team of Jason Shepherd and Mark Witt we look at the current considerations for bank lending to the wealth sector and by implication, how this may impact a change of control transaction (including a partner buy in). The article is the first of a series addressing issues facing wealth practice owners as many more start to consider their own financial futures and the value of their business.
After a pause in lending (owing to the twin impacts of Hayne and Covid) the banks have returned to the table, but with refined conditions and caveats. Funding is available to practice change of control transactions however and for those prepared you could enhance your own sale price or be able to bid more for a target practice with bank support.
Banks have been funding wealth practices for many years. As a reflection of an industry with stable customer bases and revenue sources, credits were simple and rules-of-thumb multiples made funding relatively straightforward and predictable (though some also relied on property mortgage as the ultimate backstop).
Uncertainty in the sector from Hayne and other regulatory effects on future fees and a refocus on risks post Covid has seen some banks leave the space and others refine their approach to funding the segment. To this end, we have spoken to lenders to the sector to update their current positions and have identified the following considerations:
Size Matters: A single partner practice buying a small book from an outgoing partner may find it hard to secure stand-alone finance. Some of the lenders have indicated a minimum lend of $0.5m to $1m. Exceptions can be made where there are other reasons to approve like a significant existing customer relationship i.e. a high share of wallet for other bank products.
Gearing: There is a wide range here, which is very dependent on individual circumstances. As a rough guide: 60% to 70% on recurring fees; or up to 60% LVR against practice value; or 2.5x to 3x adjusted pre-tax earnings.
Partner Numbers: While some lenders will not look at a single partner practice (with one having a 3-partner minimum post transaction), others are still happy lending to a single operator. In a single-operator situation a lender may be more likely to insist on additional security in the form of residential property, however.
Tripartite arrangements: Some of the major lenders are requiring tripartite agreements with the advisors’ licensees as a condition of finance. This is required for the lender to gain a degree of security over income flow. Not all licensees are approved for credit - sole or niche licensees may present credit issues to some lenders.
Neo lenders: There are options beyond the major banks for funding. For example, Judo Bank is currently lending to the sector in the eastern states, bringing a focus on old-school relationship banking to the space.
More Vetting: Banks are doing more detailed vetting than before, and they need more detailed information to perform this analysis. As a buyer you are the bank’s primary source of information on the prospective acquisition – you need to have the required information at your disposal.
As a vendor (whose outcome hinges on a buyer being able to secure finance) you have a direct stake in the outcome of the application. It's a good idea to have this kind of information prepared and packaged well in advance and should be part of the data room material prepared by your broker.
Takeaways:
- Those lenders remaining in the sector are actively lending and pursuing transactions under various circumstances, and all are available to discuss details with both vendors and acquirers when planning for change of control transactions.
- Your first step: Is your licensee on the bank’s approved list and/or has a standard tripartite being entered into? Feel free to discuss with us.
- Be prepared. Vendors can gather the information that an acquirer will need to repackage for a lender. Running a structured DD process within an appropriately targeted offer process is key. Contact us to discuss.
- Knowing circumstances around the fundability of a practice will prepare you in your expectation setting (buy-side or sell-side) including preparing for new partner entry where the partner buy-in is partially bank funded; and
- The implications of the above for long term transition planning is - prepare early! You may be planning for a junior partner to buy in (or buy you out) but they may not be able to borrow.
Get in touch with Jason Shepherd on 0411 427 176 or jason@adviserratings.com.au to discuss these points or for a confidential discussion on practice buy or sale opportunities. Go to https://pro.adviserratings.com.au/business-broking.html#intro for more info.
Jason has worked with Adviser Ratings since 2017 as Board adviser and on several commercial transactions including establishing the relationship with Practice Exchange and multiple capital raisings. Jason is a licensed business broker who is accredited with the Practice Exchange platform and brings over 20 years of financial advice and structuring skills to the business. Practice Exchange and Founder Mark Witt has specialised in wealth and accounting change of control transactions for 20 years.
Article by:
Comments0