The purpose behind any business acquisition, whether large or small, varies from purchaser to purchaser.
A business may want to reposition for growth or profitability, enhance its product or service offering, increase scale, buy as a strategy to retain valued employees or perhaps it has aspirations to list.
Whatever the reason, current market turmoil has reminded buyers of the importance of assessing the risks of a transaction, with the right cultural fit between buyer and vendor still the key ingredient to creating a sustainable relationship between businesses.
In some cases buyers are offering vendors a blend of cash and an equity arrangement in settlement, while others are making full cash transactions due to unstable markets.
According to broker firm Kenyon Prendeville director Alan Kenyon, like most things, the marketplace for buyers has been impacted on by the global financial crisis, but good deals can still be done in bad times for both parties.
"For businesses that have continued to make transactions, comfort for buyer and vendor has been achieved by including rise and fall clauses and extended payment schedules," Kenyon says.
Payment structures, in terms of both amounts and time frames, provide the seller with the opportunity to recover lost value and the buyer more comfortable debt servicing, he says.
In 2009, Kenyon Prendeville has experienced an increase in buyers, with a further 80 registering, taking the firm's database to nearly 1700 buyers in Australia, and Kenyon says he expects that to rise.
"Part of the motivation for buyers is that currently very little new business is being written," he says.
"The vast majority of financial planning practices are recording reductions in gross revenue of up to 30 per cent, which translates into a 30 per cent potential reduction in price if the market doesn't recover in the next year or two."
While buyer demand is increasing, supply is decreasing as owners defer exit strategies and batten down the hatches until revenues return to near previous levels, he says.
"The reaction of Australia's merger and acquisition market to the global financial crisis has been one of caution," he says.
"The scale of market erosion has been so great and so fast that both buyers and sellers have been seeking direction about how to structure a deal that is fair to both parties, so that both share the pain, as well as the future upside."
While the current market has presented opportunistic buyers with the ability to acquire lower cost books or businesses, bargain hunters who see opportunities in taking advantage of stressed or struggling businesses are barking up the wrong tree, he says.
"Advisory businesses are built on relationships and trust, and that's the relationship buyers should want to have with the person they buy from," he says.
"In these times, buyers need lateral thinking. This is the domain of the brave and confident, and this bravery and confidence is normally built on well-structured business plans and good advice.
"It's not just the present state of the business that is important. It's its history and future potential that must also be considered."
The importance of value proposition and cultural fit is key, he says. "When a vendor has the right value proposition and intangible qualities, such as ethics, attitude and philosophy appropriate to the buyer, there's greater chance the transaction will be a success," he says.
Broker firm Centurion Market Makers director Chris Wrightson echoes some of these thoughts, saying the buyers' market is still robust, with activity and cultural fit still high on the agenda for both buyer and seller.
"Some aggregators have slowed their acquisition activity due to financial losses, however, others continue to go strong, and new buyers are entering the marketplace all the time to build presence in the advice space and to find well-priced opportunities," Wrightson says.
"Compared to 18 months ago there has also been greater interest in buying risk practices and risk books due to more stable income streams and because there's opportunity to diversify.
"The biggest challenge for buyers in this environment is putting together an agreement that meets its and the vendor's needs."
Commonwealth Bank of Australia specialist markets general manager Stewart Creighton says practices that have a high proportion of risk business are doing exceptionally well in the market downturn, with those well balanced between investment and insurance maintaining a sound level of earnings.
"More and more people are recognising the need for a good spread of income, with access to capital still crucial," Creighton says.
The larger institutional dealer groups are well placed at the moment as they have ready access to capital and are willing to use it to help grow their dealer groups and the practices under those dealer groups, he says.
"The non-institutional dealer groups we deal with are still well positioned, but the institutional ones do tend to have greater access to capital, which obviously helps them in their consolidation plans," he says.
"The highly-leveraged planners and dealer groups are obviously finding the going a little bit tougher, so now is a good time for highly-leveraged businesses to consider deleveraging."
Axa-owned dealer group Genesys is one institutionally-owned dealer group that has continued to buy amid changed market conditions, with no immediate plans to stop, Genesys chief executive David Plum says.
"Genesys has executed more than 25 transactions in the last three to four years, which it does through two ways," Plum says.
"One is to buy a minority stake of about 20 to 40 per cent ownership in a business through taking preference equity, which means rather than take a dividend stream out of the total profits of the business, we take a return which is a percentage of revenue.
