Acquisition, exit strategies and value maximisation for intermediaries
Advisers and brokers keen to grow their businesses in South Africa must do so against the stiff headwinds of lacklustre economic growth and rising joblessness. In an environment where GDP growth has stagnated near 1% per annum over the past decade, financial services providers (FSPs) often have more chance of gaining market share through acquisition than by pursuing organic growth.
Acquisition trumps organic growth
In today’s newsletter, we explore strategies for navigating a tough economic environment, starting with how to grow your financial or risk advice practice through acquisition, and moving on to how to protect what you have built up through an effective exit strategy. Acquisition refers to the purchase or integration of another book of business with your own, whereas exit strategies focus on ensuring continuity when a key individual (KI) leaves the business, for example, through a succession plan.
Low growth and unemployment are just some of the factors impacting the financial advice profession. Andrew Reid, Executive Head at Continuity Solutions, a division of Premium Finance Partners, says that businesses also have to accommodate regulatory change, technology-linked disruption and shifting client expectations, to name a few. “Growth through acquisition and planning for a successful exit are two strategic interventions that have the potential to unlock significant value for financial intermediaries,” he says. “Your success depends on careful planning and thoughtful execution.”
Identifying strategic objectives
There is considerable overlap between these interventions, starting with the need to define your long-term strategic objectives. “Growth for growth’s sake can be a risky path,” says Reid. “Intermediaries seeking to acquire a book of business should be clear on the value they are looking to add, whether through diversification of product lines, geographic expansion, scale efficiencies or deepening of specialist capabilities.” By comparison, an exit plan reflects the owner’s business, financial and personal priorities alongside a clear idea of what success looks like.
“The quality of earnings and resilience of the underlying business are crucial,” says Reid. These metrics are important for both acquirers and sellers because they become inputs into the valuation discussion. Value enhancers include capable management teams; diversified client bases; strong compliance practices; and sustainable, recurring revenue streams. “Having these components in place makes the business more attractive to acquirers, and helps with post-deal integration,” he says. On the flipside, red flags include client concentration, an over-reliance on key individuals and poor operational systems.
A pragmatic view on valuation
Intermediaries considering acquisition or exit strategies have to take a pragmatic view on valuation. As highlighted in FAnews, in August 2024, smaller practices often attract lower price–earnings (PE) multiples than larger, listed firms. We wrote that small firms often changed hands at a discount because they lacked scale, governance maturity or the operational depth that buyers are looking for. You must, therefore, take care to benchmark against similar entities when setting or negotiating a price, and remain realistic about where your practice sits on the valuation curve.
“Earnings multiples vary depending on business size, client profile, growth prospects and operational risk,” agrees Reid. He says that acquirers will factor in integration costs, client attrition risk and any gaps in governance or technology that their inspection of the business might reveal. Acquirers must also avoid overpaying for perceived synergies that may be difficult to realise in practise. Both acquirer and seller will interrogate important constructs such as efficiencies in the business and transparency of earnings and revenue.
Excelling at compliance, regulation
You cannot acquire a book of business, or exit your own, if there are holes in your compliance posture. “The regulatory framework governing financial intermediaries in South Africa adds complexity to any transaction,” Reid explains. “Whether buying or selling, firms need to ensure that they have strong compliance records, the necessary licences in place and clean regulatory histories.” He encourages acquirers to conduct thorough due diligence to avoid inheriting compliance liabilities that could erode value post-transaction.
For a financial or risk advice practice, compliance includes being licensed with the Financial Sector Conduct Authority (FSCA) and staying fully compliant with the Financial Advisory and Intermediary Services (FAIS) Act and accompanying Codes of Good Conduct. The FAIS Act will soon be replaced by the Conduct of Financial Institutions (COFI) Bill and the Codes by a wide range of Conduct Standards. But there are plenty of other laws that FSPs must keep in mind, not least of which the Financial Intelligence Centre (FIC) Act and the Protection of Personal Information (POPI) Act.
Success goes beyond the numbers
Reid says that cultural alignment between the acquiring and target firm is critical to retaining staff, maintaining client relationships and delivering intended synergies post the transaction. “For those planning an exit, preparing the business so that it can transition smoothly to new ownership, with minimal client and staff disruption, is key to preserving value and reputation,” he says.
There are other considerations. Referring back to the FAnews piece, we reported one of the biggest barriers to successful succession as the absence of formal mechanisms. For example, the person exiting the business has not adequately planned for retirement or cannot find buyers aligned with their values. To remediate this, you should have a documented succession plan, formal valuation framework, staged handover agreements and buy-and-sell arrangements that are properly costed and funded. Without these mechanisms, the risk of deal failure increases.
The value of professional advice
Finally, whether buying or selling a practice, you should consider consulting with experienced advisers who can make a meaningful difference. This should be music to a financial or risk advice professional, after all, spreading the ‘value of advice’ gospel is part of what you do. Good advice pays for itself, ten times over.
From valuation support and deal structuring to due diligence and negotiation, professional guidance can help you to manage risk and maximise outcomes. “Process discipline is important,” Reid says. “You must set clear timelines and agree communication protocols and decision-making frameworks to keep the transaction on track.” This is especially relevant in the context of buy and sell decisions being hard to undo. Once you begin the journey of selling or merging your practice, thorough preparation becomes your best insurance policy.
Alignment of vision
Whether seeking to grow through acquisition or planning for an eventual exit via a succession plan, due care and diligence are essential. Success is most often achieved where there is alignment of vision, rigorous preparation and a clear focus on creating long-term value. These are the same principles that financial and risk advisers bring to their client interactions, now turned inwards.
Writer’s thoughts:
Too many advisers wait until retirement is looming before thinking about succession, or miss the chance to scale their businesses by overlooking strategic acquisitions. Are you actively planning your next move, or just hoping everything falls into place? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
