Episode 2: Financial Planning Business Valuation with Tim Lane

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Rob Pyne sits down with Tim Lane, a seasoned chartered accountant and the founder of FinConnect Advisory Group.  Tim has been active in the financial planning industry for 25 years, and in this episode, he shares his expertise on the intricacies of valuing financial planning businesses and offers practical advice on succession planning. He delves into the key factors that can drive or detract from a business’s value and how financial advisers can prepare their firms for a profitable sale or transition.

Whether you’re looking to sell your business soon or increase its value for long-term growth, this conversation is packed with actionable advice.

LISTEN

SHOW NOTES

Key Topics Discussed

  • Introduction to Tim Lane and FinConnect’s approach to financial planning business valuation.
  • How FinConnect differentiates by offering end-to-end solutions for business owners beyond just sales and valuations.
  • Understanding future maintainable earnings versus past profits and their impact on valuation.
  • Key drivers of business value: profitability, clean books, systems and processes, and client demographics.
  • The importance of having a succession plan and grooming the next generation of leaders.
  • Common mistakes financial advisers make when trying to increase the value of their business.
  • Strategic buyers, private equity interest, and how large firms attract higher multiples in the market.
  • The role of recurring revenue multiples vs. EBIT margins in valuing financial planning firms.
  • How capital providers like Oaktree Capital are influencing the financial planning industry.
  • Tim’s personal journey with FinConnect’s succession planning and valuation.

Quotes

  • “What we want to do is present the biggest, cleanest picture… clean, simple, and that drives value.”
  • “The recurring revenue model is more relevant for smaller practices, but larger practices should focus on EBIT margins.”
  • “I always say you can do succession too late, but you can never do it too early.”
  • “Future maintainable earnings are key for increasing the valuation and future profitability of a financial planning business.”
  • “It’s about finding the right buyer, whether that’s a private equity firm or the next generation within your company.”

Resources Mentioned

TRANSCRIPT

Welcome to the Trusted Advisor Podcast where you get a deep dive into the world of financial planning with industry leaders who shared their stories of winning and learning as they chartered their path to success. This podcast is for the curious, those of you who like to dig into the details. If that sounds like you, get ready to listen and learn.

Rob Pyne:

Welcome to episode two of the Trusted Advisor podcast. I’m your host, Rob Pyne, and today we are diving into a topic that’s critical for any financial planner looking to maximise the value of their business, business valuation, and succession planning. Today I’m joined by Tim Lane, a chartered accountant and the founder of FinConnect Advisory Group, a specialist advisory firm that helps financial planners with everything from business valuations to succession planning. In today’s episode, Tim shares his expertise on what truly drives the value of financial planning business, how to prepare your firm for sale, and the importance of having a clean, future-oriented financial structure. We also explore the significance of having a success plan in place, preparing the next generation of leaders and how private equity is influencing the financial planning landscape in Australia. Whether you’re thinking about selling your business soon or simply looking to build more value into your practice, this conversation is packed with practical advice you won’t want to miss. So let’s jump into this fascinating discussion with Tim Lane. Welcome Tim Lane to the Tristate Advisor podcast. I’ve been looking forward to this conversation because there’s nothing quite as interesting to financial planners about the valuation of their business. So I’m really keen to hear your thoughts today. But let’s start by setting the scene for our listeners. Give us a bit of background on who’s Tim Lane and what’s the backstory of the FinConnect Advisory Group.

Tim Lane:

Thanks, Rob. It’s nice to be here. So Tim Lane is a chartered accountant who’s worked primarily in the financial planning industry in various guises for better past since 1999. When I came back into public practice with my accounting firm and crew, I kept doing the valuation and succession work and building a team. So now we’ve got a very strong team. In fact, I’m not even the leader of the team anymore. I’ve been demoted. So the leader of the team is Fiona Edwards, who’s the head of FinConnect essentially, and she runs and drives that part of that division of the business and does a really good job. So what we were looking for was to differentiate two things with FinConnect. One was the AC crew brand. It’s a great brand in Australia, but there’s an office in every capital city.

It’s a great network, we love being part of it, but if we had some problems with identifying who we were in that place, so we decided to get a more specialised brand. And then the other thing that was born out of FinConnect was really we wanted to be more than just someone who sold a financial planning business. We wanted to be someone could value them, do succession planning and be a problem solver and help the industry to get to places that needed to go. And that was largely driven. We set down as a group, Courtney, Fiona and I, so there’s another team member, Courtney, who’s also a valuation specialist and does a lot of work with financial planners. So we saw that the industry, whilst people would sell their business still the view was as the industry sort of grew up and emerged, succession planning would be more relevant and valuation would be more relevant over time. And so that’s the backstory to FinConnect.

Rob Pyne:

Okay, so a more complete service, not just valuation and sales service, but really an end-to-end service where you can consult, help businesses drive value and be there for the journey with them.

