Rob Pyne sits down with Richard Hernan, co-founder of Broadleaf Financial Group, to explore the world of mergers and acquisitions (M&A) in the financial planning industry. With over seven years of experience and 18 successful M&A transactions, Richard shares the strategies and lessons he’s learned from working with entrepreneurial financial planning firms across Australia. The discussion dives deep into Broadleaf’s unique business model, the growing trend of industry consolidation, and how to build businesses designed to last for generations.
LISTEN
SHOW NOTES
Key Topics Discussed
1. Introduction to Broadleaf Financial Group
- Broadleaf’s mission of partnering with entrepreneurial financial planning firms
- Richard’s journey in co-founding Broadleaf with Dane Gilkison
- Broadleaf’s investment model (20%-49% minority stakes) and focus on long-term, multi-generational businesses
2. Mergers and Acquisitions Landscape in Financial Planning
- Industry consolidation and how it’s shaping the financial planning market
- The importance of non-interfering partnerships and maintaining entrepreneurial spirit
3. Broadleaf’s Investment Strategy
- Three core pillars: Fund, Partner, Serve
- How Broadleaf sources capital from nearly 60 shareholders, half of whom are within the businesses they invest in
- Investing in financial planning businesses across Australia and building ‘forever businesses’
4. Key Considerations for Mergers and Acquisitions
- Common reasons financial planners look to merge or sell their businesses
- The importance of aligning aspirations and having a sound business rationale for acquisitions
5. Geographic Expansion and Industry Growth
- Broadleaf’s initial focus on Western Australia and gradual expansion into other states like Victoria and Queensland
- Plans to build a network of up to 50 businesses across Australia
6. Cultural Considerations in M&A
- Why merging cultures can be risky and how Broadleaf avoids merging two different business cultures
- The importance of maintaining a consistent business framework and avoiding ‘winging it’ during integration
7. Financing Options for Acquisitions
- Financing models for financial planning businesses, including debt financing from major banks like NAB, Macquarie, Westpac, and Judo
- Insights into private credit and personal equity as alternative financing options
8. Evaluating Business Readiness for Sale or Acquisition
- What businesses need to do to maximise their value when preparing for sale
- Ensuring compliance and strong governance as critical aspects of business evaluation
9. The Role of Private Equity and Ownership Structures
- Discussion on minority vs. majority ownership in M&A deals
- How Broadleaf supports businesses through ownership transitions, helping the next generation take over
10. Compliance and Risk in M&A
- Why impeccable compliance is non-negotiable in financial planning acquisitions
- How Broadleaf ensures potential partners have robust compliance frameworks in place
11. Valuation and Financial Metrics in M&A
- Key financial metrics that drive valuation, including EBIT multiples
- Insights into how Broadleaf evaluates businesses for investment and the importance of free cash flow
12. Future Trends in Financial Planning M&A
- Richard’s perspective on the future of the financial planning M&A landscape in Australia
- The growing presence of overseas investors and the role of private equity in shaping the industry
Quotes
- “We don’t just invest in businesses; we partner with entrepreneurial owners who have a clear vision for the future.”
- “Compliance is table stakes. If a business doesn’t have impeccable compliance, it’s not worth partnering with.”
Resources Mentioned
- Patrick Lencioni’s work on organisational health: The Table Group: Resources for Successful Companies, Cohesive Teams, & Engaged Employees
- Adapt by Design’s tools for cultural alignment: Home | The adapt way
Connect with Richard Hernan
- LinkedIn: Richard Hernan | LinkedIn
- Broadleaf Financial Group: Broadleaf Financial Group | Partnering With You In Succession
TRANSCRIPT
Welcome to The Trusted Adviser podcast, where you get a deep dive into the world of financial planning with industry leaders who share their stories of winning and learning as they charted their path to success. This podcast is for the curious. Those of you that like to dig into the detail. If that sounds like you get ready to listen and learn.
Rob Pyne:
Welcome to episode three of The Trusted Adviser, the podcast where we explore the ins and outs of running a successful financial planning business. I’m your host Rob Pyne and today we have a special guest joining us. Richard Hernan, co-founder of Broadleaf Financial Group. In recent years, Richard has been at the forefront of mergers and acquisitions in the financial planning industry, working closely with entrepreneurial business owners across Australia. In this episode, we dive deep into the world of M&A, discussing what drives financial planners to merge or sell their businesses, how to ensure cultural alignment, and the key steps to successfully growing your business through acquisitions. Richard shares his expertise on the factors that make or break a successful acquisition, the role compliance plays in determining business value and how broad leaf unique approach to minority investments is helping businesses thrive for the long term. Whether you’re a financial planner considering a merger or acquisition or simply looking for insights into how the industry is evolving. This episode is packed with expert advice and practical perspectives you won’t want to miss. So let’s get started. Here’s my conversation with Richard Hernan from Broadleaf Financial Group.
Welcome Richard to the Trusted Adviser Podcast. I appreciate you taking the time to have a chat about something that you’re very familiar with, which is mergers and acquisitions, something that is very common now. We’re hearing a lot about it across the country as the industry consolidates, and so I thought it’d be a great opportunity to have a chat with you and learn a bit more about what you’ve picked up along the way, given you’ve been very active in this space yourself. I am looking forward to this conversation, and if I can start by asking, tell us a bit about Broadleaf and your position in the market.
