#74 Glenda Labuschagne – Transcript

Louis van der Merwe
Welcome to another episode of Ensombl Advice South Africa. Today in the studio in person, I might add I have with me Glenda Labuschagne, Glenda is the MD at broker space, a relatively new business who creates a platform to connect buyers and sellers in the financial services, space. So I’m looking forward to a very interesting discussion, it might be something that a lot of people think of, I know exactly what a buyer is going to look for when I sell my business. Or if you’re a seller, I know exactly what type of business I’m looking at buying. But just before this discussion, there’s quite a few things that already came out. Glenda, thanks for joining me today.

Glenda Labuschagne
Thank you. It’s nice to be here.

Louis van der Merwe
This is a topic that I think is really important, because for a lot of financial planners, this might be your single biggest asset that you build up in your life, right? So you work 30, maybe 40 years building a financial planning practice. And then you Google who you might sell they’ve been doing in minutes thinking, hey, what am I going to do one day? Talk to me a little bit about why people leave this so late. Is it just such a complex thing to tackle?

Glenda Labuschagne
I think it’s a very personal thing, right? So you’ve been building this baby for 3040, even just 20 years and it’s your baby, especially when you’re talking to owners. It’s it’s not something that you can just pot with and just thinking about the industry. Not only is your business a personal thing, but the relationships that you’ve built up with your clients is very personal, it’s hard to let go of any relationship right? Even more so when you’ve been that kind of dependable person that they can come to for something as important as they’ve financial well being. And I think it’s just not something that You think about and it’s unfortunate because it should be right. If you don’t have a succession plan in place, and you don’t have any fallback, especially when you’re solo advisor, it places your practice your employees, your clients in a significant risk position. But it’s something that happens. And no one can say why it’s just not something that everyone thinks about every day. And I guess you don’t want to think about the worst scenario, a lot of times.

Louis van der Merwe
You’re almost thinking about that ultimate demise, or, or your exit or life after this, you know, new transition that you’re that you’re moving into, we tend to get stuck in the busyness of running a business. And all of a sudden, oh, it’s my retirement date. Or you might not even be forced into retirement, what’s the most common reason people are selling

Glenda Labuschagne
retirement, but then also immigration, there’s a lot of people moving overseas. And although I mean, the world’s a lot smaller now with your online meetings, and so forth, your system that makes it easier. There is something to say about a personal in person meeting as well. And a lot of advisors prefer to, to, you know, focus on those personal interactions. So a lot of them feel like emigrate when they emigrate, or if they emigrated, won’t be an option to, to remain the advisors of their clients. So that is a big thing. I mean, for obvious reasons, right. And then retirement, as well.

Louis van der Merwe
Okay. And ill health, does that play a role where people are almost forced to move out of their business?

Glenda Labuschagne
Yeah, absolutely. And it’s unfortunate, because that does place your practice in a, in a bit of a worst position, financially with these types of transactions. But I mean, it is. It is also a reason, but we don’t see that often.

Louis van der Merwe
So you’re more dealing with the blend succession and the transition, what I hear a lot is people saying, Oh, I’ve had younger planners in my business. And they’d left often, five years, seven years, 10 years, and I’ve had enough, I don’t want to train more younger advisors that will just leave, I want to roll this out. Do you see a lot of the business trying to do internal succession first and then consider selling? Or are a lot of people just saying, Hey, I ultimately just want to sell my solo practice.

Glenda Labuschagne
I’m getting the younger advisor in. And yes, we do see it a lot, especially with families, right? The sun, the sun, sun, sun, sun sun, that happens often. And then the advisors have that long term commitment. So no problems.