Tim Lane:

And so we’ve got a number of clients we work with annually, some we work with every couple of years. We’ve got some defined products now, for example, we’ve got a buy-side approach, which if you want to go and buy something else, well basically that product was developed by Fiona to be able to do that. And that’s a really useful product. We’ve got a standard valuation and we’ve got variations around the valuation. What we also found was we needed to have a solution to a valuation that wasn’t what’s called the A PS 2 25 valuation. So that’s the top of the, was court proof for want of a better word, valuation. You can take that to court, but we found that that wasn’t really, people didn’t need that necessarily for succession planning. They needed a sort of an indicative, be able to play with some variable and talk was about. So the second product we really focused on is what’s called an indicative valuation, which is obvious nature not as expensive. It’s more broad and it talks about drivers and what that does and that solves some of those succession planning issues.

Rob Pyne:

Okay. You talked about the buy side service you’ve got there now as well, Tim, and I guess in the FinConnect advisory, so is the connect piece, you’re connecting buyers with sellers and also sellers with buyers at times. So you do both sides of that.

Tim Lane:

You can do that. And another emerging sort of part is helping advisors find future equity holders is the other one we’re starting apply our mine to so we can buy and sell a practise if you want. And look, it all sort of goes to the sort of triage process we use with people. So yes, we can connect you with others and look, obviously I’ve been in the industry long enough to know where the Rob Pines of the world are and all those sort of people, so the people that are going to do stuff. So we pride ourself on being relatively well connected.

Rob Pyne:

A couple of months ago I was listening to a Michael Kitce’s podcast, episode 364, which I’ll put in the show notes. And Michael was interviewing a fellow named Ted Jenkin. He’s based in Atlanta, Georgia. And Ted helps advisors get offers and negotiate and ultimately sell advisory firms. And so he’s a bit of experience in what makes a business valuable to buyers. And when Michael asked Ted what advice he would give advisors who are three to five years out from selling and wanting to put their firm in a great position for sale, he said, number one, build a marketing engine. So have a good way of growing your business that isn’t just about referrals. So consistent way to bring in new clients. Number two was get your books in order, make sure you’re running a clean profit and loss and balance sheet. And the number three, option three, number three item was to establish G two succession plan. Have some people behind you that are going to be able to take the reins when you are gone. So in your experience, Tim, given those three things that this gentleman out of the US was talking about, what would you say are the key factors that drive the value of financial planning business?

Tim Lane:

Well, I think the thing that we see buyers looking at primarily is they’re looking for profitability. So they want to know and look of its nature valuation people sort of, it’s a bit of a missing understanding about how valuation works. We’ll often get the last three years and then we’ll do some work and then we’ll say your valuation is so many times this profit here and because it has a rear view mirror look on a spreadsheet, people think the evaluation is about prior profits when in fact it’s not. It’s about what we call future maintainable earnings. So the thing in terms of addressing something to create value is you’ve got to have a very clean future maintainable earnings picture. Really, and I learned this as an m and a guy, when you have to drop money into these things, you get a little bit interested in the detail and you’ve got to go and face a C when you do get one wrong, which I had to do, you learn quickly about what question to ask and not to sort of put your rear end swinging in the wind as much as you would otherwise.

So what I want to know, I know, can I, and this is an interesting discussion I have with a lot of advisors who have very profitable practises and I say, look, that’s nice, but could the next bloke run it the same way you could run it? And often the answer is actually no.

Some of the big equity holders, I’ve done some transactions with them and this rings in my ears, one in particular who we all know and I won’t name. He said, I know they can run it at that profit, Tim, but can I, and that’s the question you’ve got to, so if I can run it at this profit and it can easily be transitioned through lot the people, the processes and the client base, they’re the key drivers of value. Now in terms of increasing profitability, which obviously applied to a model increases of value, the key thing we see is, and the markets are very, very hard on this now, any smaller undersized clients, they price them out pretty rapidly to the point where we would normally not actually take them to market. We would say, no, get rid of ’em either take them out, turn ’em off, get rid of them because they’ll actually detract from the value that you get.

You can actually see it. I had a transaction in Perth actually probably four years ago, but the discounting on the tail that occurred dropped a two and a half, three times recurring revenue model. That one was well under two. So you can see that, and it is just a mathematical equation. So what we want to do is present the biggest cleanest picture, a hundred clients with a $5,000 fee, clean, simple. And that really drives value. And then it’s at certain levels have you got the systems and the processes that are delivering the value to that at a margin. So I think one of the things I’ve theorised about, which probably I shouldn’t, but the key metric that we’ll see coming out of most discussions in the future won’t be recurring revenue multiples. It’ll be EBIT margin percentage. So if you are 25, 30, 35 or above, that’s a great practise and we can almost tell that straight away. And if I ring the people that I ring and say, look, I’ve got a practise with a 35 40% margin and this and this. They go, we’re interested. I can say I’ve got a 10% mate, maybe not.

Rob Pyne:

What’s that threshold you talk about saying they’re too small and really move them off, get rid of them before you can present a clean book. What is that threshold that you look at

Tim Lane:

In a capital city? It’s probably like, I actually was talking to my team about this recently. We would’ve traditionally said $3,000. I think it’s probably three and a half to four now. Now the qualification around that is in regional areas you might wear two and a half. Even a regional practise finds it hard to deliver that service with a decent margin to that size client. And as we all know, given the post royal commission, there’s no passive income in these things anymore. You’ve got to work for every cent you get.

