Empower staff and gear your practice for growthSteve Prendeville

Valuations

A key determinant of value is culture and key person dependency. The highest valued businesses are those that systems and processes can be replicated and has multiple known staff servicing the client reducing retention risk and is scalable.

Case Study A

Old Model Financial Planning

Case Study A

Business Profile

The Business has the following profile:

650 clients.

$900,000 plus of recurring revenue.

$250,000,000 Funds Under Management.

% based fee structure.

Principal has run the business for 31 years.

Case Study A

Funds Under Management

FY19 FY18 FY17 FY16

$250,000,000 $230,000,000 $220,000,000 $210,000,000

Case Study A

Financials

FY19 FY18 FY17 FY16

Gross Revenue $920,000 $925,000 $895,000 $898,000

Recurring Revenue

$920,000 $925,000 $895,000 $898,000

Expenses $416,000 $426,000 $424,000$446,000

EBIT $504,000 $499,000 $471,000 $452,000

Case Study A

Old - Valuation

Model Amount Multiple Valuation

EBIT $504,000 5.5x $2,772,000

Recurring Revenue $920,000 3x $2,760,000

Case Study A

Revenue Breakdown

Revenue Type Amount

Grandfathered revenue (10%) $92,000

Fee for no service (20%) $184,000

Active Client revenue (50%) $460,000

Non-Active Client revenue (20%) $184,000

Total $920,000

Case Study A

Client Demographics

Age Band No.

80< 180

70-80 250

60-70 150

55-60 50

40-55 20

<40 20

Total 670

Case Study A

Staff

Title of Role Total Remuneration Package

Service Period

Director $150,000 31 years

Paraplanner $100,000 1 month

Administration $90,000 25 years

Case Study A

Key Strengths

Tenure and retention of clients.

Total income is high.

Pricing is very competitive.

Excellent compliance history.

Excellent retention of staff through points to strong culture and team management.

Quality, skill and expertise of advisers.

No over exposure to key clients.

Mainstream platform used.

Case Study A

Key Strengths

Profitable, standalone business.

Experience and education of principal.

High Revenue and Funds Under Management.

Profitability and EBIT margin at 54% is exceptional. Staff remuneration is above industry average.

Self-licensed.

There is use of an external pricing consultant.

Case Study A

Key Weaknesses

Fees are not fixed and linked to underlying assets.

Fees are very low to market average at .36 vs .70 plus.

Service offer is as required and must be revised to be inline with royal commission recommendations.

There is exposure to fee for No Service with only 50% of clients nominated active.

There is no targeted marketing.

There is little new business being written.

There are no professional referral relationships.

Poor management and reporting structures.

There is no marketing plan.

Case Study A

Key Weaknesses

$124,00,000 of FUM is in pension stage and with the average FUM being $384,615 this would be deemed to be a declining asset.

There is significant key person risk.

A large proportion of the client base would be considered passive and unengaged.

Service delivery and client engagement as required rather than structured.

The business potentially will not be compliant with Royal Commission recommendations.

There is no clear value proposition.

Staff are inexperienced.

The proportion of the client base is receiving a fee for no service.

Case Study A

Key Weaknesses

There has been little growth in revenue, FUM or profitability for an extended period of time showcasing business is at maturity.

The business has the characteristics of a business in decline, ageing client base, little new business and flat lining revenue.

There is a low number of client referrals given the small team size and large existing client numbers a low desire to grow client numbers. This may be addressed through employing more staff.

There is no clear succession strategy in place.

The client age demographics is aged with the majority of clients over age 70 representing a mortality risk to revenue.

The balance of FUM per client is average.

Case Study A

Recommendations

Immediate compliance review.

Fixed fee service model.

Increase infrastructure or reduce client numbers.

Look to efficiencies – M.D.A.

Transition fee for no service & grandfathered.

Build effective CRM system.

Elevate marketing after re-engineering.