Louis van der Merwe
But you let the family down if you

Glenda Labuschagne
but in terms of your younger non family type of advisors that come in, it is a I don’t want to call it a risk because they might have a change of heart or mind. But a lot of advisors do feel like it’s just easier to do what you do and just sell off the business as it is someone else can take or the take a you know, training, the younger advisor takes a lot of time, effort and so forth. And by the time these advisors think about it, it’s too late to go into a five year plan. So yes, obviously it happens. But I haven’t seen it happening that much,

Louis van der Merwe
Joe, that internal succession is is a challenge. I read a stat last week that in the US they expect people to on average have 13 different employers during their life. Wow, to expect someone to join you at the age of 20 and leave and take over the business maybe 2030 years later. I think that’s a tall order. At the same time, we spoke about trying to sell a business and as systems business, a business or a firm that’s not reliant on the owner. Talk to me a little bit about the risks of you know, building a business that’s too reliant on the main advisor on the owner, what are the things that that you see are going wrong when it’s so tied to that one specific person, the main advisor or the or the principal, as we like to call them?

Glenda Labuschagne
And some people prefer to withhold that information from the employees, just to kind of eliminate that stress factor. As when, when the business gets purchased by another business, there’s obviously a massive change, waiting for these employees, and they don’t know what type of culture they’re moving into, are they going to be appointed on a contract basis? For one year, three years? Are they going to be appointed on a permanent basis and have that security, what’s the financial situation situation going to look like? So I think my personal opinion is be open, be open with your employees, help them understand what to expect. But then also make that part of your due diligence process when you when you choose a buyer. Make sure that the cultural fit excetera is is on par with what you feel you want to provide your employees with. Because at the end of the day, your clients have a very close relationship with your employees as well. And they they play a very important part in making sure that the transition is is is better, and runs more smoothly. And especially if the structure of the deal is deferred payments, where the transition actually influences your payout at the end of the day, those people are super important. Yeah,

Louis van der Merwe
and the communication to the client. So assuming that your staff members don’t know, I guess it would be near impossible to communicate it with your your clients to say, hey, we’re selling yet, please don’t tell anyone that works here.

Glenda Labuschagne
Very important to educate your clients even even if you’re not in that space, where you’re going to move, move, right now. Having that open conversation with your clients, you know, just discussing it with them, making them feel comfortable that you will no matter what, look after the interests as well, when you pick a buyer, or someone that will take over in your stead is extremely important. But it doesn’t happen. Because I think I think advisors are scared of their clients feeling that there’s going to be instability, and they’d rather move over to another advisor while they still can, while they’re a bit younger, establish that relationship, perhaps a company with more advisors that will provide them with that stability in house. So I suppose there’s various reasons for not doing it. But in my personal opinion, it’s something that you should do earlier rather than later.

Louis van der Merwe
I think it comes back to this over communicating and saying, This is something that we’ve been thinking about. And I want to always guarantee that if you’re older than 60 Your clients probably wondering who’s going to take over definitely know if I’m retiring. My advisors 60 They’re probably not going to be there when you most need them at some point in the future.

Glenda Labuschagne
And then any case, Babs gonna just move away because they don’t know. They just don’t know and they’ve got these questions. they feel a little bit awkward and on, you know, asking,

Louis van der Merwe
Are you saying from a client perspective? Rather look to find someone else?

Glenda Labuschagne
If they don’t know, right? They know that their advisors 70 years old? Are you going to ask your advisor? What’s going to happen? A lot of them don’t? I would imagine, and they would just move on naturally, because they think that there is this kind of something coming up, potentially. So communicating with your clients can very much eliminate that natural move away. If I can,

Louis van der Merwe
I think they’re spot on. I mean, we often talk about this statistic of 80% of widows find a new advisor, after their husband has passed away. 80%. Before we started, a lot of our conversation was around the structuring of these deals, and the retention of clients. And this kind of ties into what we were talking about now. Yet, it doesn’t feel like a lot of sellers are thinking through, how do they manage the retention of clients? Talk us through the terms of these deals? What do they typically look like? Is it is it dependent on retention of clients? Is it only looking at income? What does the typical deal terms look like if there even is such a thing as a typical deal?