Richard Hernan:
Yeah, thanks, Rob. Keen to be part of the podcast, and obviously an area I’m passionate about and being been part of for a little while now. So yeah, Broadleaf Financial Group is the business I co-founded with Dean Gilkison probably about seven years ago or so now; made our first investments around probably five years ago. We invest in financial planning-led businesses, and we’re optimised to work with owners and leaders of those businesses. So we’re looking for entrepreneurial owners of businesses, and we’ve built our whole business model around that. So we invest as a minority. So typically between 20% and 49% in fine, as I say, financially, financial planning led businesses all around Australia, yeah. So Broadleaf, as I say, been in the market for just over, over five years. We’ve been at it for seven in terms of building the business model we partnered with so nine businesses around Australia, and when we say, partnered with, we invest as a minority in those businesses, and we’re about helping but not interfering. So we sit with an owner of a business and we say, what’s your aspiration? What are you trying to do? And then our business model is catered around, trying to help them achieve what they’re doing there. And we do that in a whole range of ways. And we we do that as a business partner to that business, and we try and differentiate ourselves in that way. So we run a lean team. We try and think we’re pretty entrepreneurial in what we do. So there’s a team of five of us, Dean Gilkison and myself, are the co-founders of broad belief, and where really the interface with the business owners, there’s, there’s three parts to the business. We describe it as fund, partner and serve. Fund is essentially the corporate finance bit. Where’s our capital come from, and that’s essentially a wide shareholder base of nearly 60 shareholders, almost half of those people within the businesses we invest in. Partner is the, what you call the M&A piece, which we’re, I think, going to talk a fair bit about today, and, and the third piece is, is serve, which, once we’re invested in a business, how do we help? So that’s identifying what it is that you know, the business owners have, have got into business with us for and how can we help? You know, in the long term for that and we’re all about building multi generational businesses, or forever businesses, and the sort of business that can live on beyond the the current owner. So whether that owner wants to be in that business for the next 1020, 30 years, we’re trying to build a method, a framework, where others can come through. We can, we can help them and the next generation building the Broadleaf business to create these forever businesses. So it’s not about a buy and flip, it’s not about listing. It’s about building a community of businesses that can go on into perpetuity and help continue to serve the clients for multi generations.
Rob Pyne:
Ok, you talk about there having about 60 shareholders, nearly half of which are actually owners of businesses that have taken a stake in Broadleaf as you’ve taken a stake in their business. How many, how many transactions you know, merger or acquisition transactions have you been involved in?
Richard Hernan:
Yeah, so there’s been nine of what we describe as hub businesses. And a hub is a standalone business with its own identity. They’ve got their own way of operating. And we invest in ordinary shares in those businesses. There’s been nine of those, and then there’s been another. Include the couple that are settling. Legals have been done, and DD and everything. Include those as another nine, what we call sub acquisitions. So that’s where, when you’re doing growth through acquisition and you’re looking to find a client base or another business that’ll merge into yours and help provide some more scale. And a number of reasons for doing that, but of those transactions, there’s been another nine. So Broadleaf, directly, we’ve had 18, what you describe as M&A transactions in that time.
Rob Pyne:
So the sub acquisitions that you are investing in, you are putting them together with nine, the other nine hubs, one way or the other, they’re going and joining a hub.
Richard Hernan:
Yep. And it’s not a one for one. It depends on the aspiration the owner some if there’s an owner that’s really on a wanting to grow to a certain size and scale, and they want to do, you know, 456, whatever number of acquisitions, sub acquisitions we’ll help find those, we’ll help execute on that. There’s others who are, you know, there’s no reason for them to do acquisition type work. It’s more, you know, they’re growing naturally, organically, which is obviously a much cheaper way to do it. So, so the nine aren’t one for every hub, and we don’t have a formula. We say you must or you should do this. It’s all about, you know, what’s, what’s the rationale, what’s the reason for wanting to, you know, if you, if you’re going to do an M A transaction, it’s about understanding the reason for that. Because blindly going into it because someone down the road or the pub, whatever said it’s a good idea is probably, in our experience, not maybe the best reason to do something.
Rob Pyne:
Yeah, for sure. And now you’re a proud West Australian and but I understand your geographic reach goes beyond WA. Now how far afield have you gone outside of WA?
Richard Hernan:
Yeah, definitely. So when we first raised capital and put our business plan together, we said we’d stay in WA. We’d made a commitment that we wouldn’t invest outside of WA for the first three years we we stuck to that COVID helped in a way, because it meant that we probably stayed another year or so, and then we’ve been building a pipeline around Australia for some time. And we’ve got two investments currently outside of WA, so one in Victoria, one in Queensland. But before too long, we should have, you know, fair coverage around Australia. We think, with our business model, we can have a investments in a footprint of businesses all around the major population centers of Australia. We think, we think we’ve got capacity to be up to, probably, investments in about 50 businesses. And that’s, you know, the and it seems there’s a high correlation between population and financial planning businesses. It’s almost 100% correlation. So if you find, you know, any population center seems to have a, you know, at least a number of quality businesses of the, you know, size and scale and culture that we, you know, entertain partnering with.
Rob Pyne:
What are some of the common reasons you’re seeing that a business or a planner is looking to merge or sell? What are you seeing is, if you like, a top two or three typical reasons that people are wanting to find a new home?