Rob Pyne:

Yeah, for sure. And so fees is obviously a big factor then in terms of how to drive a good valuation. What about the demographics in terms of the age profile I’ve seen, I think I saw Bob Neil present once on this and he had sort of a combination of fees and age matrix and put a different multiple effectively on where the client fit on that age and fee matrix. Does that something that you guys factor in? Tim, when you’re looking at it,

Tim Lane:

There’s really two ways. A smaller book will be valued on its recurring revenue and that’ll have a first filter. A first filter will be size a client and then a second filter. So you might say, this is a $3,000 client, I’ll apply two and a half just for sake. But then the next filter is, oh, now that’s an 80-year-old. The two and a half might then be discounted further back to say one or alternatively the other thing that may happen is if it’s a sale, the clawback arrangements will be different for those older clients than they will be for those. Because really what you want to be able to get your money back, that’s the whole point about any acquisition is when do I get my money back? So that’s absolutely correct. The place where it gets a little bit vague is with EBIT multiple.

So traditionally they’re five to six issues. They say actually five and a half to six. There’s a theoretical discount to an EBIT multiple for an aged demographic. But the problem is the reality of the market is that multiple is applied to larger practises generally speaking. And what happens after that is the demand and supply for those large practises is pretty high. So you see compression, small margin range, but also mostly speaking in a large practise, the age demographic isn’t sort of as material to the client base. And so the answer is theoretically there’s a discount to an EBIT multiple for an age demographic. A practical reality is we don’t really see it that often in that pure sense, but we definitely see it when you’re valuing a client base style transaction.

Rob Pyne:

Okay. So speaking of the methods, I guess you talked there about EBIT margin being sort of increasingly the most important factor and recurring multiples have been traditional way of businesses valuing themselves. So how do you look at that? I think I’ve seen you once before talk about this when you would look at an EBIT margin and then because when you’re doing a clawback, it’s hard to do that on EBIT margin, but you can do it on a recurring multiple. So how do you line those two together?

Tim Lane:

So there’s two issues you are referring to there, and I think you must have watched one of my vlogs because that, so really a recurring revenue model was generally applied to a smaller practise. We sort of say sub a million dollars now is roughly when you do that. And above that you tend to look at EBIT multiples. So I dunno, 15 years ago when I was at Genesis Worth advisors, we did a lot of work on the practises and we sort of worked out that the point where the EBIT based valuation exceeds the recurring revenue is generally back then was generally about 1.2 million. So under 1.2 million use an RR because it’s a bolt-on transaction and above that you’d use an EBIT multiple. What we’ve found is that because of the royal commission and compliance costs and the trimming of the tail, the 1.2 is probably close to 1.5 or 1.6 where you start to get a real uplift in value.

So that’s the first way to understand the two of them. And then I think the issue you are referring to, and this is the major confusion in the industry, is often we’ll do a transaction and it’ll be basically based on an EBIT model. So the value is X and then we go, and then the challenge you get out of that when you’re trying to design a clawback is it’s impossible to manage a cost base of your acquirer. So what we do then is rework the EBIT price into a recurring revenue multiple and use that as the metric for the clawback. So the prevalence if you like, and particularly with larger practise of actually doing deals on a recurring revenue model is actually very low. However, the amount of documentation that uses the recurring revenue model is almost diametrically different. 90% of the documentation will have a recurring revenue model, but it doesn’t mean that the actual transaction was negotiated on that.

Rob Pyne:

Yeah, no, that makes perfect sense because as you say, the clawback, you can’t do that on an EBIT margin, but you certainly can easily measure the revenue that you get and figure it out from there. So that makes a lot of sense and things that might factor into valuation. I’m curious about, do you consider other things like brand reputation when you look at valuations, do you consider other perhaps technology or systems and process things that a business might’ve developed in the way of intellectual property? Do you build some of those things into your valuations?

Tim Lane:

Well, as someone who would sell your practise, Rob, I’d always put everything that was going to push the price up in by definition. But look, so really what you’re talking about is quality and strategic value and you would always present that as a quality. This is a quality practise cause it has all these systems, whether someone would pay for a particular IT system that you develop or something like. What we would tend to do with that is not try and colour the picture and we would separate the two assets and say

The challenge is one may be related to the other, but the issue that the market has at the moment is clearly supply demand exceeds supply. So the ability to nuance prices is relatively less. So you can say all those things, but if we were brutally honest about the way the market works, in my mind we’re always towards the top end of the range all the time because the demand is so much stronger than supply. If we had a more even market, you would see much more of a difference I reckon. And you would see people paying extra for those strategic things. I mean, but for example, people will, strategic buyers will play a bit harder in the space if for example, you’ve got an efficiency dividend or they want to get into, say you are in medis and they want to get into that market, they will play in that space.