Glenda Labuschagne
I wish there was but each and every company has their own unique way of compensating the adviser and then also accounting for the risk and taking over. Not a tangible asset, but an asset in brackets that can that has a personality that has an opinion and can walk away at any stage. Typically, what we see too, is where you’ve got a certain amount upfront. So the valuation, let’s say your value is 5 million, for example, they would pay you 50% upfront to incentivize you for that. But then over time, so perhaps over two years pay you the rest in deferred payments based on a reevaluation. So that’s where they then account for clients that perhaps moved away. And that’s also where they try and incentivize you as the advisor that’s leaving to assist as far as possible with the succession a successful transition. Other deals very much depends on client stains. So we say that they they find these transactions with the actual books income. So they would pay you a portion of the Commission on a monthly basis for five years, for example. That obviously has a lot of tax implications. So a lot of sellers don’t prefer that model. But it could, it could lead to you getting more out of the bill, because there’s less risk for the buyer. We have also seen offers upfront, nothing else afterwards. They do happen, but they are significantly lower. Some people do percentage upfront with the rest of the eight months. No, you know, reevaluation needed. It really does depend on where the rather why the seller is selling dye, they want to do an immediate sell, they’re gonna get a lot less and the period will be a lot different.

Louis van der Merwe
If they immediate being they’re not going to be involved in this transfer.

Glenda Labuschagne
Okay, not going to be involved. It might be due to health reasons they want to emigrate immediately dying a list of names and yeah, yeah, and that has a significant influence on the price. Obviously, death, unfortunately. And then retirement, which is better because it can happen over time unless the person is approaching 90, which wouldn’t be ideal, but

Louis van der Merwe
might get a bit more tricky as a before this session we spoke about there was an FBI annual report last year that noted to people in 90 Someone who is someone out there is still practicing and there might be a wealth of wisdom, so I don’t want to discount the value. But if you still own a practice as a solo advisor, maybe in a sole proprietor, which a lot of practices still have, how difficult is it selling a sole proprietorship or what are the options when you’re running a CC or a sole prop? What should people be thinking about if they intend to sell in the future?

Glenda Labuschagne
Look, so in normal cases, the client is contracted with the business itself, okay, so with the CC, the FSP, and so forth. If there’s a movement from one FSP to another, those clients would need to be re contracted. And a lot of your suppliers or your product providers do require that in any case, to make it easier on both the buyer and the seller is to kind of try and extend that period so they have more time to do it.

Louis van der Merwe
So they’re paying you they’re paying you income in this process. So they say

Glenda Labuschagne
your salary for example, by their by your salary or a part of the commission in the first year or six months and so forth to help facilitate this transition of seeing each client and so forth. Most of them focus on the top 20% of clients in the race they’re just kind of the most siphoned through the admin stuff. But buying a CC is tricky because if you’re an entity you can’t be a shareholder there’s no such thing as shareholders in Assisi so before you actually buy the business you would need to transfer or was it from a cc convert? Yes, converted from a CC to a PT why that shouldn’t have any influence on the contract with your clients because it’s with you as the business and according to the phase after the FSP idea.

Louis van der Merwe
And for example, spot on.

Glenda Labuschagne
Changing your business structure has no influence on the contracts with your clients. Okay. You need to though be conscious about the providers. Okay, so they are certain providers that makes it extremely difficult to transfer clients even over time to a new FSP

Louis van der Merwe
are those typically life insurance companies or what are the type of businesses that

Glenda Labuschagne
life insurance companies but with with your, your your investment structures as well so your combined product is all school structured products if you some of them just outright stop the income that you earn from them. And I mean it’s really easy to do that. I mean, those clients are being bought by a buyer with presumably another investment for sort of Finland law really gave us a fee. And it’s not going to be in their favor to get those clients on their books, if they can’t kind of move them over, and you don’t want to place your clients in a position where it’s really not good for the financial well being to, to move over. But then I mean, what is the worth of that company just continuously earning the Commission as it is? makes it tricky.

