Although aggregators, or consolidators, have been buying up big in the marketplace, some of their activities have been curtailed of late due to the market environment, according to broker firm Kenyon Prendeville.
The firm's director, Steve Prendeville, defines an aggregator as a company looking to achieve size and scale by buying multiple businesses.
The drop in aggregation while companies wait for the market to recover is particularly evident among companies that were acquiring businesses with the view to list on the Australian Securities Exchange (ASX), the firm's second director, Alan Kenyon, says.
Kenyon Prendeville has identified a few of the big players, including WHK and Financial Index, that are still active in the market despite current conditions.
Those that had immediate plans to list but are now no longer buying include Centric and Storm, while listed companies still acquiring include Snowball and DKN, Prendeville says.
Aggregators will consider a number of factors when looking to acquire practices and other related businesses, such as the quality and ongoing nature of client lists, funds under management (FUM) and the kind of exit strategies in place.
Kenyon Prendeville facilitated over 70 transactions between businesses in the past five years. Prendeville says practices become more attractive to aggregators if they have a succession plan in place and are profitable.
Practices are now selling for less than they might have six months ago and Prendeville says they are still being purchased by multiples, however, it is recurring revenue that is often less in recent transactions.
Before November 2007, aggregators were more likely to acquire on an earnings-before-interest-and-tax (EBIT) base of six to eight times, Kenyon says.
"This is because financial practices are trading on price earnings (PE) ratios of historically somewhere between 16 to 20. This means they can arbitrage from their acquisition or buy it for a set price even when the share market will value it at a higher price," he says.
Last year, many aggregators were looking for businesses with similarities to their own, such as if they were both servicing high net worth clients, Prendeville says.
"What they were looking for is common cultural elements, because what people have learnt from past failures is that you need to get the cultural fit correct," he says.
The most active aggregator over 2007, WHK Group, says it will continue to purchase businesses it views as a strategic fit and compatible with its plans.
Having predominantly purchased accounting and financial planning businesses in the past, WHK managing director Kevin White says some of the other businesses the company has acquired recently include general insurance, finance broking and risk insurance firms, as well as self-managed superannuation fund (SMSF) businesses.
When acquiring businesses, WHK purchases them outright and virtually always as a 100 per cent stake.
The group has purchased 24 separate businesses this year alone, and now has around $9 billion in funds under management, White says.
These businesses include small and larger practices, such as William Buck in Brisbane, which was purchased by the group in November 2007.
The group's latest tuck-in acquisitions were announced in early April and include accountancy practices Lisa Richards and Associates, Kingsun Accountants and Jan Lude, as well as finance brokering firms SJ Finance and Fee Parcel.
As part of the next stage in its evolution, Professional Investment Services (PIS) has decided to establish a new business that will aggregate some of its top financial planning and accounting practices.
PIS managing director Grahame Evans says the dealer group plans to home in on suitable practices -most of which are already part of the PIS network - and will purchase 20-25 per cent of those qualifying practices.
"Many of the businesses involved with Professional Investment Services can count themselves amongst the most profitable and better financial planning and accounting businesses in the country," Evans says.
He adds that once Professional Investment Holdings, the holding company of PIS, achieves critical mass (at least 20 practices) the plan is to list on the ASX.
Evans says although the actual number of practices may vary according to how large the acquired practices are, ultimately ASX listing will occur once enough acquisitions have been made so as to garner market interest.
Over the next 12 months, PIS hopes to have made at least 10 part acquisitions under the new business, he says.
For Best Advice chief executive Tony Fenning, the process is all about building on the group's national network through mergers, rather than outright acquisitions.
Best Advice is unique in that it collects practices by adding the selected business into the network and giving each practice a share in Shadforth Financial Group.
The network started with seven firms around 18 months ago, Fenning says, and has grown to 11 with the addition of four practices in April.
The network now includes Arnheim Gillard and Partners, Gannon Growden Schonell and Associates, Guest McLeod, Heraud Harrison,
Keysbrook Financial Services, Douglas Wenck, Ellwood Barry McPherson, Kilkenny Rose, Shadforths, Haintz and the Money Managers.
When looking for businesses that will fit in with the network, Fenning says the idea is to seek out those that share its friendly and close-knit culture.
"Because we've been so focused on bringing together a union of equals around the country, we've really been looking for those that share the same view of the world and share the same aspirations," Fenning says.
By the end of the year, Best Advice is planning to add another handful of practices that have already been assessed and given the green light as a suitable fit.
The collective group currently has around $10 billion in FUM, a figure Fenning says will rise to around $15 billion by year's end with the next round of mergers.
The new additions have affected the way the national network is run in that considerations such as compliance, technology, investment research and training are now taken on at a national and not singular level.
"Instead of each of the firms running this separately, we now run what you might call the back-office services, or the dealer services, nationally," Fenning says.
Shared costs are one obvious advantage.
A large number of Shadforth owners are all directly involved in running the national business so things do not always run seamlessly, Fenning says.
"One wit around the industry that shall remain nameless, has said that my job has been like getting them out of their trailers in the morning and onto the set," he says.
Once the new partners join the ranks, he says Shadforth will focus more on looking outside the current close-knit network.
Best Advice is looking to list on the ASX towards the end of the year, he says, which may give the market time to stabilise.
Perth-based dealer group Plan B Wealth Management is another company looking to grow both in terms of practices in its network and straight acquisitions.
Plan B in April announced it plans to significantly grow its affinity partner business arm, Partnership Financial Services (PFS), in the next 12 months.
PFS has nine practices signed up to its partnering program and in terms of acquisitions, Plan B managing director Denys Pearce says the decision-making process behind purchasing practices is always very involved.
"The decision whether or not to make an acquisition, and the decision obviously on the other party's behalf as to whether to be acquired, is a very significant one," Pearce says.
"You have to expect that the number of practices you may run your ruler over is very large relative to the number of firms that you may actually put a non-binding proposition to."
Once due diligence is completed, the number you actually proceed with is a lesser number still, he adds.
"There is very high redundancy in the process of identifying and fleshing out a proposal, then making a decision as to whether to proceed when it comes to acquisitions," he says.
When looking to acquire businesses, Plan B will assess a practice's qualitative components, he says.
"This is both in respect to the client base and the principles of the advisory firm, particularly in terms of the quality of the client relationship, how they provide the service to the client and how they engage with the market," he says.
"Some of the affinity partners we bring on and some of the acquisitions we make could be quite small, but we do that because they are the right fit and we believe that they have very strong prospects, particularly with the enhancements we can make to their business.
"Equally some of [the businesses] will be quite large, but we're not wedded to saying that they have to be a minimum size or have minimum revenue. To us the qualitative issues are more important."