The other thing to bear in mind is the people with the big chequebooks are very sophisticated people now and the due diligence and the contracts, it’s all so much more sophisticated. I mean when I first started doing this, we’d put, this is how old I am, but two times multiple in the contract and we’d come back 12 months later and say, is that revenue there? Then ticket off and go. Whereas due diligence is stronger. The analysis of the client base, the detail in the contract, the warranties, all of that stuff is so much more sophisticated. And so getting extra value out of a transaction is much harder.

Rob Pyne:

Okay. When you say sophisticated buyers, are you talking about private equity players that have come in

Tim Lane:

The NGAs, the iron barks, the count pluses, obvious one there that I shouldn’t have anyway, those guys merchant. But the other thing we need to be really aware of, we’ve seen the emergence of these large dominant practises. So invest Blue James McGregor at, I’ve forgotten his name, sorry, James, his daughter and my son are great friends. So I’m really James where he’s, and there’s a couple of others I can name. They have sophisticated m and a approaches. They’ve done it a few times, so you can’t really get much past them.

Rob Pyne:

Have you seen businesses spin out anything into their own venture vehicle? They might say, well we’ve got technology that we’ve actually developed that we don’t want to just get rolled up into the value. We might actually, we’ve got something that’s intellectual property here we could carve out into a separate vehicle. So we’ll retain that and it probably wouldn’t really negatively impact the price that a buyer might pay for the practise itself.

Tim Lane:

So that would be generally our advice is to say, if you’ve got that and that’s working, don’t cloud the picture and put it together, separate it. But even if you think logically about even people with their own A FSL, generally speaking, the clients won’t be in a separate entity in a car and not directly in a licence. So it’s the same thing. But yeah, technology’s an interesting one because it has a completely different metric of valuation and understanding. So the minute you’re stuck it with the actual practise itself, my view is you’re probably going to diminish its value, so get it out well because everything homogenises to the bigger part of the business. And the only other way to look at it would be like if there was the revenue or profitability of that piece say of software was significantly larger than the practise, then it would go the other way. But again, you would always separate to get your maximum value.

Rob Pyne:

And so given the demand is so strong in the market, are you seeing much differential around size of firm or is there just such demand that the size of the firm doesn’t really play as heavily into the valuation because most would accept that the larger firm gets the more deep its resources stable in terms of cash flows and support structure that multiples conceivably become higher. I’m not sure what that threshold is, what is a large firm and where the bigger multiples start to apply, but is that something that you are seeing that larger firms will attract a higher multiple?

Tim Lane:

I think that the capital chasing those firms is bigger and stronger and capable and wanting to pay more. So big firms will attract bigger multiple. The way I sort of look at it is I always sort of look at it this way. There’s a smaller book or a smaller practise that’s really a bolt on to somebody else and that’s a different transaction where you have a big firm generally, often it’s not all, it’s a sale of a piece of equity of some description like to a merchant or an so on. And the pricing of that tends to be different, but it also tends to be based around some sort of preconceived model. And I mean I don’t think Paul Barrett would dismiss this if I said it. The way the A ZNJ model works is under my understanding, it’s evolved a lot. They’re now not really as much directly buying into practises. They’re trying to buy other practises with their practises to create bigger firms. That’s a strategy. And so that leads to different valuation consequences than if I’m going direct in at the top.

Rob Pyne:

So they’re essentially now looking to find growth partners as opposed to simply taking a stake in the business and hoping it grows. They’re really trying to find the entrepreneurs out there that have grown something substantial and then the smaller Boltons paying for, but they’re trying to fold them into other larger growth.

Tim Lane:

I use a z an example again because pretty good at it it it’s a scale game. They’re chasing big firms with big resources who can, you got to remember a big firm can have a HR manager, a big firm can have a CEO, big firm can invest in technology. It can do a lot of things that other firms can’t do. And the other thing is big firms that can actually invest more easily in the next generation. That’s the other thing that people seem to, because you run pods and people are training, the challenge that we see with lots of sub million dollar firms, the right advisor to take it to the next level is probably a minimum 120, 140 may be more in a capital city and that’s going to push your profit backwards quite rapidly for a period of time. Whereas in a big firm, if I bring on a new guy and he spread across a larger revenue base and infrastructure base, I’m not going to have as much challenge to my ongoing profitability to bring that person through.

So that’s a real feature of the market. And I think the forgotten part of the market that I just might jump on now it’s in my head, is organic growth. One of the things I talk to advisors a lot about, they say, I want to do an acquisition. I say, well, let’s just unpack that a bit. And there is far more demand for advice and we have advisors to give it. That’s a known fact. So if they’re not getting organic growth, I really unpack that with ’em. Now there’s reasons like an acquisition can work. Again, that sort of chunky cost point where you’re going to go backwards where might say, well let’s just go and buy another 500 to get over that quicker. That’s a legitimate strategy if you have good organic growth. And again, if you want, my view is those with, and so even margin and good organic growth are going to be quite big differentiators of future value.

Because if you think about it from an end up, Rob, when am I going to get my money back? If I got to go and tell the C that I bought this thing and I haven’t got his money back or I’m only going to get it back in 10 years time, he’s not going to look at me very favourably. He might send me a TSE email about that. So the thing you’ve got to really answer is when will I get my money back? And high EBIT margin, high organic growth means that you do do that. So that’s why those two are quite important.