"By taking preference equity, we don't destroy the entrepreneurial spirit of the working partners in the business, who effectively get a bigger share in the upside.
"It means while we continue to work strategically with these firms, we don't have to get involved in the day-to-day operations and minor business details."
This type of deal is quite useful, particularly in cases where a practice may have seven principals but only one looking to retire, he says.
"In cases like this we might buy out the principal's interest or a large part of their interest, which helps the remaining principals carry on the business," he says.
"The second type of transaction is where we buy a 100 per cent stake. "On two occasions we've also sold back a part stake to a next generation adviser because for most the task of buying a 100 per cent stake is too difficult."
The Genesys equity partnership model encourages partnership among institution, dealer group and practice, he says.
"There is some trend towards the institutional group in the current environment for a few reasons," he says.
"We have greater access to capital, more resources and offer strong brand recognition, which is increasingly important at a time when many companies are going bust."
The Genesys board, which comprises Axa representatives, invests a lot of time making sure it is buying strong businesses that have a diversity of revenue, strong management and a good cultural alignment to the Genesys model, he says.
"Groups looking to buy or sell for purely monetary reasons are dealing in risky business. Relationships can break down and there is more chance that partners will not work to aligned objectives," he says.
On the non-institutional side, Shadforth Financial Group (SFG) established the Shadforth Financial Services dealer group last year as a way to amalgamate the practices it has acquired.
SFG wanted to merge its back-office operations as a way to free up advisers' time for clients and boost recognition of the group through the same branding, SFG chief executive Tony Fenning says.
"As these businesses were already familiar with each other, there was already a strong cultural fit between them and all shared the same ethics," Fenning says.
"The knee-jerk reaction to these markets might be to look at the potential of buying risk businesses because they have safer income streams, but if they don't fit your model, down the track they are more trouble than they're worth.
"SFG is no more or less interested in risk books than it was 12 months ago.
"It's more important that we acquire the right types of businesses, with the right type of clients and expertise we're familiar with."
The market downturn has not affected the buyers' market as much as it has impacted prices," he says.
"From our perspective the market is becoming a bit more rational and vendors are selling for more reasonable amounts," he says.
Institutions that have greater access to funds are not too concerning to SFG, he says.
"We don't feel threatened by the institutions greater fire power so to speak," he says.
"Our sales pitch to vendors of practices is you've built up something valuable and you want a result that not only gives you fair value but that doesn't blow up the legacy.
"The deals that go wrong are where price rather than legacy have been the focus." The SFG strategy is to work with its existing businesses and to roll in other groups that fit the model, in which SFG already has a list of appropriate candidates.
"The amount of change going on is unprecedented and now is a very exciting time," Fenning says.
"We've got people questioning pricing models, potential rule changes by the regulator, down markets and low client sentiment.
"It will be those that have invested the time to ensure both businesses are aligned that will be able to navigate through the storm and come out ahead of the rest."
AFS Group, owner of the AFS dealer group, has been particularly active, acquiring 80 practices in the past four years and buying a strategic stake in the Salisbury dealer group in 2007, chief executive Peter Daly says.
"We're interested in buying practices, smaller dealer groups and we've looked at medium dealer groups as well," Daly says.
"We want to acquire alternative income streams as well and are currently in discussions with a mortgage aggregator as a potential acquisition opportunity."
In the case of acquiring dealer groups, AFS will buy out a dealer group in full and bring it under the AFS umbrella or, in the case of Salisbury, buy a majority stake in the business and give it the opportunity to retain identity and culture, and operate under their own brand, he says.
"Despite our success, at least six small dealer groups have turned us down because of an offer from an institution or because they're already in negotiations with an institution," he says.
"If you speak to those dealer groups they'd say institutions potentially provide greater security, more infrastructure and a raft of other services, but the reality I believe comes down to price.
"We're coming up against institutions that tend to have bigger pockets and as a consequence are prepared to pay premium dollars, where for us it's just not commercially viable."
The benefits of joining AFS are that businesses retain institutional independence and are owned and driven by and for advisers, he says.
"And if you look at our results, during the bull market our average practice was growing at double that of the institutional groups and in the bear market our practices are still growing about 30 per cent faster than institutional practices," he says.
"Too many groups look at immediate cost rather than long-term benefits."
AFS can boast good results and that it invests time ensuring both businesses complement each other and there are no compliance concerns.
