Key person dependency limiting advice sale prices

Around a third (34 per cent) of advice business owners plan on exiting the profession over the next five years, according to a new report, but findings suggest many practices are woefully unprepared for this.

Based on a survey of 116 advice businesses, The Hidden Value Report, produced by CFS 10x in partnership with Succession Plus, explored the state of advice businesses as the profession experiences a period of consolidation coupled with an ageing profession.

While one in three (34 per cent) of surveyed advisers said they intend to stay in the profession for at least another decade, an equal amount expect to leave in the next five years, including 9 per cent who plan to do so over the next two years.

Almost half ( 47 per cent) of respondents said the business couldn’t operate effectively without the owner, and a further 23 per cent said they were unsure of what would happen if the owner was absent from the business.

An important caveat to this discussion is unplanned exits are not uncommon, according to the report, as external factors could force a business owner to make an involuntary exit from their business.

Described as the five Ds, these trigger events are:

• Death
• Divorce
• Disability
• Disagreement
• Disruption

Even so,  the report found: “This suggests these businesses may have weak organisational resilience and a high degree of key person/owner dependence. In terms of exit readiness, if these businesses were forced to sell unexpectedly, they would likely be offered a much lower sale price than what they believe the business to be worth.” 

When do practice owners plan to exit?

Source: CFS, August 2025

Less-prepared businesses generally share some common characteristics, according to the report, including a lack of up-to-date shareholders agreements such as buy-sell and funding clauses, inadequate insurance coverage versus the business valuation, and a lack of up-to-date wills and estate planning.

This would be problematic if they were approached by a potential investor as the lack of succession planning and key person dependency would likely be negatively viewed by the buyer during the due diligence phase.

Succession Plus founder and chairman, Dr Craig West, said: “This should be a primary focus for any owner. Often business owners only think about their costs, revenue, profit and turnover when they consider the value of their business, but there’s so much more to it than that.

“They also need to take into account the non-financial aspects because that’s what exposes them to risks and ultimately drives down their value.”

These businesses which rely heavily on the owner typically have the owners working more than 50 hours a week, reflecting a lack of trust in other colleagues, an inability to delegate, and poor systems and processes.

“If owners are working more than 50 hours a week, we view it as a red flag because it suggests that the business doesn’t have a succession strategy in place and it’s not well-documented and systemised. This makes the business higher risk, and higher risk equals lower valuation.”

Last year’s Adviser Ratings Landscape Report found 40 per cent of advice firms have not nominated a successor and said they don’t need one, while 30 per cent said they need a successor but are yet to begin the search.

“Traditionally, smaller businesses in particular have told us day-to-day operations have taken up a lot of time and sidetracked future planning. A minority of AFSLs offer succession support, but most advisers told us they do not utilise these services.”

The report recommended that practices wishing to reduce their owner dependency should begin the process in a gradual transition. This should see certain tasks and responsibilities handed to other staff members – even if only on a temporary basis, they should identify talent, implement development pathways and potential share equity models. 

Money Management previously explored the pros and cons of appointing a younger staff member as a successor. Younger staff can be highly skilled in the world of financial planning and portfolio management, but may lack the necessary skill set and motivation to run a business.

Olivia Ellis, head of accounting and financial services at Macquarie Business Banking, said younger advisers shouldn’t necessarily underestimate their capacity to participate in succession plans and that, if they are interested in taking on a business, options are available.

“Junior staff may underestimate their ability to participate in succession plans, despite viable funding options being available earlier than they may anticipate. It’s worth business owners making potential future leaders aware of options that may be available to them,” she said.