Richard Hernan:
Yeah, there are a few main themes that go through that. So there’s certainly the one where someone’s really successfully running a business, but they’re doing 100% of the decision rights, 100% of the risk and the pressure, and they’re saying, I really want to partner in this. I don’t, I don’t need one, but I want a partner, because I think that’ll help me as it have a sounding board. There won’t be conflict, that sort of thing. So it’s the it’s the person who’s done it themselves, who wants to kind of share that experience. There’s the person who is bumped up against, they’re trying to grow, and they’ve tried number of different things, and they’re frustrated, they’re bumped up against a ceiling, and they they really want some help. There’s the person who really wants to just merge completely into another business and that that would be what we describe as a sub acquisition. And they’re saying, I’ve got a gift for being a an advisor. I love the advising, but I don’t want to be business owner on I’ve become a business owner because I was successful as an advisor. But that’s what I’ve learned, is it’s not me. So they’re saying, I just want to, I want to plug into something. And then probably the last really common one is, you know, a 6070, year old who’s getting towards the end of their career, and they want to retire, and they want a great home for their for their clients, and sometimes for their team, and that’s where they’ll partner with and merge into another business, or or will help recruit, if it’s a bigger business, will help recruit next gen leaders to come into those types of firms.
Rob Pyne:
So on the other side of the transactions, then what? What are some of the key steps that businesses that need to take that looking to grow their own business through. Measure acquisition. What are the key steps that you would be talking to them about? Because obviously, you’re helping businesses do sub acquisitions. So what are those businesses that are your hubs? What are they doing? And what are you helping them do to plan for those transactions?
Richard Hernan:
Anytime someone is looking to grow through acquisition with there’s a fair bit of counseling from us, and we encourage from others. You know, really understand yourself, like, what do you do? You know your business? Do you know yourself? Do you know your business? Have you got a repeatable way of doing things? Have you got a repeatable culture? Because it’s only going to magnify by anything becoming larger is going to magnify what it is, if you’re already disparate in what you do, adding some more is just going to, again, amplify that. So it’s understanding exactly who you are and who your business is, and then looking for a complimentary business that’s going to come in. Have you, have you got the scale, and you’re looking for clients of the similar type to what you’ve got, and that’s the most common one we see where they’re looking they’ve got the scale, but it’s going to take a fair while organically. So it’s about understanding the client type, the culture of those clients, and even the culture the businesses they’re coming from, because it’s like, like attracts like. So if you’ve got a certain leader, generally, your clients are going to be culturally quite similar, is what our experience has been. So in terms of what to look for and what to do, we will counsel on those things, and then it’s about really planning it out the transition. What’s it going to look like for those clients? It’s not about, you can do it on a spreadsheet, but, you know, typically the spreadsheet doesn’t, isn’t, isn’t particularly accurate. So you can really get into a fair bit of trouble by just taking on an acquisition that’s not right for you, doesn’t fit. It’s just going to create a whole lot more work for something without generally the benefit, if not done properly.
Rob Pyne:
And for those that are looking for a buyer, looking for someone to sort of merge into or sell to, how do you evaluate whether they’re ready for that in terms of getting maximum value for themselves in that process?
Richard Hernan:
Yeah, and it’s very similar in terms of that piece around running a good business. If you know who you are, you run do something repeatable, you do something consistent. You can describe that to you know, if you’re the seller of and typically a sub acquisition, I think maybe more talking about here you can describe to potential buyers. Here’s exactly what my clients are like, here’s what they value, here’s here’s how you would reduce the risk by, you know, in your business, because it’s all about reducing risk, you don’t want to pay an amount of money to merge a business in that you don’t know if the clients are going to stay so and our experience there is the better, if you like, the client base, it’s been about the consistency of service provision that they’ve provided to those clients. The clients are really clear about what they do and what they don’t do. As a really good example of probably one of my favorite sub acquisitions, if you like, where the owner said, you know, I make hot dogs. I don’t, I don’t sell fries with the hot dog. I make a hot dog. This is exactly what I do. The clients know and love what I do, and I don’t stray outside of that. And the client type was, you know, very similar ish across across the board. So it gave that certainty to the business that was the new home for them, and, you know, no coincidence, that has worked out really successfully.
Rob Pyne:
Yeah, and what? What are the mistakes that you’ve seen, or perhaps they’ve been a part of, but witnessed that buyers have been, that buyers make in making a merger acquisition. What are they? What are they getting wrong when they’re going and looking for a business that they can tuck in, or, you know, bring, bring into the fold. What mistakes are they making in that process? Typically?
Richard Hernan:
Yeah, I think it’s doing something for the sake of doing something. You know, it’s like, well, you know, we’ll be able to sort it out. You know, you ignore the warning signs, or you you’re talking to, and everyone’s business is fantastic. You know, if you, if you ask someone how they’re going, they’re all doing well, and their business is great, but I guess being a bit too superficial, being a bit too optimistic, being it kind of not doing like anything in life, right? If you don’t do the work, you’re probably not going to get the outcome. So, you know, and I would like to think we haven’t been involved in any of these, but certainly spoken to people who, who’ve talked about, you know, the integration hasn’t been great when you’re bringing people in, and particularly if they’re on a different platform, or they’re used to a different service provision or a different pricing model, the more you compound the differences, I think, the greater the risk that something’s going to go wrong. So I think, yeah, nothing’s going to be perfect. So looking for the perfect client base is probably a mistake as well. You’ve got to, there’s got to be some pragmatism, but it’s, what are the concessions? What are the things you’re going to that are okay? And we, we build a little bit of a matrix around that to say, here’s the five or six key things you’re looking for. What do you rate each of those out of you know. Out of or firstly, what do you weight each of them? And then what do you rate them? So you want to, and then that goes into the pricing as well, to say, well, what are you prepared to pay for a client base? Well, if it’s perfect, here’s what it is. If it’s, you know, not perfect, but still acceptable to work on, you know, what would it be you’ve been long time clients of adapt by design.