Rob Pyne:

Yeah, for sure. And you mentioned A at ngo, so we’ll stick with that for a second because obviously they made big news recently when they announced that Oak Tree capital are going to put in up to 240 million takeout. Some of this stake I think that Asmu has in a NG, but I think a NG are still going to, or Asmu will still stick there at least 25% of that. So for a business like Oaktree to step in with up to 240 million of capital, what was your take on that and that transaction? Because obviously there are some serious players now. I mean Oak Tree are a well renowned high profile successful investor and for them to be entering this market down here in Australia with that sort of dollars, what was your take on it?

Tim Lane:

I think it just confirms there’s so much. There’s a couple of issues that I’ve seen. One is at a six times multiple Australian financial planning firms on a global basis are relatively undervalued. The bigger guys in America are the eights and above and probably significantly. So that’s the first thing they see. The market is relatively cheap to them. The second thing is we have this magical thing called the SGL super system with these rivers of money going into this advice world that will go on forever. And so there are other markets, Singapore’s is probably a good example, but not that and sorry, and we’re a well-defined liberal democracy with great regulation. So if you were going to do that, ours is the market to go for. I mean the biggest challenge I see, there’s two issues that I think come out of these big guys coming into the market. They have a role to play, but there’s sort of two issues. I think there’s a lot of capital chasing the same offices. So I think there’s, again, we’re back into this supply restrained world, but secondly from the profession’s point of view, if every practise is owned 50% by a capital provider and the young Tim Lane at 1809 and 20 comes in and says he wants to go into that industry and he says, well, I’m going to do all the work and get 50% of what comes back out this, I’ve being quite theoretical here,

I think there’s some challenges around future remuneration, equity sharing, all that sort of stuff. So I’ve called that one out for a while, but look, I think it’s a bit like calling the demise of the Sydney propping market. Rob, you think about it, but it never happens.

Rob Pyne:

Yeah, yeah. I’ll share something else. I was talking to Sharon McClafferty the other day from Slipstream Coaching and she was thinking your praises. And I said, yeah, I’m talking to Tim soon and we were talking about this exact issue. She said, if a business is 30% owned by a passive private equity player, and this is the key thing there being a passive player, she said her experience from seeing the firms that they work with is that there’s 30% less enthusiasm for the people that are doing all the work and seeming 30% go out the door. So that is an interesting one, and I know that if you’re talking to some of those investors, they are not passive and they would certainly strongly suggest they are very active and especially those that are looking to help firms grow by finding other businesses that want to perhaps bolt in merging with other businesses. So they’re very active in the m and a space. And so if they’re bringing that to the table, then I guess there’s a growth that they can help contribute to that wouldn’t have the existing shareholders begrudging that effort because they’re going to get a return for that effort that the MA partners bringing.

Tim Lane:

There’s a couple of issues to unpack, Rob. One is the most expensive source of funding is capital. Capital costs you 16.66% and then three years ago debt cost you two. So you’ve got to be careful of I’ve got this lumber capital that really helped me. They do, you’ve also got to be careful of this. I’m going to sit on your board and give you a strategy. I think there’s value in that, but there’s not 50% of the equity value in that with my view. So you keep on that alignment trail and often what I would theorise or see is when they come in, the actual winner is the exiting advisor, not the next generation. So they get a great deal. The guys who are left behind don’t always get a great deal. So that’s the other one. You’ve got to be careful and I just wanted to, so one of my previous roles when I ran m and a at Genesis Wealth Advisors was to invest in practise.

And what I learned out of that was the first year they really like you because given ’em a lump of money, they’re a good bloke. Second year you are okay, but I don’t like it as much as I did in the first year and then the third year, hang on, what are you doing around the table? You’re not doing anything. And so now that’s an extreme example and Fiona and I have just had a conversation with a firm about this very issue in the last 24 hours. So where the capital sits is quite important because Sharon’s right, if I’m 30% of the efforts going to them, there’s two things about equity and practise. One is it’s got to sit where it doesn’t disturb the what I call. So what you want out of any person working, you want discretionary effort, I’m going to stay later than five, I’m going to do something at night to get this done.

I own the business and I’m doing it. You don’t want to disturb what I call discretionary effort. My view, I have no data to support this position, Robert, it’s just Tim’s view of the world between 15 and 20% with multiple partners. That piece of equity is not going to disturb any major shareholder and say it’s going to affect me two or 3%. So it’s good to have ’em around. So that’s the way that I think you should view it. So it’s a really complex issue, but it’s very, very important to get the right people, get the right people aligned to the equity because, and actually Stuart Bell, I dunno if you know Stuart Bell is what leading Stuart put on LinkedIn the other day and he just said the three characteristics of successful business people as drive and all this sort of thing. And that really tweaked with me.