Louis van der Merwe
Oh, Glenda, the discussions that I’ve had with financial planners coming to a point where they’re thinking of, you know, either their career ending or getting to a point where they just don’t feel like this anymore. Price has been one element, right? I need to get some value for this. But it seems like most people just want to make sure that their clients are looked after, in a manner that was maybe similar to what they did. What are what are sellers? What are the questions, sellers aren’t asking these buyers about what’s happening to their clients? Like, are we spending enough time doing the due diligence on? What does my clients look like, five years from now, six years from now,

Glenda Labuschagne
it’s important to understand the philosophy that your buyers is using. You don’t need to be involved with the detail on each of your clients. But unless you if you don’t understand what the general values are, how they, you know, charge these clients, and how do they approach the longevity of these clients products. If that doesn’t match what you’ve been doing, your clients are most likely going to move to someone else, because it’s not something that they used to, it might be to their benefit. And a lot of them might feel, you know, cool, I like this change. But you need to understand what their philosophy is. You need to understand the culture, how they approach clients, is it a cold email every year, once a year? Is that they review system? Do they contact these clients? Do they email them happy birthday, you know, you need to find a company that is not completely in line with your values, but at least you know, has the same approach to provide your clients with at least some form of stability over time,

Louis van der Merwe
Vic, the dilemma comes in how you find a business that’s similar to yours. They might not have the capital to buy your business, they might not have the people to serve as your business. Right? Because if you think about to have to have the same like, typically, I think it’s smaller businesses or maybe a small team, maybe small teams servicing them. How are these new businesses financing the deals, I’m not talking about the big corporates that have got a big paycheck, they can just write out a check and say, there you go, are they financing these deals for maybe a three or four man business or woman business that says I want to bring this person in the fold? How are they affording to do this,

Glenda Labuschagne
most of them don’t have sufficient capital on hand to just pay cash. So a lot of them depend on the income that you earn from from the new business, they pay off the purchase price with that income. But because you going into three to five PE range, right, it becomes a long game. So you’re gonna have to earn that income for a couple of years before it starts making sense. Before you start seeing the advantages of those purchases. A lot of them do apply for loans with banks. Unfortunately, banks just don’t see you know, they don’t see this as something that they can find because it’s quite significant risk they I haven’t personally seen a bank approve one of these transactions. You can also find venture capitalists we work with with someone as well. Obviously they the into interest rates kind of reflects the rest of the day that they take but at the

Louis van der Merwe
scribe because it’s it’s probably not that risky if you think about the fact that it’s generating the income yet that George you. My mind exorbitant costs to finances.

Glenda Labuschagne
Yeah, but also they don’t look at the intricacies of this practice how successful this transition should in theory being they look at the cold hard facts financials, what’s the income going to be EBIT? Da?

Louis van der Merwe
Hey, there we go. And here’s the end.

Glenda Labuschagne
Point. So yes, it’s tricky. I mean, every single business wants to grow and acquiring a client base or a firm is the easiest and quickest way to grow. I mean, you can cross sell, and so forth, that’s going to kind of grow over time. But buying the book is the quickest way to grow. But that’s unfortunate. But if you don’t have the funding, you can’t. And a lot of your smaller companies would then going to equity deals, so they would sell a portion of their business to find buying other businesses. And that’s, you know, that’s a high price to pay for growth.

Louis van der Merwe
Here, this is, this is such a tricky space. Because when we started this conversation, we spoke about the emotional connection you have, you know, your baby, and even with wealth up, feels like my baby, so do you sell, then, I would probably expect to receive a much higher price than what a buyer would want to pay within broker space. How do you manage just the differences in opinions? Like, how do you navigate that? Or do you step back and say, You guys need to need to strong armies? Are they defining the right? The right price,

Glenda Labuschagne
I do think it’s important for us to take a backseat when it comes to that just to to remain kind of unbiased. But it is important for us to manage the expectations of especially the sellers, you cannot expect that you would get the same PE or multiple for short term practice as you would for an investment practice two completely different product lines, the stickiness is completely different, you will not get the same, you will not get a P you have more than five, if you want to exit immediately, you won’t even get four probably. So these are a lot of things that needs to be considered soft kind of measurements that affect these prices. So significantly. And I don’t want to say that it’s our role, but it is something that we feel quite passionate about is to try and you know, get the seller to be more realistic about this deal. At the end of the day, it is their decision. I mean, it’s like a property sale again. I can advise you on what I think it should be. But at the end of the day, you’re gonna put a certain price on property 24, for example. So it’s difficult, it’s extremely difficult

Louis van der Merwe
managing those expectations, I think is the is the key. And what you’re saying is that we bring in some additional data, right from the revenue analytics. What other pieces of information do they look at? Do they look at? What software you use? What do people do? What are the things that people might be surprised to think that they would they would look at?

