Planners flying blind into debt

Some independent advisers seeking to acquire other small planning practices are getting into debt without determining whether their practice can actually afford the repayments, according to NAB’s national manager of financial planner banking, Shane Kirsch.

Speaking to Money Management, Kirsch said some advisers looking to acquire financial planning practices were not conducting appropriate forecasts of their business cash flows, and were simply trying to borrow debt from the banks based on a multiple of their recurring revenue and forcing their practice to fit the debt repayments inside their monthly cash flows.

“A lot of advisers have taken the view that they can simply gear up to a multiple of recurring revenue and bolt that in to their business and make it work, rather than actually doing appropriate modelling,” Kirsch said.

“If you look at the corporate and the larger boutiques, they do model scenarios when they’re making acquisitions. They obviously want to make sure it works and fits within their business cash flows, whereas some of the smaller one-man operators ... will say I can get debt at whatever amount of recurring revenue, depending on which bank they’re talking to, and I think I can afford it,” he said.

“A lot of it is based on guesswork, so they will raise the debt and buy it at that [level of recurring revenue] rather doing some analysis to say, ‘If I pay X for something, what does that mean to my business cash flows and revenue streams?',” Kirsch said.

Kirsch said some stronger practices may be able to withstand the repayments just through sheer "strength of their business”, while other businesses could collapse under the strain.

“On average, people who do appropriate modelling and understand the impact on their cash flows are more successful than ones that don’t,” he said.