Rob Pyne:
They’re very big on culture. How to actually get the right people all aligned around culture, and what do we stand for? Who are we and and what do we do here? And are we all on the same page? How do you in coming to a partnership mergers and acquisitions on either a buyer or seller side, how do you ensure there is cultural line between two businesses. Have you used any of the tools that adapt have or how have you kind of got that cultural alignment piece prepared before the transaction takes place?
Richard Hernan:
So we guess is the answer around the do we use the tool so, so adapt by design has been a fantastic tool set for us in looking at culture, and, you know, a range of different tools within that allow us to have a good look and have a view. And Dean and I read and talk to read widely, talk to a lot of people about it, but I sort of preface this whole thing by saying, we actually avoid merging cultures. So we’ll we actually say there’s no such thing as emerge. There’s and here we’re talking about a sub acquisition, if you like, where you’ve got a client base coming in. And we, and the conversations up front are very much about whoever, if we’re helping someone bring a client base in, it’s very clear to the seller that this is they’re merging in to this business, but it’s merging into that business as essentially, it’s a takeover of that in the way the processes and the systems and the culture and everything is going to be and there’s very good reason for that. You know, I feel that the merging of cultures eventually ends up, ends up breaking. There’s too much compromise one way or the other, and we, we specifically avoid bringing merging in teams as well. We say, will we sometimes, or even often, have have employees, team members from a business that’s being purchased come across, but they come across on the basis of a job interview. They’re separately. There’s a separate process around that. We don’t just say, Okay, you’re just going to fit, you’re going to bolt in, unless we were going to run siloed pieces within one business. So, so there’s a couple of parts of that. One we we try and avoid the risk by not merging the cultures. We say, this is the culture of the business is going to be and and here’s the client experience that it’s going to it’s going to be, which we believe will be a fantastic client experience, but we’re not going to merge to different cultures. We’re going to avoid that completely. And then with the businesses we work with, the hub businesses, we do a hell of a lot of cultural work, and we do a lot of review of that, and have a framework around career valuations, peer catch ups, around really understanding the people you know, when we’re making an investment, we do a, what we call an org review, and as part of that, we we do personality profiling, we have deep, sort of qualitative discussions, and all of that is around doing DD on the on the culture and leadership of the business. So, yeah, probably a long answer, but really important to us, and trying to think about the, you know, is it any tips or tricks around that for people? I don’t think there’s any tricks. There’s no shortcuts, but it’s, you know, what are the big risks that you can avoid? One, don’t merge the cultures. Two, there’s if it’s if it’s you know, it’s no way around that. What are the pieces of work that can be done to minimize your risk, and then within your own business, yeah, there’s tools around there’s a whole heap of different tool sets. But, you know, don’t wing it. Use some actual tools and frameworks that are then consistent and people understand, you know, the culture, you know, the short saying around that, right? Is it just this is how people it’s how people behave. You know, here’s how we do things around here, and back to consistency. What’s is it consistent how people behave and do things? You know, have we invited a team member or two in that don’t live that those same sort of ways of doing things and behaviors? You know? Now we’ve got an inconsistent culture which is going to grind the gears of other team members.
Rob Pyne:
And the tools that you use, were they all adapt tools? Or have you kind of brought some other things in from all your reading and and listening to different ways of doing things? Have you kind of had a blend of things over the journey, or is it being pretty much driven by adapt and the tool set they’ve got?
Richard Hernan:
I think it’s been a blend of things over time. There’s been experience that’s been brought but I think in anything, if you can use, and, you know, there’s lots of different analogies of stuff, but typically in my again, in my experience, people don’t use 100% the capability of anything, you know. So if you can just use to its maximum a tool set and then blend it with other experience. So yeah, for us, we. Is adapt by design, as as a tool set and a framework. But then, you know, read widely, we talked a fair bit about the likes of Patrick Lencioni works, and we use, you know, the lens around humble, hungry, smart as you know how we sort of when we’re initially meeting people, how does that? How does that fit? And frameworks around those things, a whole range of podcasts and books and courses which complement things, but without having some sort of framework, it’s just, you know, what’s the latest thing that I read and try and try to apply that hasn’t worked well for me in the past. So it’s just more about have some consistency, have a framework that people can rely on and then enhance that or complement that with other stuff.
Rob Pyne:
So we catch up reasonably frequently you and I, and we talk about all sorts of things. And more recently, we’ve been talking a bit about financing. You your business and our business. We both bank with National Bank to a major player in banking professional services firms like ourselves. What financing options are you seeing for planners out there looking to acquire another firm. Are you really dealing predominantly with the main financier, your bank, or are you seeing other financing options? I know that Judo are out there. Westpac is doing it. Macquarie certainly always been in the market as well. What financing options are you seeing that is pure debt finance, or even maybe, maybe not, maybe non bank finance as well.