Glenda Labuschagne
I don’t know if they’ll be surprised that things that they are basically looking at is your revenue, right? So how to how your revenue is

Louis van der Merwe
kind of that split between the different providers? That is it. That is made up of I guess,

Glenda Labuschagne
let me start that sentence over. And a lot of them. But everyone will look at how your your income is made up. So how much of your revenue comes from certain providers? How much of your revenue is recurring based? And just on that these differences of opinion? Is that ACI renewal recurring or is it not? Am I going to include that in the value that I see this practice is worth or am I not? So just on that small portion? There’s already a big debate

Louis van der Merwe
just to pause there. What do you mean by ACI for people listening

Glenda Labuschagne
on life cover? Can you get first year you can say you get second year but each year when that premium increase happens you get what we call the ACI renewal fee. And that is in theory recurring payment although it happens once a year unless you You decided on as in when option. So a lot of people viewed as a recurring income, but because of life products, the structure it might not be transferable post fail. So they don’t feel like it’s worth

Louis van der Merwe
doing typically discount that amount. Yeah, yeah. The same with initial fees like that you only earn once, I would assume that they probably discount that quite aggressively as well.

Glenda Labuschagne
Okay, so, so the depends on the product. And like I say, initial fees on investment, you won’t get again, if you talking about initial fees on life. So first and second, yet, you’re not going to get that same amount. And again, but if you valuing a business based on the past 12 months income, and you received first year, the probability is they they’re going to receive second year and ACI renewal in the following year. So what some people would do is they try and include the future will have future potential earnings of those products at a much lower rate, because it’s just future valuation. So some of them do that. And some just discount for it completely. They don’t value that. The other stuff that is looked at from a revenue perspective is the concentration of your clients as well as AUM, of course, distribution of age brackets, and so forth. What’s the average age of your clients? If it’s at 90, then? Um, so even it’s not, it’s not going to be the best buy? What’s the product distribution? How much do you earn on average from from a client? And that would obviously be significantly impacted by the product line. So medical aid is Captain, you know? And then other stuff is your systems. So what CRM system do you use? What financial planning tools do you use? How do you communicate with your clients, so they used to signing the docs via quickly sign, or they used to go seeing you in person and having a physical document in front of them. So that

Louis van der Merwe
would impact on revenue multiple, someone would most likely it

Glenda Labuschagne
wouldn’t have a direct impact. But it would be something to consider from the buyers perspective. Because again, if you need to go and sit in front of each client, and that is not the way you do business, it’s not a turnkey client, it will be something that they considered might not have a direct impact on that multiple, but it will be cited, that’s a very small thing. It was just you know, an exam. But that’s

Louis van der Merwe
a great example. Because we often think, hey, we want to make our lives easier want to make our clients lives, even, we don’t think, Hey, I’m going to probably be able to sell my business at a higher multiple, to almost a, a way of thinking that just you know, prompts you to do those kinds of things, even though they might not be the best in the short term.

Glenda Labuschagne
Today, in today’s age, I mean, it’s completely, almost a non negotiable to, to, at least a certain extent automate your practice, because there’s so many tools out there, these tools that would probably fit every single kind of need, you just need to look for one. But, and yes, it can, most definitely has an impact on the multiple, but it’s a very, you know, how it impacts that multiple is, is incredibly difficult. So when you compare the buying of a book to a property, it’s not at all the same thing. But what would be a turnkey for one person, maybe a house with solar with a solar system wouldn’t be a turnkey for another person. So for example, if you using at work and the buyers buyer is using elite wealth, as an example, the transition might be influenced, but they might discount that with if they’re also using at work, it’s going to be a super easy plugin, and they might, you know, that will be in your favor then in terms of the valuation.

Louis van der Merwe
This is interesting, because I’m wondering, do people go back and say, Okay, I have a sense of what potential buyers would look like let me go and fix some of these things, and come back and go through another round. And at the same time, do people end up hiding things to the end up hiding compliance risk, because that’s something that is critical in these sell agreements yet something that is very difficult to know if you don’t know where to look?