I said, well yeah, that’s what we want from people. We want that extra drive. And if they don’t think they’re getting remunerated for it or they’re not getting their share of it, that will cause some problems. I just got one more point. One of the things about strategic shareholders I think is really important, and I’m not sure any of them do it is what I think in my mind is I’m going to start at 20, I might take all 50% out, but a good strategic shareholder will run that down to 20 or 15 if there are people that need to have that equity, get the thing to the next stage and then they’ll go back up and down. What I think the biggest problem I see with many of the equity holders is, and there are some out there who will be variable, is that they need to be able to move around and that causes all sorts of problems.

Rob Pyne:

I’m very happy to hear Tim’s view of the world, even if you say the data’s not always there, but I certainly can relate to that thought that yeah, you want discretionary effort and you want therefore people that have got an ownership stake giving more of themselves. So yeah, I totally accept your point. So given that, what are you seeing some of the mistakes people are making when they’re trying to set their firm up for sale or they’re trying to increase the value of their business? What are the common mistakes you’re seeing owners make in trying to increase their value?

Tim Lane:

Well, it’s important to be sort of deliberate in your plan and work to a plan. I know you were talking to Sharon McCafferty the other day. So our coach from Slipstream is Phil, who’s a great mate of mine. We’ve been doing stuff together and Phil has this classic comedy ghost don’t do that, Tim, that’s brain damage. But his point is valid. He said sometimes we’ve got to have a plan and we’ve got to work to a strategy. And that may be as simple as we’re going to go and find this ideal client and do it more. What if I had to be brutal? Those guys that have this wide be all things to all people. And this is a challenge for me in this accounting firm right now in our compliance book. If you’re trying to be all things to all people, two things, you will never be as profitable and you’ll never be as attractive because oh, what’s in that black box there?

I dunno. So be deliberate, relatively singular. So it doesn’t mean specialised just means I’m not going to take on the 1500 client, I like them, I’m going to be disciplined. So discipline around profitability, but the real driver of value that I’ve seen is the right clients that you’ve articulated. So the right client might be a doctor, a 10,000 doctor. And the other thing I think I’ve always been a bit sceptical sometimes about a high net worth model that sometimes feels to me like in the numbers you’re overly touching those clients and driving costs and two things often I don’t think the client actually really wants it, and two, it’s hard to be profitable without a really sizable fee in that world. So in terms of profitability, I’m trying to answer is and best sale outcome simple in a market clearly articulated client value proposition, good organic growth, you need to be demonstrating that I’ve got, because what we’re talking about is a future maintain learning.

So what I want to see is that grow so that I, again, back to my client, get my money back as quick as I can and diminish my risk. So I’ll pay more if I’ve got less risk and sorry, risk is about moving parts. So I’ve got less moving parts in the model for my business. Great. And then, sorry, just the last point as it comes to me is if I’m going to be bought by APT Wealth, James McGregor at Apt Wealth, sorry App Wealth is going to buy me, then I want to look like I slot into their model as much as I can. I want to have a good client value proposition, I want to have a good average client sale size, all of those things. But you got to remember too, there’s two options. I’m going to either sell or I’m going to bring the next generation through. Both of those require exactly the same thing. An ideal client with a good fee size system, processes everything. The quote on

Rob Pyne:

Speaking of good organic growth being one of the key factors that a business would look at, what is good organic growth? Have you heard of this rule of 40 where they talk about the combination of profitability of a firm, what’s the EBIT margin together with the organic growth of the firm being better than 40? It’s taken from the software industry I think. But this idea that the combination of those two things, let’s say you were doing 30% EBIT margin and 10% organic growth, you get to the 40. Is that something that you have ascribed any sort of value to that thinking and what is good organic growth for a firm that makes it attractive?

Tim Lane:

I’ve never really thought about it in those terms. I’ve been in the industry a very long time and so I get a bit crushed on with some of the numbers that I think about. But what we would generally look for is not so much, we generally look at what we call upfront business. So new SOAs, new advice documents, and we look at that to be sort of 10, 15% regularly. That means that the future recurring revenue basis is sort of growing underneath that. If you see 1, 2, 3, 4, 5, I go, oh, it’s not really growing because there’s about 5% you’ll get anyway because clients will die and all that sort of stuff. You rewrite stuff. But we would like to see 15% or above SOA new business revenue to get to where we need to go.

Rob Pyne:

So if a firm doesn’t charge upfront fees but is growing in, because often you’ll hear people not attribute value to SOA fees or if they do, they’ll attribute one times value to the SOA fees because not necessarily considered to be recurring earnings or it isn’t recurring earnings. But you talk about future maintainable earnings. So do you put a value on new fees?

Tim Lane:

By definition, a future maintainable earnings calculation puts value on it

Because it’s part of profitability always anyone who’s not, because really maybe this is a bit of a timism again, but if you are not charging for the most important piece of advice you are giving the SOA at the start of the relationship, I question whether you’re getting it right, you’re leaving a lot of profit on the table that theoretically is going to be picked up through that recurring move. Now you might say, I’m getting double everyone else’s recurring revenue. I still struggle with the concept of not charging for the most important piece of advice you’re going to provide.

Rob Pyne:

Okay, so the future maintainable earnings builds in the SOA fees.