Richard Hernan:
Yeah definitely. So the main ones there, if you’re doing a pure, pure debt in acquisition of a client base, and one of the things around, Should I do it, or shouldn’t I do it? If you’ve got capacity in your business and you talk to a bank, and the metrics make sense from a financial perspective, if you can do it as an all debt deal, it points to the fact that, okay, that is improving the value of my business, if it wasn’t improving the metrics or the financial ratios of your business, well, that would be one, one sign that you know, perhaps this isn’t the right thing from a financial perspective, that we should be doing. So certainly the banks that you mentioned so, so now Macquarie probably the leading to in our experience, Westpac have apparently got an appetite, and they’re certainly out there and trying to win business. Judo, people will say that they’re certainly out there and winning business, and they’re competing on flexibility. So they’ll pitch a little bit higher price on the rate, but much more flexible in terms of the some of the ratios and flexibility. If you’ve got very low leverage or already, then you’re typically getting a lower price at the NAB and Macquarie or Westpac. But Judo is certainly winning a lot of business, so they must be doing a lot right that that’s the traditional lenders. And there’s definitely been a trend where there’s the private credit coming into the market, there’s this private equity who are also providing some of those, the debt fund. And private credit is just a way of saying, you know, it’s debt provided by private not not banks, so that that’s on the pure debt side. And then there’s definitely an appetite on the equity side as well, from, as I said before our shareholder base, 60 shareholders, and that’s all. We call it personal equity, rather than private equity. But that’s, you know, that that’s a funding option. There’s vendor financing, which is, you know, using businesses and and certainly, if you’re looking as a as a financial planning business, to bring it to merge in or purchase another financial planning business, if you are the right cultural fit for them, if you ticked a lot of other boxes, there’s, there’s a conversation to be had about how much of that is in deferred payments, how much of that is essentially vendor financed. And we’ve certainly seen a lot of that, and that’s down to, you know, the quality of your proposition. There’s, there’s value in that. So you don’t have to be paying 100% upfront or going through the bank for everything, you know, it’s, it’s sort of a win, win deal for, if you, if you’re a great home for their clients and they want them to come to you, what? What can you negotiate? Be a suggestion from me? Okay, yeah, probably the main, main options.
Rob Pyne:
So I know that you and I both recently have had a chance to catch up with David Hynes, a friend of both of ours working with merchant Investment Management. And in talking to David, he was talking about their ambitions to ideally, they’re looking for firms where they cannot offer primary equity rather than secondary equity. What he defines as primary equity is money goes into the business. It goes on the balance sheet. It gives that business the capacity to go out and grow. And it’s really what you would call growth capital, as opposed to the alternative being secondary equity. Is really what we call succession capital, if you like, money that’s going in to really get someone out, sort of buying someone who’s a maybe a retiring partner out. Does the structure of a deal, or even the price associated differ depending on whether it’s primary or secondary, or is that the valuation of the business is what it is, and there’s no real difference between the pricing model and the structure of that, whether it’s primary or secondary?
Richard Hernan:
I don’t, for me, it doesn’t make a difference to the valuation as such. It definitely makes a difference to the motivation and the and the one. Want to partner with a business depending on what your business model is. So as you say, in the discussions with with with David, they certainly there’d be a bit of a red flag if the people they’re looking to invest in are wanting to take all their money off the table. So similar to us, you know, we invest with, from a hub business perspective, we’re investing in businesses that we want to carry on for the long term. We’re investing in the owner. We’re back in the owner. And if the owner said, hey, I want to take all my chips off the table. But trust me, I’m going to hang around for the next five or 10 years. You know, you’d have to go, well, is, do I actually believe that? So, so it’s really the willingness to do, to actually make the investment, if it’s primary versus secondary, but that, that would be the main part of it, you know, we’re, we’re much more in the secondary market, you know. So where we’re investing, which sounds contrary to what I just said before, but we’re investing as as a minority and and often it’s we’re not a partner in the business, unless there’s a way for us to invest that capital. So, so say 100% owner, they’ll often say, Well, what’s the minimum investment? You know? So that’s 20% and they’ll take that investment on the basis, not because they need the money, but because they want us, us to come in as a partner, and they believe that’s going to be much more valuable to them than the the 20 cent, the 20% that they’ve sold. But they are getting money for that 20% so so, you know, we’re much more of the of the secondary, the primary is where you’ve someone will come in, invest money in your business. That money goes into the bank account, and you’ll use that for purposes of, essentially, you might use that to to purchase another client base, or, you know, whatever it is that’s a value accretive thing. So they’ll use those that’s growth capital, so we’re much more of the secondary world partner. And then will you the growth capital, where it sub acquisitions. A lot of that will come from, from banks, rather than us, going, well, here’s equity capital that comes through. And we’ll, we’ll help arrange that financing and do all of that. But it’s not about putting a whole heap of money in the bank account. It’s about being a partner. The only other piece I’d add there, where you talk about the deal structure being changing, whether it’s its primary or secondary. P and this is one we bump into a lot when valuations are being done and and a business owner will often just ignore the fact that there’s, there’s debt on the balance sheet, and it’ll be kind of like, you got to buy a house, and the mortgage stays with the house, or they ignore the mortgage. I’m not sure which, but a business is just like a house. It’s worth the equity portion. It’s not worth, you know, if your business was ten million and you had $3 million of debt, it’s, you know, the equity value is seven. It’s not, it’s not 10. So, so that would change where that becomes relevant as well, for the funding, if, if you had primary capital coming in and it was going to wipe out the, you know, the debt that that changes the valuation, if you had ways of paying that off before that changes, changes evaluation. But, yeah, debt is a critical part of evaluation, although, you know, there’s been a number of instances where people would just say, Well, can you just ignore that? Can we take that out of the equation?