Case Study A

Valuation -Now

Revenue Type Amount Multiple Valuation

Grandfathered revenue (10%) $92,000 0x $0

Fee for no service (20%) $184,000 0x $0

Active Client revenue (50%) $460,000 2.x $920,000

Non-Active Client revenue (20%) $184,000 1x $184,000

Total $920,000 $1,104,000

Old Valuation

EBIT $504,000 5.5x $2,772,000

Recurring Revenue $920,000 3x $2,760,000

Case Study A

Case Study B

Succession

Case Study B

Overview

Backstory

Merge 3 Existing Practices operating under one roof and one AFSL.

Mature aged Principal with largest practice and owner of AFSL.

Operating as team and culturally aligned.

Want to come together not sure how.

This is their thought process.

Case Study B

Growth Analysis

2012 2013 2014 2015 2016 2017 2018

EBIT % 46% 54% 38% 35% 24% 25% 30%

Net Profit Growth 56% 28% 27% -10% 37%

Case Study B

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2012 2013 2014 2015 2016 2017 2018

EBIT % and net profit growth

EBIT %

Net profit growth

Growth Analysis

Reasons for negative profit growth in 2016:

Additional tax, Succession Planning, Relocated Office, Additional Staff member.

Case Study B

Why?

Why do only a few firms attempt the internal succession journey to create a multi-generational business?

It is difficult

Vested Interested

Different viewpoints and timeframes

Different valuation methodologies

Cash flow implications

Change to status quo

Unwilling to give up independence & control.

Case Study B

Forecasting

FY18 FY19 FY20 FY21 FY22 FY23

Total Revenue

$2,550,000 $1971,000 $2,259,000 $2,561,000 $2,877,747 $3,209,000

Total Expenses

$1,842,000 $1,133,000 $1,139,000 $1,174,000 $1,210,000 $1,247,000

EBIT $708,000 $838,000 $1,120,000 $1,386,00 $1,667,00 $1,962,000

Net Profit 27.77% 42.53% 49.57% 54.14% 57.93% 61.13%

FY19 FY20 FY21 FY22 FY23

Shareholder 1 $408,000 $587,000 $784,000 $1,000,000 $1,238,000

Shareholder 2 $263,000 $379,000 $506,000 $647,000 $800,000

Shareholder 3 $94,000 $136,000 $182,000 $233,000 $287,000

Shareholder 4 $45,000 $65,000 $87,000 $111,479 $137,000

Profit and Loss

Investment Returns – 90% Distribution

Case Study B

Empowering staff through equity

Key Steps

Clear understanding by all parties of the approach and consequences.

A commitment to the strategy or a decision not to pursue.

Agreement on the execution plan and the implementation timetable.

Allocation of responsibility and authority.

Case Study B

Empowering staff through equity

Issues to consider

Valuation methodology.

Remuneration levels. Important to get right from the start.

Decision making framework.

Business model.

Exit and entry of stakeholders.

Funding and capital.

Dividend Policy.

Dispute and mediation process.

Case Study B

Empowering staff through equity

What is required to execute

Sale or transfer agreement.

Option or other future commitment document.

Employment agreements.

Shareholder agreement.

Buy Sell agreement.

Shareholder Agreement

To define how we are going to interact with each other as stakeholders in an entity that will conduct the business.

Binding document that can be relied on when required.

Can be amended with significant majority (90%).

Should be reviewed from time to time.

Case Study B

Case Study C

Migrating Licensee

Case Study C

Business Profile

The Business has the following profile:

The current business has the following profile:

• 107 clients

• $1,037m plus of recurring revenue

• $180m Funds Under Management

The forecast (31 May 2020) is as follows:

• 119 clients

• $1,114m plus of recurring revenue

• $190m Funds Under Management

Case Study C

Structure

3 full time staff plus principal. 2x staff adviser associates.

1x client services.

Paraplanning is outsourced.

Embraced technology My Prosperity/ O365 / Egarda / KC / Mailchimp/ VOIP/

Ventra IP

Capacity of 200 high-touch clients with current infrastructure. All future clients translate to direct profit.

New generation platform.

Case Study C

Client DemographicsAge/Revenue

Case Study C

Service Segmentation & Pricing

Category Criteria Average Remuneration per Client per annum

Client No’s

A High strategic needs, unlimited service with new SOA each year.

$20,600 13

B 2-3 meetings per year. Medium needs.

$9,635 63

C 1-2 meetings per year. Lower strategic needs.

