It has often been said that fortunes are made in the bad times rather than the good. For those looking to capitalise on their businesses in the current tough climate, by either exiting or raising expansion funding, this saying should provide some comfort.
Valuations being placed on financial planning businesses have been impacted not just by the general malaise in the world’s financial markets but also by the uncertain future shape and structure of the financial planning industry.
But savvy investors relish the opportunity to buy assets, be they stocks or bonds or privately owned businesses such as financial planning practices, when values are low and the future seems uncertain. So, how does one take advantage of the current difficult climate?
Raising money for expansion in the current climate should be easier than it is. Most equity investors look to what the immediate returns will be and most debt investors (lenders) want more security than normal. This is despite the obvious truism that it is much better to invest at the bottom of the market than the top. People are people. Many studies have shown that while people are both greedy and risk averse, the latter usually outweighs the former in investment decisions.
So, to expand, practice owners should be looking to take on debt rather than equity if possible, with the added bonus of comparatively low interest rates. The time to diversify their risk was in the good times. Now is the time to concentrate the risk – that is, take on more risk. Often, of course, this is a personal and/or family decision.
Selling a business in the current climate, particularly in the uncertain world of financial planning, is similarly, if not more, difficult. Practice owners need to be patient and offer a consistent and credible message to potential buyers. Ideally, they will have drawn up a list of buyers two or three years ahead of when they would like the transaction to take place, leaving a further one or two years in order to provide a work-out period.
Those who know most about the industry are more likely to invest when the future is uncertain, so other financial planning groups, the big aggregators and current senior staff are the most likely buyers at present. Because it is more difficult to borrow currently, vendor finance has greater value than at other times.
With the three financial media companies I have founded and subsequently sold during the past 25 years, one went public during the ‘dotcom’ boom, one became a trade sale to an international publisher (of Money Management) and one became a leveraged management buyout. I found in each of these businesses that it was easier – and a lot more fun – starting the business than selling it.