Rob Pyne:
Or I’m sure that’d be very handy, wouldn’t it? So in the transactions you’ve done, you’ve talked there are taking minority stakes, predominantly 20 up to 50% do you see some of those strategic ownership positions as being non permanent for you, like, do you actually buy up to a certain portion because it’s needed, because, as a retiring partner, perhaps needs the funding to get out the next generation hasn’t got the means on their own, but you become a go between for a period of time where you would take a stake and possibly look to then really give the next generation, who are obviously going to be important for the businesses continuity, an opportunity. Continuity, an opportunity for them to then buy back off you to a portion, you know, a portion of that that you’ve purchased.
Richard Hernan:
Yeah, absolutely. So we’re, we’re situational in so we’ll, we’ll invest in a business and so, and we want to be, you know, really clear. We want to be in there, multi generationally. So we’re not, it’s not a situation where we situation, where we make a make an investment, and then six months later, we solved the problem. We’re out. But what we how we describe it, is we’re elastic, so we’ll go up and down in terms of our percentage ownership based on the and we’ll prioritize the needs of the business over our our company’s percentage ownership. So so two good examples of that happened recently, where situationally, we needed to purchase more than 50% because it was one owner, owned the majority of the business, and they were, they were retiring, they were exiting. So we held more than 50% for a period of time and then helped help them recruit the next generation leaders. And sold that portion to sold a portion down to bring us back to where, where, you know, a more natural fit as a as a minority, and we want to be a minority owned, and we still acted as a minority, even when we had a majority, but that’s for the reason of bringing those next gens in. And, you know, why would we do that people get because there’s a school of thought you just want to own 100% of everything, where. We’re trying to optimize for how best to run those businesses for long term. So if we’ve got there’s great, great talent within the business or external coming into the business, we’re trying to optimize for ownership thinking and owners running the business so that that requires often that they need enough of an equity stake to make it a fair, win, win proposition. So So yeah, we’ve certainly done that, and we’ll continue to do that into the future. And we’re not trying to, we’ve got, we’re not trying to sell that at anything other than a market price. We’ve got a market mechanism built into the shareholder agreement. There’s certainty for people of what they what they’re going to get now and into the future based on the how profitable the business is and how well it’s run, yeah, sure.
Rob Pyne:
And having on the same subject, just talking to Tim Lane from fin connect advisory and talking about this idea about how much a private equity investor has in a business, and Tim called it a Tim ism. He said, I don’t have the data to back this up, but his feeling was something in the order of 15 to 20% ownership external to the business, albeit they may be an active partner in helping to grow the business, but they’re non operational, or that’s probably an argument to make whether they’re operational or not. Tim’s view was that that’s kind of the about the sweet spot where the private equity player has a significant enough investment for it to be worth their while, but not so much that it disincentivizes the generations that are there to grow the business and are doing the day in, day out, work. Do you have a view on that? Do you share that view that Tim’s got there, or do you think it’s more nuanced than that?
Richard Hernan:
Yeah, no. 100% agree with Tim’s view. I think it’s if you’re the more disincentivised the people in the business, day to day, running the business are, I think the worst outcome for for the business, the specifics of what that percentage looks like, I think, is is nuanced based on the size of the business. If you got a much smaller business, then those percentages would be quite different. And we went through an exercise quite some time ago where we were talking about, you know, that optimal ownership percentages, and we did a fair bit of work around, is it the percentage, or is it the actual dollar amount? And it was very clearly the actual dollar amount, because you could say, well, you own, you own 70% of a business that’s worth a million bucks, or you own 10% of a business that’s worth hundreds of billions, right? What would you take? And it’s so it was, it was more in that regard. And the other point was around the we have this discussion a lot around active versus passive. So what Tim described there as external and external owner, we don’t talk about internal and external. So much we talk about active and passive, and we talk about in the Small Business, Small Medium Businesses that we invest in, we’re strongly of the view that there should be no passive ownership. That’s on us as Broadleaf to say, well, if we’re passive, we don’t have a place in your in your business, or being an owner of your business. We should be demonstrating that us being on the on the Share register is actively helping your business. And I’d like to think that that’s always been the case. We certainly haven’t had anyone come to us and say, You’re not doing enough, or you certainly that you you are passive. So you know, and in future, if we have that conversation, we’ve got mechanisms where we’ll sell down at the at the market price, and so we don’t have any value to add. And particularly if we’re squeezing out others who, you know, it’d be better for the business for them to be involved.
Rob Pyne:
Yeah, for sure. And on that, Tim shared, and he’ll be episode two here of The Trusted Adviser, which will go to air shortly. He said he’d got some slides that he was going to share in the show notes for Episode Two. Just around that point, you’ve just made Richard, which is to say, having a smaller stake of a faster growing pie is always better than trying to own a larger portion of a business that really isn’t growing, because you’re holding up the opportunity for the next generation to come through. And it’s almost a false economy thinking to hold on to the equity, and you’re not really getting the motivation Ownership mindset you’re looking for from your next generation. So we’ll look out for that on the on the episode with Tim. Over the journey, we have had a challenging regulatory environment, and hopefully there’s some shift coming in that does compliance still play a really big part in the due diligence that you’re performing, and what are you seeing that you’re looking for to ensure a business is really strong in its compliance framework, to to make it a really good partner for someone.
