Expand your portfolio with a financial planning practice loan
Buying a financial planning portfolio or expanding your current practice will usually require a financial planning practice loan. Find out how to get approved.
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A financial planning practice loan can be used for a number of reasons, including the purchase of an existing portfolio, working capital to fund the day-to-day operations of your existing financial planning practice, or the purchase or fit-out of commercial property.
Regardless of the reason, being approved for a financial planning practice loan can be difficult at first, particularly when dealing with lenders that may not be aware of the strengths and advantages of the financial planning industry. Read on to find out how to maximise your chances of getting approved for a financial planning practice loan.
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The financial planning industry
2013 saw a number of regulatory changes to the financial planning industry. The Future of Financial Advice (FOFA) reforms overhauled the fee structure of the industry, moving all financial planners away from a commission fee structure towards a fee-for-service model.
The reforms aimed to raise the standards of the financial planning industry as a whole, and to do away with the long-accepted practice of charging ongoing commissions from clients despite no additional value being added.
The effect of the reforms is that some financial planning clients acquired prior to 2013 remain on a commission model, while newer clients are solely charged on a fee-for-service basis. This can make valuing a financial planning portfolio difficult, necessitating the balancing of commission clients against newer fee-for-service clients.
Buying an existing financial planning practice vs setting up a new practice
You've been working in the financial planning industry for a number of years and feel it's time to move out on your own and start your own practice. Before applying for finance, you'll need to decide whether you plan to buy an existing portfolio or set up your own practice.
Consider the following:
- If purchasing an existing portfolio, you will need finance to cover the acquisition costs. If starting up your own practice, you may need finance to purchase or fit out commercial property or for start-up funds.
- An advantage of starting your own practice is that you will have the freedom to determine the types of clients you want to deal with and the types of products you want to offer, rather than taking on the make-up of an existing portfolio.
- An obvious advantage of purchasing a portfolio is that you can bypass the stage of acquiring new clients and can hit the ground running by continuing to service the existing clients.
If purchasing an existing practice, ensure that you establish from the outset what is included in the sale. Is the seller offering the portfolio of clients only or does the potential offer include, for example, business premises, office equipment and a non-compete clause? It is not uncommon for business negotiations to fail simply because the parties are not on the same page from the outset as to what is included in the sale.
Valuing a portfolio
Regulatory changes to the financial planning industry in 2013 have had a drastic impact on the way financial planning portfolios are valued. There are two common ways of valuing financial planning portfolios.
The multiple of recurring income valuation method reflects the reality that the buyer is, in effect, purchasing the rights to the future income generated by the client portfolio. It is calculated by considering the recurring income generated in the previous 12 months, including commissions and recurring fees. One-off fees and commissions, including implementation fees and plan preparation fees, are not included in this valuation method. A disadvantage of this method is that it does not take into account the costs of producing the recurring income. This valuation method is typically only valid if you are planning on subsuming a portfolio into your existing business and costs structure.
The earnings before interest and tax (EBIT) valuation method does take into account the costs of producing the income and is therefore a more realistic relation method. As a guide, an efficient, well-organised and well-established financial planning practice could reasonably net a 20% profit on gross earnings.
Factors to consider when purchasing a financial planning practice
When weighing up the potential purchase of a financial planning practice, consider the following:
- How has the financial planning practice been performing over the past three years? Sellers should provide full financial records, subject to a confidentiality agreement, on request.
- Why is the practice being sold? A thorough consideration of the financial records of the business should reveal any underlying financial difficulties of the practice which could affect your decision to purchase, or the negotiations of the purchase price.
- What is the reputation of the practice? Ask the current owners for contact details of existing staff members and clients to gauge the status of the practice in the community.
- What is the composition of the client portfolio? Does it include a diverse mix of clients and products?
- How does the composition of the client portfolio match with your own skills and expertise?
- Keeping in mind the regulatory changes in 2013, to what extent is the current revenue of the practice reliant on commissions from pre-2013 clients?
- Will the seller consider a transition period? Are they willing to contact or even introduce you to their current client base?
- Will the seller commit to a non-compete or restraint of trade clause?
- Are there any liabilities that are yet to be resolved? Will the current owner indemnify you against existing debts and potential legal problems?
Getting approved for a financial planning practice loan
The purchase of a financial planning practice or portfolio is a major investment, one that requires proper consideration of a number of factors. Your options for finance will largely depend on your current financial circumstances, but could include:
- A secured business loan, allowing you to take advantage of interest rate discounts if you have residential property you can offer as security for the loan
- An unsecured business loan, suited for those who do not have property to offer as security
- A business loan with a guarantor, suitable for people who would otherwise not qualify for a secured business loan but who have one or more people who are willing to offer a guarantee for the loan
- Cash flow lending, in which funds are extended based on the security and current cash flow status of the business
Understanding business loans
If dealing with one of Australia's big banks, some kind of security – either residential property, commercial property or by way of a loan guarantor – will generally be required. Non-bank or alternative lenders, such as those detailed on this page, are more likely to offer unsecured business loans, generally with shorter loan terms.
A major factor that lenders take into account when considering an application for business finance is the age and stability of the business. A financial planning practice loan to fund the start-up of a new business can be much harder to get approved. Applicants will need to have a strong financial position and offer either residential property or a third-party guarantee for the loan.
A finance application to purchase or further develop an existing financial planning practice can put applicants in a stronger position, as the lender can use the current turnover of the business as an indicator as to the serviceability of the loan.
As always, different lenders will offer different products that will suit people based on their individual circumstances and loan requirements. Compare your options to find the right lender – whether a major bank on independent lender – to fund your financial planning portfolio.
How can I increase my chances of being approved for finance?
The best way to increase your chances of being approved for a financial planning practice loan is to be fully prepared for the finance application process before you begin. As a financial planner you will have no problems creating a business plan for your proposed practice, but ensure to enlist the help of your accountant so that every base is covered. Include profit forecasting in your business plan, along with your current procedures and systems and any changes you will make to reflect the potentially different make-up of your new client portfolio.
In short, lenders want to be satisfied that you have a clear plan for making your financial planning practice a success, and that you have demonstrated success in similar endeavours in the past.
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