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Financial Planning Practice Loan

With skills and experience under your belt, are you ready to branch out and buy a book of clients or start your own financial planning practice?

A financial planning practice loan can help you fund the purchase of an existing portfolio or a commercial property to use as your business premises. You may also qualify for working capital if you already own a practice and you want to continue your growth plans.

Getting a really competitive interest rate and borrowing the amount you need will come down to choosing the right commercial lender.

How much can I borrow?

Whether you’re buying an established financial planning practice or you want to start your own, your application should contain details on the financial position of the portfolio you want to buy and a robust business plan.

This will give a stronger chance of getting approved!

Lenders view each application on a case by case basis but this will give you some idea of how much you can borrow:

  • Client portfolio: Borrow up to 70% of the purchase price or 2.25x recurring revenue or 3x earnings before interest and tax (EBIT) of the client portfolio you want to buy, whichever is lower.
  • Freehold property: Borrow up to 70% of the purchase price of a standard commercial property.
  • Security: Charge over the financial planning practice, directors guarantees, tripartite with the Australian Financial Services Licence (AFSL) holder or dealer group.
  • Refinance existing practice debt.
  • Working capital is available: This includes business overdraft facilities and fit-out finance.
  • Low doc and no doc: Not generally available.
  • Principal and interest: 10 years (fully paid off).
  • Interest only: 1 year (at least 50% of the debt must be repayable in 5 years).
  • At least 5 years professional experience with at least 3 years in running a practice.
  • A practice business plan with profit forecasting may need to be provided.

Discover if you qualify for an financial planning practice loan!

We have strong relationships with a number of commercial lenders which means we know exactly what they’re looking for in an application and negotiate competitive interest rates on your behalf.

Tip: By using a residential property that you own as security for the purchase you may be able to borrow up to 100% of the purchase price of a freehold commercial property.

Speak with one of our commercial loan specialists by calling 1300 889 743 or by completing our free assessment form today.

How do I get approved?

In the last few years, banks and lenders have gotten a lot stricter when it comes to assessing financial advisers that want to buy new books of business.

The reason for this has a lot to do with the regulatory changes that came into effect in 2013 through the implementation of FoFA (Future of Financial Advice). Effectively, the entire industry was forced to move to a fee-for-service model.

All of this, of course, was designed to lift standards across the industry and weed out advisers that had previously been collecting ongoing commissions from their clients but adding no foreseeable value.

Today, you’ll see some client portfolios that are heavily-weighted with commission clients while others are heavily-weighted with fee-for-service clients.

This is the reason that lending criteria is typically based on a combination of a proposed Loan to Value Ratio (LVR) or multiples of recurring revenue or EBIT.

The experience requirement is also fairly strict, with the lender usually wanting to see 5 years industry experience with at least 3 years experience in a managerial role of a similar-sized practice.

In addition, you’ll need to be in a strong financial position from a business and personal perspective which means you’ll typically need to provide your last 3 years business financials and your last two years personal financials.

Independent advisers versus dealer members

Some lenders can be stricter when it comes to independent financial advisers and limit your borrowing to 50% of the purchase price of a practice rather than 70%.

They may also take a more conservative approach when assessing the renewable income and the EBIT of the client book that you want to buy.

Why?

If you’re one of the few independent advisers operating in Australia, you certainly have more flexibility and control in choosing investment products for your clients and following your own methodology when building an investment portfolio.

However, the trade-off is that you potentially carry a higher compliance risk and there are also higher costs in maintaining your AFSL.

You have to keep a compliance plan and update it on a regular basis as your practice grows and that’s not to mention the level of Professional Indemnity Insurance that you’ll be required to hold depending on the size on your current book of business.

If you’re independent and you want to refinance to a cheaper interest rate or you want to access working capital, you’ll may still be considered for finance! You just need to show evidence of recurring revenue from your current book of clients and that you are RG 146 compliant as per the Financial Services Reform Act 2001 (FSR).

Remember, not all lenders are the same!

We can help you put together a financial planning practice loan application that highlights your strengths, including your financial position and the systems and procedures you have in place to meet your compliance obligations.

Call us on 1300 889 743 or complete our free assessment form to speak with one of our mortgage brokers.

How will banks value a client portfolio?

As a basic requirement, your interest coverage ratio (ICR) should be more than 2 times earnings before interest and tax (EBIT).

In addition to this, you’ll generally have to meet the following financial benchmarks:

  • Profitability (EBIT/gross income): More than 20%
  • Minimum annual revenue: $750,000
  • Profitability (renewable income/gross income): More than 50%
  • Gearing (total liabilities/total assets): Less than 70%

Apart from the above performance indicators, lenders will want to be comfortable with the stability of the planning practice, specifically, how long they’ve been operating for.

The longer that the practice has been running successfully, the better your chances of getting approved for a financial planning practice loan.

What should I look for in a practice?

Since the financial planning industry moved from a commission-based model to fee-for-service, identifying value in a practice, and the book of clients that comes with it, is essential.

So what should you consider?

Why is the practice being sold?

It’s always the first question you should be asking and, as a wealth management expert, you should be able to see when you’re being taken for a ride.

It may be that the practice owner is simply retiring but there may be something else going on.

When buying any business, you’re buying goodwill and that includes the reputation of the practice.

Ask the vendor for permission to contact existing clients and staff members – get in touch with them and use them as references for the practice!

Also, find out what the practice’s compliance record is like.

If the financial planning practice has poor client and staff relationships, it may not be a business you want to be involved with.

Also, beware of vendors that refuse to provide these details as well as their last 3 years financials showing recurring revenue.

It may be a clear sign to walk away from the deal or at least talk the vendor down to fairer price.