Tim Lane:

So we will normalise that though. If you go and have a nose bleed and have three times as much in one year, we’ll say hang on. And it comes back to this question of organic growth and what’s normal growth and what’s normal throughput. And so we will normalise it. We won’t say, but look, in the last five years and this is a really good test of client value proposition for the last five years you’ve generated this many new clients through referral. That means your client value propositions working. That means your future maintain earnings are more solid. It all sort of builds on itself.

Rob Pyne:

And how do you think about client retention rates? And do you track that in when you’re looking at a valuation and going back over, I say three years worth of financials? Are you looking in the due diligence that about retention? We’ve heard of retention rates kind of 95 to 99% typical of our industry, which is why it’s so attractive. Do you look at retention rates as a key variable to say how good are they keeping these clients? How good are they at keeping these clients?

Tim Lane:

We’ve never really come across retention as an issue. It’s an interesting comment, right? Theoretically you should monitor, but you’ve really got to do a lot to lose a client these days. I mean, I know that from personal experience with me. I mean I’ve lost them and retention isn’t really, it sort of put it a different way. Retention will come out in other features of the practise a little bit. You won’t have the upfronts, you won’t have be charging the level of fees because people will only pay what they think the service is worth. And so if you’ve got low, if someone’s getting low, it’s more about low fee levels more than anything that I, something not quite right here. You should be charging more. Why aren’t you demonstrating more value? And look, Rob, we all have that client. That’s hard work. I’m not saying that, but as a general rule, you should be providing value and they should be heavily paying and they shouldn’t be leaving.

Tim Lane:

And this sort of goes to that point why there’s the capital coming into Australia. My experience is these are relatively bulletproof, these firms. This is why two things I always say is I think we under gear them and we overcapitalize them in terms of we don’t have enough in them. And I’m not saying silly debt, but we sell too much of it as capital and don’t restructure it into debt. So because these things can wear that sort of thing, taking aside that big sort of fraudulent one, whatever that was, that’s just gone under the big self. I’ve never seen one go badly into, you’re

Rob Pyne:

Not talking Dixon Advisory,

Tim Lane:

Sorry, Dixon’s a sort of strange case and so was Storm because of what the advice they were doing. But a general run of the mill financial planning practise, it’s very hard to damage that asset.

Rob Pyne:

And so speaking of debt to equity, how do you think about that then? What is a reasonable and productive level of gearing on a business like a financial planning business that is so consistent and repeatable in terms of its recurring income?

Tim Lane:

So I don’t have a cookie cutter answer for that, which is unusual for me. I always run the numbers in my head and see what it feels like, but it’s sort of maybe 20, 30%. I mean the interesting thing is if you look at what’s happened in the accounting profession, as the firms have got bigger, they’ve turned into what I call a no capital model. So they’ve got debt, so that old capital bought out with debt and it runs a debt model and new partners come in on this, eat what you kill model where I’m going to get all this money while go, but at the end I’m not getting anything back. And so that’s where I think we’ll go. We’ll have more geared, more gearing, but it won’t be like it’d be 20 or 30% money. But again, I have used gearing as a way to bring younger partners in. So let’s put a little bit more debt in it and it’s very tax effective, allows for a lower buy in point, all that sort of stuff.

Rob Pyne:

And being in this business of seeing businesses be sold and thinking about how to make that work for the generation one people that are selling out, have you seen businesses successfully do that where they’ve become very large businesses and you’ve got generation two and three that are trying as best they can to get a stake of it, they can’t really absorb it. And then you start talking to private equity players to be able to take that piece out that’s too large for the next generation to purchase, as you said earlier. Ideally they do that, but then with a view to winding back their ownership potentially over time as the next generation comes

Tim Lane:

Through. I don’t sort of see it in those terms. I think mean, one of the things you’ll hear me say a lot is you can always do succession too late. You can never do it too early. And I think the thing is to give smaller parts of equity to these people earlier and train them how to do it. Because you’ve got to remember it’s a 16.66% return. If it’s a six times multiple growing, you can fund debt from that on. I did a presentation at the FPA, would’ve been pre covid actually with a guy called David Andrew, who’s that? He’s over

Rob Pyne:

In WA Partners.

Tim Lane:

And they had a facility they’d done with Macquarie where they could buy little bits of equity and the non-deductible and deductible piece and was a really innovative, really great thing that they did. And look, I suggest if we went back to David now that has probably progressed where those people have more and more equity, I reckon. So my point being is don’t worry about the big bang, try and get more people of the right people holding the equity early, even if it’s in smaller parcels. One of the things, and that avoids that problem because what happens is people hold onto the equity too late. So there’s 60, it’s worth three or $4 million. That sounds great, but that limits the buyer. The buyer can only be Asia at NG at 4 million bucks maybe, or whereas if I’d have built up pieces of equity over the journey, so in my own practise I’ve got three, four or five of us now owning equity and I’ve created my market for the future.