Richard Hernan:
Yeah it plays a massive part. And my answer made me saying a massive part. By then, this the Australians probably the answer. I’m thinking in my mind around if it’s such a massive part just being a very compliant business or an exceptionally compliant business. Mean, my business is worth more than a business that’s just okay with compliance, and to me and us, it’s it’s binary. You’re either the assumption before we start our due diligence is and based on all the discussions we’ve had to get to that point, is that you’re. Impeccable on your compliance, because if you’re not impeccable on your compliance, well, we don’t want to partner with your business. We don’t want to have anything to do with the business. So it’s table stakes. You need to be impeccable with your compliance. Because of the, you know, the financial planning industry, the regulatory overlay and framework, means that the risk to us and to you as a business owner, if you’re not, if you don’t take compliance seriously, if you’re not impeccable on your compliance, what’s the value in your business? You know, your the valuation is about the future income of your a multiple. The multiple just represents the number of years that you’re saying there’s, you know, you have high confidence that the business is going to continue doing for that, for, you know, on into the future, and the higher the multiple is, the higher the confidence, the number of years you think that’s going to happen. For the central to that is the license to operate. If you’re not compliant, you’ve, you know, you put at risk the license to operate. And in an intangible business, the value is, is zero, right? If you, if you can’t serve your clients, you can’t earn an income. So it’s absolutely fundamental that compliance is impeccable, that your question around, what do we actually do? Well, through our due diligence, we we review what their framework is, what the governance is around that who’s providing the advice. I had a discussion with a licensee some time ago, where they talked about and where we’re agnostic to whether someone’s within a licensee or they’re self licensed. We had a discussion about, you’d be crazy to be self licensed. You’d be crazy to do because you’d be crazy to to not basically to do it yourself, do compliance yourself. And I said, Yeah, I absolutely agree with that. You would be crazy to do compliance yourself, but you wouldn’t be crazy to get a fantastic external compliance person who’s got decades of experience to come and do the compliance for you. You take responsibility, but they help create all that. They have the oversight, the overview. So we’re again agnostic to whether you’ve got your own in house team doing that an external team, but the outcome needs to be that you are absolutely impeccable. The legal the legal framework is the minimum standard. You know, you’ve got to be do all the things that are, you know, way beyond the minimum standard.
Rob Pyne:
It’s fundamental to financial planning businesses and the great for acronyms in financial planning, both at the advice level, but also at the business level. We’ve got ebook, we’ve got EBITDA, we’ve got n Pat for net profit after tax. What in your mind is the most important financial metric to consider when looking at valuing of financial planning? And obviously one’s a derivative of another, in terms of net profit after tax versus EBITDA margins. But what are you looking at when you’re looking at the valuing of a business? What margins are you looking at as your most important financial metric?
Richard Hernan:
Yeah so it’s hard to say most important as well, but most important to our valuation. And we do a very simple valuation, we say EBIT buy a multiple less the debt that sits on the balance sheet of that business, and that’s the fundamental most important things to come to, the valuation number, but we but that’s just one number. We don’t then go, we’re going to that’s what we’re going to pay. That’s the valuation. And the price then, is dictated by what are the qualitative elements around that. So EBIT margin is a really important part, because that tells us, if someone says they’ve got an EBIT margin of 15% or they’ve got an EBIT margin of 70% it tells us very different stories, almost. With that one metric, you can say, well, are these people, you know, if someone’s telling you they’ve got a 60, 70% EBIT margin, you’re saying, Well, are you actually doing this with any any staff? Is this business actually sustainable? If someone’s got an EBIT margin of 15 or 20, is the story they’re telling you consistent with that? Are they, are they investing for for growth? Are they not charging appropriately? What’s the you know, so that’s a really critical metric that we find. But in terms of other, you know, ebook and earnings after tax and dividend ratios and all these sorts of things. Find a lot of that is, you know, all of them need to know, but bit of noise around that, like, I’d say free cash flow is critical. If the business isn’t generating cash, then, you know, there’s that’s a really important thing to know. So what dividends are being paid out historically is an important one, are they needing to borrow to carry on the operations the business would be a big red flag.
Rob Pyne:
And the question on valuation around multiples of EBITDA or EBIT margin, what are you seeing is perhaps the most critical things that will influence the variation between a five or a six or even a seven times EBITDA margin multiple.