The bank will have their own level of risk that they’re willing to bear when it comes to financing a business purchase but if the circumstances still don’t sit right with you, you have to make the decision to either move on or see whether there are opportunities to turn the practice around.

What’s the makeup of the client book?

Client concentration is an important consideration that your bank will also be assessing,

While the overall portfolio shouldn’t be heavily-weighted to just a few clients, the mix of clients should also be diverse.

For example, consider a client base that has a mix of mums and dads, young people, and retirees, as well as professionals, high net worth individuals, SMEs (small and medium businesses) and tradespeople.

Also, if it’s a business that’s been operating for at least 5-10 years, how much of its revenue base relies on commissions prior to the FoFA regulatory changes of 2013?

What about practices that rely on annual life insurance renewals over new fee-for-service clients? Is there an opportunity to improve this side of the business and attract and retain clients using your sales skills and experience?

Does the purchase come with a transition period?

Consider having a transition period with the previous owner of around 6-12 months. A big win is if the vendor offers to introduce you to the current client base and referral sources.

They can also help with sending a notification to clients explaining the upcoming ownership change.

Older clients (reaching retirement age), business owners, high net worths, and clients that live several hours away from the practice premises tend to maintain greater loyalty to the existing principals in an acquisition situation so it’s important to keep these clients on your side.

The service industry can be fickle but if certain guarantees are made by the vendor prior to the purchase (such as revenue benchmarks or the retention of key man staff for a certain period of time), consider deferring part of the payment (perhaps 6-12 months) if the practice doesn’t meet those expectations.

Consider your own skills

If you notice that the book is particularly heavy in high networth clients, you have to really consider whether you have the skills to service these clients.

Perhaps you need to upskill in this area or perhaps choose a financial planning practice that better suits your own business model and the clients you want to target.

Enlist the help of independent experts

It goes without saying but even though you have wealth management expertise, it often pays to surround yourself with a team of independent advisers such as an accountant and a solicitor.

An accountant can help you to look over the financials of the client book that you want to buy while a solicitor can help to ensure that the Heads of Agreement and Contract of Sale (the latter applies if you’re buying the freehold property) are in your best interests.

For example, they can help you negotiate with the vendor on a specific client portfolio sale agreement that clearly states the final purchase price and what you’re actually purchasing as part of the portfolio including client data, confidential information, goodwill and the right to service the clients.

Buy existing or set up your own practice?

You can either buy an existing client book or buy a commercial property such as an office unit to start your own business under your dealer’s licence.

There are advantages and disadvantages to both options.

Starting your own practice

The benefits include not having to pay a huge upfront cost for goodwill and having the ability to make all of your own decisions in terms of what kind of clients you want to deal with.

For example, you may want to work with business owners to set up investments rather mums and dads planning their retirement.

The big drawback is that there is a higher change of business failure.

Buying an existing client book

Although the upfront costs of goodwill are high, you can tap into the expertise of long-time practitioners and administrative staff.

Depending on the strength of the business, there is essentially no need to hire new staff, implement systems and software, or be involved in marketing.

Labour costs are typically the highest cost when running a financial planning practice so have a really good look at the compliance systems and technologies the practice has in place, as well as their business process management systems.

Where parts of the business aren’t automated, negotiate with the vendor on the retention of key administrative and management staff.

This can save you thousands of dollars and plenty of time upfront compared to setting up your own business.

You can potentially start generating cash flow from day one, which is a huge boon for any new business owner.

Check the lease agreement

Are you planning to lease the premises instead of buying a freehold property?

Unlike other types of commercial properties such as retail, you’ll want to avoid being locked in with a long lease just in case things don’t work with the practice you want to purchase.

Yes, it’s important to give yourself time to get the newly-expanded business in working order but you also don’t want to leave yourself in a situation where a significant proportion of the client portfolio departs after the acquisition.

This may leave you unable to pay the rent.

In saying that, it always makes sense to negotiate with the vendor and their landlord for at least two 5 year options.

If the lease agreement states that the vendor is required to restore and repair anything in the office prior to the lease ending, you should make this a requirement in the Heads of Agreement that these repairs be undertaken before you complete the purchase otherwise you’ll be left with these costs.

Some final tips

  • Business assets that come with the purchase: Depending on the purchase, this may include plant and equipment and practice premises (as a freehold purchase). It’s essential that the Contract of Sale details specifically what is and what isn’t included in the sale. In addition, make sure that there is good title on the business assets and ask to have liabilities and caveats removed as a condition of the Heads of Agreement.
  • Check for liabilities on the balance sheet: This can include outstanding tax debt and, in particular, litigation not yet commenced. It’s important to get written guarantees and indemnities from the company’s directors otherwise you could find yourself assuming these debts.
  • Negotiate a restraint of trade clause: This specifies a certain geographic and time restriction for the vendor if they decide to set up shop in the future. It basically protects your investment.

Do you need a financial planning practice loan?

Discover how you can borrow at the maximum Loan to Value Ratio (LVR) for your situation and qualify for heavily discounted commercial interest rates.

With an extensive lending panel and credit expertise, our mortgage brokers are financial planning practice loan specialists.

Call us on 1300 889 743 or fill in our online assessment form today.

  • Smith

    Can you give me some examples of standard commercial properties and those that aren’t?

  • Hi Smith,

    Standard commercial properties are classed as having a wide appeal, on a good location and zoned as residential, commercial, industrial or mixed. Some examples of this are offices, factories, warehouses and shop fronts. Specialised commercial properties appeal to a niche market and are more difficult to sell. Some examples of this are aged care centres, car yards, petrol stations and land subdivisions.