There are a number of initiatives and programs that can assist in building practice value. As far as business values go in recent times, many financial planning practitioners see a 30 per cent EBIT as unachievable. While FoFA has created a level of uncertainty in the industry, falling EBITs are primarily due to the fees paid to licensees because they are in percentage terms.
So for every extra dollar of additional revenue a practice earns, the licensee takes an additional percentage, thereby reducing the practice’s margin. However, a business can improve their EBIT and bottom-line profit overnight by working with “business-minded” licensees that charge fixed fees for their services.
Most licensees predominately charge a component of a percentage-based fee. Some have a hybrid model, some charge a flat fee, and a lot charge percentages from dollar one and tier down from there. This can range from 15 to 17 per cent for businesses with less than $300,000 revenue, while those between $300,000 to $700,000 will come back to about 10 per cent and businesses with more than $700,000 revenue can come down to as little as 5 per cent.
Some businesses then have a flat dollar fee with a percentage on top, and that flat dollar fee could be around $20,000, with a 2 to 3 per cent percentage-based fee on top of that additional revenue.
Flat dollar fee models
We were like most other dealers in that we charged a percentage-based fee, but earlier in the year we changed our dealer model and moved to a flat dollar fee basis. With FoFA coming in and related issues around grandfathering and volume bonuses, dealer groups need to add value through providing tools, mechanisms and other support to assist advisers in transforming their businesses.
Our view is that we can’t ask our advisers to operate a professional flat dollar fee service business under FoFA, but have us in the background still taking a percentage of the revenue they create. So all the way down the value chain you have to get that alignment in order to take the industry to a more professional level.
If we can assist businesses to operate professionally, they can use whatever administration platforms they need to use in order to run their business. But rather than relying on providing shelf space for product, if they have a good value proposition and a good service model for their clients, they can actually charge a larger fee to the client and get a better margin in their business.
Take for example a $500,000 business that is on a 15 per cent dealer split. They’re paying a significant amount of fees, but if they increase that business to $750,000 they have to pay an additional 15 per cent of that extra $250,000 to their licensee.
Improving EBIT
If a business has more cash flow and a better EBIT, their financials look a lot better so they are able to go back to their bank and talk about acquisitions. So they can buy another business and bring another $200,000 to $300,000 worth of revenue into their business – but they haven’t got that incremental percentage-based cost so they are getting an immediate cost saving out of the other businesses.
EBITs normally run at anywhere between 10 and 15 per cent, so it’s a pretty exceptional business in our industry that has a 30 per cent EBIT. Where an adviser is looking to sell their business and develop a succession plan, if we can get a business that has a 30 per cent EBIT, 3x occurring is equal to 5 x EBIT. It doesn’t matter from a seller’s point of view how someone values their business, it’s still going to come out at the same figure.
So by moving to a flat dollar fee basis you can have a 10 -15 per cent EBIT but overnight you can go to a 20 per cent EBIT just by having a flat dollar fee arrangement.
The feedback we have had about flat dollar fee arrangements is positive. It’s good for cash flow, makes adviser’s financials look a lot better, and they can go back to their bank to discuss that acquisition they wanted to make.
