A private equity perspective on navigating M&A due diligence

The Australian financial planning sector is witnessing an influx of private equity (PE)-backed acquirers which is set to accelerate this year. 

This is due to favourable market conditions, including a stabilising regulatory environment post-Royal Commission, declining global interest rates for business acquisitions, and a strong US dollar creating a compelling opportunity for PE firms seeking high returns.

The due diligence process for financial services acquisitions is meticulous, requiring a deep dive into key operational, financial, and compliance aspects to assess the true value and risks of an acquisition. 

Here’s a structured approach to what PE acquirers typically prioritise when evaluating financial planning businesses:

1. Cultural alignment: The foundation of a successful partnership

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One of the first considerations in any transaction—particularly when taking a minority or majority stake in a smaller financial planning business—is cultural fit. The success of a PE-backed investment is often contingent on the alignment between the acquirer’s strategic vision and the target company's leadership.

• Are the business owners receptive to external investment and change?
• Do they align with the governance and operational rigor PE firms expect?
• Is there a willingness to leverage external expertise to drive growth and
  efficiency?

If the cultural alignment is strong, the next step is to assess the financial viability of the business.

2. Financial health: Evaluating profitability and sustainability

A thorough financial review provides critical insights into the business's health and growth trajectory. An in-depth review of financials not only uncovers opportunities for optimisation but also highlights potential red flags that could impact valuation. 

Key aspects include:

• Profitability and revenue trends – Is the business profitable, and are revenue streams sustainable?
• Overheads and expenditure – Understanding fixed and variable costs to identify efficiency opportunities.
• Financial projections and realism – Are revenue and profit forecasts realistic, and do they align with historical performance?

3. People, salary structures and role titles

Understanding the human capital of a business is critical in due diligence, as it provides insights into both financial expenditure and operational efficiency.

Key considerations include:

• Salary levels and benchmarking – Are salaries aligned with industry standards, or is there potential for cost efficiencies?
• Role titles and organisational structure – What does the hierarchy look like, and does it support scalable growth?
• Key staff and expertise – Does the business have the capacity to increase revenue with the right skill set in place?
• Reviewing people costs and job descriptions helps identify where efficiencies can be gained, as well as whether the business has the right expertise to execute future growth strategies effectively.

4. Operational frameworks and technology infrastructure

Beyond financials, understanding the business’s operational efficiency is crucial. 

This includes:

• Internal platforms vs. third-party providers – Does the business operate its own technology, or is it reliant on third-party platforms? If so, what are the contract terms and associated risks?
• IT security and cyber risk – How robust is the firm’s cybersecurity framework, and have third-party providers undergone security due diligence?
• Technology stack and client interaction – What systems are used for client engagement, marketing, and compliance? Are they scalable and future-proof?

5. Compliance and regulatory oversight

Compliance and governance play a significant role in the due diligence process, particularly in financial planning, where regulatory scrutiny is high. A robust compliance framework is not just about mitigating risk but also about
enhancing business value in the eyes of an acquirer.

Areas of focus include:

• Governance frameworks and board oversight – Are board reports comprehensive and reflective of sound governance practices?
• Conflicts of interest and incident management – Has the business effectively managed past regulatory breaches or client complaints?
• Regulatory risks and liabilities – What is the historical track record with regulatory bodies, and are there any outstanding compliance issues or contingent liabilities?

6. The due diligence challenge: Information and timelines

PE firms typically deploy specialist teams to conduct due diligence, deciphering complex financial, operational, and compliance data to gauge an acquisition’s true value. While each transaction is unique, the principles of a rigorous due diligence process remain constant. PE investors must balance speed with depth, ensuring they capture a holistic view of the business before proceeding with an acquisition.

However, challenges often arise due to:

• Limited access to full DD early in the process – Some vendor’s are reluctant to share comprehensive data until later stages.
• Time constraints – A thorough DD process can take months, dependent on the speed of information sharing by the vendor.
• Uncovering hidden risks – Identifying potential liabilities that could impact future performance or regulatory standing.

The Australian financial planning sector presents an attractive opportunity for PEbacked investments, but success hinges on disciplined due diligence. From cultural alignment and financial viability to operational efficiency and compliance oversight, each aspect plays a critical role in determining the value and sustainability of an
acquisition. A structured and thorough DD approach can be the difference between a high-yielding investment and a costly misstep.

For PE firms eyeing Australian financial planning businesses, the key takeaway is clear: due diligence is not just about numbers—it’s about people, processes, and long-term strategic fit. By taking the right approach, investors can unlock significant value and build sustainable, high-performing businesses in this evolving market.

Tony Beavan is a managing director of consultancy The Guild of Ethics, Culture and Leadership.