Richard Hernan:
Yeah, so we’re not seeing huge variations in what we do, and it’s, in a way, it’s quite difficult. You sort of get deep into what your own you do yourself, and then you hear the commentary from others, but to see the actual evidence of what people are paying there’s, there’s kind of a bit of smoke and mirrors around, you know, someone says they’ve got this high multiple or a different number. And there’s a revenue multiple, there’s an EBIT multiple, there’s an earnings multiple, you know. So I think it’s really important apples, for apples to compare all those things. And firstly, say, Okay, are we on the same we’re talking about same stuff. And then I think what dictates what the average fare multiple would be to something that’s higher or much lower? There’s a few different factors, you know. One would be the percentage of the business that you’re buying. You know, if you’re if you’re a business that’s buying 100% of something, and then maybe revenue is a different is the metric you’d be looking at there. But you you’d be able to pay, potentially a higher multiple to have 100% of that, knowing with certainty what it’s coming into. If you’re buying into an existing business, as we do as a minority, we believe we pay what’s a fair market multiple. So I think in Australia, currently, we’d say the multiples are generally between five and seven, and dependent on the type of business. We say, you know, if you’re buying 100% of it, and it was a much bigger business, that might be seven, we come in generally at about about six in terms of what today’s valuation is, but there’s certainly, if it’s a fast growing business, we’re able to and this is another bit of smoke and mirrors that people can can play, they’ll say, Yeah, I’ll pay you seven now. But the ability to be able to look into the future, future growth and put that at risk, you might get a much higher multiple on an apples for apples basis for doing that. So I certainly hear and read that, you know, there’s us groups that are paying some some crazy number. But I feel like every time we look into that, we say, Okay, that was a special situation, and the company was worth, you know, ten billion or something, you know, if again, comparing apples for apples to the types of businesses. So if there’s a business owner who’s operating a business that’s, you know, three or $4 million of revenue, they’ve got bible so advisors, what’s, what’s the multiple being paid on those? And to try and compare that to something where a business is worth, you know, hundreds of millions or billions of dollars, it’s a different it’s back to what’s the certainty, or the increased likelihood of repeatable profits, the bigger the business, the more repeatable, the higher the multiple someone can pay. And then the other side of the multiple equation is who’s for someone to pay a higher multiple. That’s a percentage return they’re expecting on your business. So someone comes to you and says, I’m going to pay double what someone else pays you. Say, Okay, well, how are you going to get a fair market return from that. Is it because you’re taking my clients and you’re vertically integrating them, you’re charging going to charge them double? What is it? So it’s about being curious on that. But I think circling back to your question, What am I seeing in the multiples? I think in the five years or so the last five years, it feels like the actual EBIT multiples have ever remained pretty steady in the sort of size and scale of businesses. We’ve looked at the revenue multiples for the 100% sale of a retiring, retiring owner emerging that that seems to have fluctuated a little bit from back where you had client bases that weren’t really, you know, there wasn’t really a lot of service being provided. It seemed like those multiples drifted up, you know, some time ago, but now it feels like, though they’ve gone away, and now they’re genuine, you know, genuine client relationships. And those multiples, I think, vary a little bit, but it’s within a fairly tight band, which, without quoting numbers, that doesn’t seem to have changed. Like we use, we just say what’s the market multiple, and we look at radar results which publish, you know, publish on their website. Here’s based on age criteria. Here’s the high and low range. And that’s we look at that as what we see as the market. Do
Rob Pyne:
you have any thoughts or comment to make about as we wrap up here, what trends that you’re seeing in the M&A landscape you’ve been in this a while now, what trends have you seen that you would comment on that are showing up in the financial planning business landscape in Australia?
Richard Hernan:
If anything, I’d say there’s a trend where there’s, guess, a maturing offering, or a difference or wider range of solutions. So I think maybe, as we were getting into it, there was, maybe there was the option, really, of, don’t sell, or sell to someone who’s going to buy 100% of your business and merge it in. There’s, there’s certainly, you know us and and from and some others are doing the minority investments where you can carry on the business as it is. You definitely have some overseas investors now, who are you know, things have gone well in the US and and the UK, with financial planning, business investments, and they’ve said, Okay, well, Australia is a a pretty steady market as well. So there’s been a trend of that. And I think it gets picked up more in the media than what we we see day to day. I mean, we don’t see a lot of it, you know, you see some, and I think until someone’s actually been in the space for a number of years, like an overseas competitor coming into Australia for a number of years, and showing that sort of commitment to space, you know, do you take them seriously? And I think that so there’s a handful of those that have been here long enough to go, okay, they’re a viable option. They’re committed to it. And so that’s. That’s sort of the overseas as a theme, and private equity taking a bit more of an interest, I think, is a theme that’s grown. And there’s definitely, I think, just with better access to information, there’s, there seems to be enough. It’s more or less, seems to be more talk of M&A activity. Now, whether that translates to more being done, I know there was the theme after the Royal Commission, with going from 28,000 advisors down to 15,000 there was this going to be a tsunami of clients coming onto the market for sale, but it seems like a lot of those numbers were accountants with financial planning, or classified as a financial planner or whatever. Thankfully, there seemed to be a more of a steady state of transfer of some of those client bases. So I think they’re amazing.
Rob Pyne:
I’m saying, well, we’ll wrap up there Rich. I just want to say, in closing, congratulations on building a terrific business in Broadleaf Financial Group. You’ve obviously been able to win the confidence of a number of people through the reputation you’ve established over multiple transactions now and building strong partnerships. And so it’s been great to witness as someone who’s kept obviously in close correspondence with you, and we catch up frequently, but yeah, just want to say well done on you and Dean building something terrific. Obviously you’ve got some really committed shareholders there now and and helping to fund the growth that you’re experiencing. So a great success story and obviously you’re finding people that want what you’re bringing to the market, which is a stable, long-term partner that can support their growth ambitions or succession plans, as it might be.
Richard Hernan:
Yeah, thanks. It’s been great to chat in in this setting. Thanks very much.
Rob Pyne:
Terrific. Thanks Rich.
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