$5,194 31

Case Study C

Client Fee Schedule and Basis

Type Basis

Upfronts

Establishment Cost recovery

Plan $2,000 to $15,000 for planning fee.

Ongoing

Trail Nil – all trail rebated to clients.

Service – (based on client requirement and strategic needs)

A – up to $25,000 B – up to $15,000 C – $5,000 per year

Case Study C

Financials

Current position annualised

Forecast 31 May 2020

2019 (within previous

organisation)

Gross Revenue $1,037,000 $1,114,000 $1,250,000

Grandfathered Revenue Nil Nil Nil

Recurring Revenue $1,037,000 $1,114,000 $1,200,000

Expenses $620,520 $620,520 Within employed partnership model at previous organisation

EBIT $416,480 #1 $493,480

Adjusted EBIT $463,580 #2 $540,580

90% of clients converted across from previous organisation with another 12 in the immediate pipeline.Case Study C

Key Strengths

Fixed service fees and not asset-based fees ensuring revenue stability and no over exposure to top FUM clients. This is a significant consideration to value assessment.

Strong profitability ratio

EBIT / Gross Revenue = 40%

Management and reporting structures.

Excellent. Quickest turnaround of information that Forte has encountered.

Ahead of future legislative changes as recommended in the Royal Commission.

No grandfathered commissions

100% Active client base with all SOAs produced in last 6 months.

Annual client engagement

Case Study C

Key Strengths

Aspirational business plan with a current capacity of 200

clients.

Excellent retention of staff through transitional period points

to strong culture and team management.

Very good average FUM per client ($).

180m/107 = $1.68m average FUM.

Case Study C

Recommendations & Observations

There should be consideration to furthering the adoption of a I.M.A / S.M.A / M.D.A which could further enhance client service and potentially business efficiency and profitability.

Under the current metrics the profitability ratio (EBIT / Recurring Revenue) has the ability to grow above 60% if the business were to grow to capacity.

The greatest opportunity to lower client overall cost and increase the value is to reduce asset management costs, or conversely to increase profitability is to retain existing cost but insert Integral in the Funds Management component. This can be best done by out-sourcing asset management to insure “best of breed” investment choices.

Asset Management

Platform/Product Packaging

Dealer Groups

Planner Client Total

0.65-0.85% 0.15-0.2% 0.57% 1.37-1.62%

Case Study C

Advisor comments migrating license.

1. Be sure about where you are going

2. Communicate effectively with staff and clients

3. Embrace technology

4. Outsource where you can

5. Don’t be complacent

6. Back yourself

Case Study C

Advisor comments

How did you manage your staff through this critical period?

Clients appreciate dealing with a familiar team.

Gave staff certainty and comfort through permanent employment, waived any probation periods, same/higher pay.

Whole team on day 1 allowed us to hit the ground running.

How did you manage your client relationships through this critical period?

Talk to your clients as much as possible!

. I took the transition as an opportunity to start from scratch with clients.

You can use the transition as a chance to re-price / change your pricing methodology for your practice.

I have been inundated with clients referring friends and family.

Case Study C

Case Study D

Empowering Staff

Case Study D

Case Study D

Mid-sized, self licensed practice

Median employee engagement ration 6.2 out of 10

Key activities undertaken Behavioural profiling & development planning

Employee involvement in business strategy development

Flexible work arrangements

Peer mentoring

13% improvement in employee engagement scores over 12 months

Increase performance against budget for FY19/20 year to date.

Decreased employee turnover over 12 months.

Case Study D

Why is empowering staff important?

87% less likely to leave.

Take half the number of sick days.

20x more likely to advocate their organisation.

5x more likely to recommend their organisation.

Case Study D

What does it mean to Millennials

Explain the big picture They won’t just take on a task without questions. They want to

understand the why.

Flexibility They expect the ability to achieve work-life balance.

Career Pathways What do they need to progress and how do they get there?

Learning & Development Giving them the opportunity to get there through development

opportunities.

Collaboration Like everyone, they don’t want to be talked to; they want to be

part of the conversation.

Case Study D

Millennials

Millennials represent 35% of the global workforce. It’s estimated they will represent 75% by 2025.

Case Study D