Tim Lane:

I mean, look, we had some fun working that out and some tension and all of that. You can imagine two other valuation experts trying to work out what the value of their own business was an interesting game to play. But we got through it. We’re a good team. But the point was the market’s created now and we’ve, in fact, we’ve mapped said there’s equity to come, but we don’t really know who’s going to get that yet. And that’s what I mean. So we’re constantly cycling through that. And so what we’ll end up with is the right people holding the right equity and we’ll never really get to a point where we need a capital provider. But Tim Lane had to get his succession plan because a terrible piece of advertising if he stuffs it up, right,

Rob Pyne:

Leaky pipes plumber. Yep.

Tim Lane:

I was very driven by that question, Rob. I thought, I’ve got to get this right. If I get this wrong, I’m the heretic or whatever they call. So that was my view of the world.

Rob Pyne:

So yeah, personal equity as opposed to private equity, personal equity from people that are in the business and doing it early enough that they can buy in and help the business continue to grow. So yep, I can attest to that model ourselves that we’ve got a similar scenario happening at HPH with our team acquiring a significant stake in our business now over time as well. So as a wrap up question then, Tim, appreciate your time today. I’m keen to know if you’ve got a final thought around this whole succession planning and how it plays into valuation. And you’ve obviously been through this now with Courtney and Fiona and how do you, and having to come to a valuation, do you think that now having reached a resolution to that in the way that you’re all working together, has that improved the valuation of your business?

Tim Lane:

Oh, I think it certainly has. And look, the plan with Slipstream is to do that. And if you talk, I spoke to Phil the other day and we’ve all agreed the numbers are really good. So we’ve sort of divisionalized and people heading divisions have equity and they’re going to drive it. And so I think over the journey, it’ll at least get the value that it would’ve otherwise. A couple of years ago at the Slipstream conference, the one that didn’t go ahead, it ended up being a virtual because of Covid. I did some slides, which I’m happy to give you where I sort of worked on this myth that you have to sell it in a big lump to get the same end capital amount. But if you actually work through a growing practise sold over a period of time, there actually doesn’t end up being a great difference in the number because what you’ve got to remember is that the next generation drags your end valuation up for you as they build the business. So people I was sort of saying is you’ve got to really get your head around your mathematics first and understand how that’s working, because often we perceive that that’s the better outcome, but it actually sort of isn’t as materially different as you think. So I did the numbers for me, I went, oh yeah, that’ll work.

Rob Pyne:

And you’ve now got the people that are going to be there to help you drive it forward so you get the benefit without too much of a, so it’s a really investment in the businesses future as well, isn’t it, to be able to do that. And so now I could see the point well made. So if you’ve got slides to that effect that actually sort of illustrates that point, I’d love to share those.

Tim Lane:

Yeah, I’ll try and get those. Fiona will know where they are. She knows where it’s That’s right. Yeah. But yeah, look and look, I think just sort doing the marketing pitch at the end, we would prefer people rang us and said, I’ve got this problem. We spend 10 minutes with ’em and do this, do that, or have a think about this, then charge off doing things that might get them into trouble.

Rob Pyne:

So the answer is, yeah, as always being in the financial planning profession, we all know this. Well get advice early chat to FinConnect if you’ve got a plan to try and get a succession arrangement in place. And appreciate time today, Tim, it’s always good to chat to you. And I do watch your vlogs and other bits and pieces on,

Tim Lane:

I got to get, and I’ve just got to plug, I’m a musician as well, so if you can get on Spotify and look at Tim Lane Music, I’ll give it to you to put in the show notes, have a spin, a song or two.

Rob Pyne:

I did hear this, Sharon told me, she said, you’re a guitarist.

Tim Lane:

Yeah, guitarist. Vocalist. Yeah, singer.

Rob Pyne:

Alright, you do the whole, in fact, did you actually perform at one of these events? I did. Last year’s slipstream.

Tim Lane:

I performed at the Slipstream conference, did two songs. Yeah, very, very enjoyable.

Rob Pyne:

Are you up there again in February at the Gold Coast?

Tim Lane:

It’s by invitation, Rob. So I dunno what Sharon, whether she’ll invite me back again. But the story to that was that I did a coaching session with Scott Sharp and I said, I really love to play in front of a 200 plus crowd. Then he rang me before the conference. I said, why about you come do a couple of songs for us? And I said, he said, there’s over 200 people here. I know, okay,

Rob Pyne:

What songs were they?

Tim Lane:

They were covers. So I did two. I’ve learned as a musician, you go to the low risk party in a big gig. So I did two songs that I’ve been playing for 20 years. I did April Sun and Cuba by Dragon, and I did to Her Door by Paul Kelly. Brilliant. You can’t muck them up.

Rob Pyne:

You can’t get there wrong can you? Because it’s a terrific Australian flavour there too. So yeah, that would’ve

Tim Lane:

Dance to it in whatever state they’re in. But I’ll shoot you a Spotify link for the show notes.

Rob Pyne:

Do that. That’s sensational to hear. Tim, you’re a man of many talents, so appreciate it. If you get up there in February, I’ll be there too. So I look forward to seeing you play and

Tim Lane:

We’ll have a frothy and enjoy it.

Rob Pyne:

Sounds good. Terrific, Tim, thanks for your time.

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Thanks for listening and learning with us. For a complete list of episodes, show notes, transcripts, and more, go to thetrustedadvisor.com.au.

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