Glenda Labuschagne
I would like to think that no one has anything But I suppose it is it is possible compliance is a massive thing pi cover. Have you had any claims in the past couple of years? How many? How significant? What was the influence, all of that is stuff to look at, apart from your financials and your automation and so forth. It’s an incredibly involved process to determine whether the fit is right. It’s not just, you know, handshake, have a drink, let’s do this anymore as that might, I think that’s how it used to work in the past, to be quite honest. But it’s a lot more involved. And one of the questions we actually quite often get asked from from sellers is why, why is all of this necessary, it’s a lot of work. And the fact is that this is not info that you shouldn’t have at hand, you should have all of the revenue type of info, you should have your financials sorted out, you should be compliant, you should have those certificates you should have covered in place, you should have all of this stuff in place. So it shouldn’t be that difficult for you to to provide it. But for some, it is a bit more difficult. And I guess, yeah, I guess that that places the buyer in a in a position of uncertainty,

Louis van der Merwe
that doesn’t sound like it would necessarily take the deal off the table. Now, you will just reduce the price that you can expect. And at the same time, in our legislation is actually a great thing for business owners, because it forces you do have these things in place, which makes it so that your clients on service better and so that you can get to FA prize. We love complaining about legislation, but sometimes it it really saves you from ruining probably the biggest acid that that you earn.

Glenda Labuschagne
And that’s why I say it shouldn’t be that it shouldn’t be something that you need to go and spend weeks on and so forth. It should be that should be a natural thing. You should have it somewhere in your computer. It should be there. Right? So So I’m asking the question why? I don’t know how to answer that other other than, you know, it should be stuff that you have,

Louis van der Merwe
you know, is it worthwhile for someone to go through this exercise, even if they’re not planning on selling? Like just to say, Hey, what is the benchmark value for my business right now?

Glenda Labuschagne
Absolutely. So if you are 40 years old, okay. And part of your plan is, you know, growth strategies, some people just have, I want to grow my business by 20% on a revenue basis perfectly fine. But you need to consider at an early stage, what the impact of every small decision is that you make in that business, be a business owner, don’t just be a financial planner. And I think that quite often happens that it’s not the highest priority to look at your business holistically, instead of just looking at, you know, the income that I’m gonna earn, I think that is something that that is lacking. So, absolutely, understanding what buyers look at can help you create a lot more value in the long run. So if you know now that this is my current value, and just based on revenue, this is what it can draw on. That’s a very easy calculation. But then, what is the influence of all of the stuff that I got on that valuation? And how can I improve it? It’s vital. I believe it should be part of every single person’s, you know, just annual planning at least,

Louis van der Merwe
seems like the compliance will then learn if you’re listening to this, the compliance will almost need to marry with valuations. And you know, the work that broker space is doing to help people in the future unlock more value, but also create a more sustainable just a sustainable business for our clients. Because ultimately, that’s why we’re doing this right so that our clients are still looked after.

Glenda Labuschagne
Absolutely, absolutely. But, I mean, like you said at the start, your business is probably the largest asset that you’ve got. Why would you look at this asset differently, then improve in your home with new fixtures etc. Why is it any different you need to improve this as well as an asset for future sales? And yes, it does have a quite an influence on I think how your clients see your business as well. Again, stability is an important thing

Louis van der Merwe
Glenda as we are coming to the end of this conversation, for people that want to engage with you and maybe consider in either buying a practice or listing as a potential seller, what’s the best way to reach out and connect with you?

Glenda Labuschagne
So you can visit our website at broker space dot co dot za. There’s links to booking meetings with us and our contact details. You can also email me at Glenda at brokerspace dot co dot za. Yeah, that’s the easiest way.

Louis van der Merwe
Thank you so much for sharing all of this with me it sounds like it is a maze of different things to look at. And I know your attention to detail, as well as being able to zoom out will be very valuable for any advisor to have a conversation with you. So thank you once again for being here.

Glenda Labuschagne
Thank you was a pleasure.