"AFS anticipates achieving a record profit for 30 June and wants to use that to create more acquisition opportunities, including possibly the purchase of some smaller dealer groups that fit our model," Daly says.
AFS planned to list in 2011, however, due to the market downturn expects to list closer to 2012 or 2013, he says.
Another non-institutional dealer group gaining headway is Count Financial through its acquisition arm, Countplus. Countplus has made nine acquisitions to date, has five acquisitions in the pipeline and hopes to finalise three or four of these by June, Countplus chief executive Jeremy Wardell says.
"Out of the nine investees, four have made tuck-in acquisitions and one of those has made two tuck-in acquisitions," Wardell says.
The Countplus model includes the purchase of an initial 25 per cent stake in a business, with the option to buy the balance out via a call option, exercisable on 1 July 2011, when Countplus plans to list if the timing is appropriate, he says.
"The Countplus model lowers the risk of what we're doing because if a business is not performing we haven't spent all our money on the one transaction and can manage their performance until the final buyout date," he says.
"We had an initial target to acquire 30 businesses, but that might be closer to 20 as some of our firms are already growing through the tuck-in acquisitions they have performed, which we also help to manage.
"We're seeing a line of distributors such as ING and Axa buying dealerships and we've also been approached to buy out some dealer groups, which Countplus would certainly look at."
Countplus has focused on acquiring accounting practices as their earnings are not as affected by markets, and it is now the number two accounting consolidator behind WHK, he says.
"We're also interested in risk businesses as risk does well in these markets," he says.
More importantly than the services provided, Countplus is looking for businesses that display qualities such as best practice, a track record of growth, due diligence, a strong history, good work processes and good returns, he says.
"A lot of the people we're buying are already well known to Count," he says.
"We're not buying businesses we've never seen, with management we've never spoken to.
"Eight of the nine Countplus acquisitions are Count franchisees."
Another benefit to the Countplus model is it stops other groups picking off its best firms because when Countplus lists, it will provide younger generation planners with the opportunity to own a stake in the business without being the practice principal, he says.
"It protects our funds under management and also gives existing principals the ability to incentivise younger generation planners by offering them a stake in the business," he says.
"The models of ownership are changing and enabling generation X and Y to buy equity is a good way to reward and align them to the business over the long term."
Listed financial services firm Snowball Group has been busy in the acquisition space since 2001, acquiring all or part of a number of financial planning businesses, an accounting distribution business and corporate superannuation businesses.
Last year, Snowball bought a 25 per cent stake in a financial planning business connected with a credit union and a year prior to that merged with dealer group Western Pacific.
Many of its acquired businesses sit under its dealer group, Outlook Financial Solutions, Snowball managing director Tony McDonald says. "A lot of practitioners who want to get away from worrying about the day-to-day operations and get back to seeing more of their clients are finding an organisation like Snowball useful to join as it offers institutional independence and the infrastructure to lessen the burden of back-office duties," McDonald says.
"Practices can try to ride out current conditions or find someone bigger than them to help them through it that doesn't necessarily think or behave like an institution, but which has the scale and access to capital the practice requires."
For Snowball it is not about the service provided by a business as much as it is about cultural fit and sharing the same vision, he says.
"We've gravitated to corporate superannuation opportunities recently. However, that is because we have good size in that business and we see corporate super as being an area that will require scale," he says.
"It has to be a meeting of minds for everyone to benefit.
"It's about choosing the right people to fit the family photo and this needs to be a two-way street."
Snowball spends a lot of time talking about cultural alignment before the issue of price is even mentioned, he says.
"We come in with an open mind and aim to find the smartest way that both parties can benefit from the transaction," he says.
"If it's not the right fit, everyone should walk away.
"For businesses that haven't done so, I think we'll see many of those acquisitions unwind as we move forward.
"In down markets many things are exposed, so it's likely that there will be some fallout from those businesses that have had an aggressive acquisition strategy and not spent time investing in the right cultural fit for both buyer and vendor."
It is not going to be easy over the next 12 to 18 months, but Snowball is confident about its position as it has spent a lot of time and energy making its acquisitions work pre and post deal, in good times and bad, he says.
"The main thing for any partnership to work is that prospective couples realise that post marriage there is always going to be something about one party that annoys the other - like a towel left on the floor or the toilet seat left up," he says.
"For those who don't want their relationship to end in divorce, the key is to work on issues as soon as they arise and to continue working on them together into the long term."
