Banks force struggling firms to sell client lists
Up to six boutique advice firms are being forced by lenders to sell all or part of their client books each week, according to John Birt, principal of advice firm buyer consultant Radar Results.
Birt said this figure, which amounts to about 300 firms a year, was calculated on the basis of discussions with Radar’s network of lenders, liquidators and administrators around Australia.
He added that Radar, which organises advice firm acquisitions for its 100-strong client list, receives one of these forced sales each week on average from lenders.
“The banks approach Radar as an alternative to putting [the firms] into administration and selling them in a fire sale out in the marketplace,” Birt said.
Many forced sales are due to planners breaking bank covenants as a result of lower valuations driven by falling revenues during the global financial crisis, he said.
“If a planner has borrowed money based on revenue of $1 million, for example, and that has then dropped to $700,000, they will have to top up their loan to value ratios.
“Either the bank will require them to sell some of their planning clients or sell the whole lot to avoid being put into administration.”
A key reason for the forced sales is that advice firms are struggling to cope with a shift by the banks away from issuing interest-only loans since the global financial crisis, Birt said.
Whereas before the global financial crisis loans to advice firms were ordinarily interest-only for upwards of five years, planners in Australia “virtually cannot get interest-only loans”, he said.
“Where existing loans are coming up for renewal, which are usually interest-only loans, these loans are being replaced by principal and interest arrangements by the lenders.
“This means an advice firm will suddenly find itself having to pay back both principal and interest on the loan, and many firms simply can’t afford to do this.”
Birt’s fellow director, Matt Taylor, said the forced sales were often also the result of planners “not being able to reign in their extravagant lifestyles”.
“Historically, it’s been the personal expenditure of the directors of advice firms that’s got them into trouble, and this is now being compounded by the global financial crisis,” Taylor said.
“They’re drawing so much money out of the firm on personal expenditure that there’s nothing left as soon as top-line income or new business income comes off.”
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