Operate a Professional Services Practice and looking to access debt? Credit providers have become increasingly focused on customising their lending policies accordingly. The recent Government Guarantee Scheme has also extend the ability of many financiers to participate more aggressively in professional services on many cases.
There are now a number of established policy guidelines across traditional service industries such as Real Estate Agencies, Financial Planning, Finance Broking, Insurance Brokerages, Legal Practises and Accounting Firms.
If you are involved in these industries, funding growth via acquisitions or expansion, or to help in succession planning, is a viable option to explore.
Financial Planning Practices
SMEs in the Financial Planning industry generally provide advice relating to a specific financial matter requested by a client; or a complete and holistic assessment of their financial situation.
Accordingly to IBIS World data, there are around 11,400 businesses in the industry with combined Revenue over $2.2 Billion and over 22,000 staff. Not surprisingly, the industry has undergone considerable transition in recent years.
The implementation of the Future of Financial Advice (FOFA) legislation in 2013 led to change, then the FSRC, and revenue declined drastically over the following years, as a number of operators exited the industry. There has also been increased competition from accountants over the past decade.
On a positive note, IBIS World expects Industry revenue to expand at an annualised 0.7% through 2025-26, despite there being fewer participants.
Like other professional service firms, these businesses are chasing a better recovery of fixed overhead costs, but they may have a need to acquire new people to meet growing demand for services.
With a changing business model and extra layers of compliance, many in the Financial Planning industry haven't been able to achieve their ideal profitability.
At a practice level, this is playing out in a variety of ways, but as the number of advisers shrinks, behaviours change, and businesses reorganise, the future will be an interesting one.
Lender Appetite - Financial Planning
Banks have gone through some volatility in their appetite for lending to Financial Planning businesses. Historically, this was more straightforward given the nature of commission-based recurring revenue, which built some confidence on the continued ability to service debt. In the new world, there is an enhanced focus on the "business" of which the strength of existing Revenue is still a key part, but not the only consideration.
As a starting point, some financiers will limit lending to certain Authorised Representatives “AR” of a Dealer Group, so you will need to confirm that lending to that licence holder will be supported.
To remove any concentration risk, the business generally needs to have two or more owners/advisers.
In terms of participants, ANZ Bank, Westpac, NAB, Macquarie Bank, Judo Bank have policies in the category.
Smart Debt Strategies
Financial Planning Firms as a rule have a fairly strong appetite for risk, especially in comparison with say the accounting industry. As a result, success in managing money and debt typically embraces the following strategies.
- Have a Realistic Loan Term
Planners often want an interest-only term for as long as possible. However, with benefits from the funding unlikely to sustain forever, a longer-term P&I facility is usually a better option than an initial interest-only term, followed by aggressive amortisation.
- Consider the Security profile and its link to Credit terms.
One of the positive things about borrowing in Professional Services is the ability to borrow without tangible security such as property or varying levels of guarantees, etc. However, make sure the nature of the security provided fits the resultant impact on price and/or terms.
Lender philosophy is advancing in assessing professional services firms, including Financial Planning.
So what are these worth?
Financial planning businesses are either valued as a multiple to the recurring income of the business, or a multiple to Earnings before Interest and Taxes (EBIT). These results are now across a much wider band, with higher amounts paid for quality assets.
How much can I borrow?
When it comes to talking with the bank, it is important to determine what the actual income is to use for loan servicing. EBITDA is the most familiar measure, but what about adjusting for a market salary for the owners? When putting in a market value of the Owners' contribution, this can change this number materially. This is what we call EBITDAO.
Once the income is normalised, borrowing limits are generally based on the following guides:
1) Maximum loan amount to be less than around 2.5 - 3.25 times EBITDAO.
2) Maximum loan amount to be less than 70% of valuation as above.
3) Interest Cover Ratio (ICR) of more than 2.50 times
4) Maximum Loan Term of 10 Years.
Criteria do vary widely and will keep emerging as trends in the industry develop.
Our Professional Services Industry Lending Guide can provide more insights.
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au