Advice firm buyers facing financing difficulties

The rise in interest rates is having a knock-on effect on financial advice M&A activity as buyers are finding themselves approved for financing compared to last year.

After several years of low or static interest rates, the Reserve Bank of Australia (RBA) had increased rates for 10 consecutive months, currently sitting at 3.6%. 

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Those who were looking to buy an advice firm were struggling with being approved for lower levels of financing than when rates were low. 

John Birt, founder of Radar Results, said he had seen the amount of financing approved fall by 25% to 30% since rates started to rise.

“A client looking to buy a practice in Sydney was previously approved for $6 million by his bank. When it came to exchange contracts, he found he could only borrow $4 million, and unfortunately, the deal fell through.

“Another was approved for $1 million and this fell to $800,000; this was three months ago, so it’s probably fallen to $600,000 nowadays.

“Buyers are still keen; the appetite hasn’t changed, but finance is tighter.”

HLB Mann Judd Sydney’s restructuring and risk advisory partner, Todd Gammel, said the current environment was a “great opportunity” for larger businesses to acquire firms that were underperforming or struggling with operation costs.”

In particular, viewing smaller innovative firms as an attractive opportunity to acquire would benefit both parties involved.

“Not only does an acquisition add scale and increase hard-to-find workforce, they can improve the margin and market position of both businesses by operating as a single entity.”

With this in mind, firms needed to evaluate if a proposed acquisition would expand or consolidate their offerings and whether it would lead to greater capacity across markets.

Birt noted the amount being paid for advice firms had risen as supply was shorter thanks to the adviser exodus, and he expected this to continue to increase over the next two years. 

“If a company is reasonably priced, then we have buyers who are able to buy straight away.”