Choosing a Capital Partner: What No One Tells You

“How do I choose a capital partner?” 

This is a question Encore Advisory is asked more and more often as the number of capital providers grow and the value propositions evolve. 

To help answer this question you should first work out if a capital partner is what you actually need – in most cases it is not. 

The initial conversations we have with advice business owners on this topic is quite similar to the initial conversations financial advisers have with prospective clients, who often come to them with solutions in their mind that are usually related to a product, as opposed to a strategy. 

Advice business owners that reach out to us for advice, often think a capital partner is what they need. In many cases, they can achieve their goals and overcome the challenges they face without entering into a transaction that may result in a passive investor enjoying the growth in dividends and capital value from the advice business owners’ blood sweat and tears, while being prevented from making and implementing key strategic decisions, or losing control of their business and legacy. 

A recent conversation highlighted the fear of missing out – or FOMO effect – in full swing as a business owner I spoke with was urged to sell part of their business now while valuations “are still at their peak”. 

There is also a narrative that you need to be super-sized to have a better performing advice business that will be highly valuable in the future, as arranged marriages become more common in the financial planning market.  Some of the most profitable high–growth businesses in the market today are small to medium sized businesses with the majority owners actively involved in the running of the business and providing advice to clients. 

Our advice is to start by considering what are the problems you are seeking to solve and/or the opportunities you are seeking to exploit and what are the timeframes that suit you and your business partners, and to broaden your opportunity set when considering solutions. 

If growth (as opposed to short-term succession) is a key driver, often the lowest cost path to success is to invest in organic growth capability as opposed to sourcing a capital partner for growth via M&A.  

There is no shortage of capital providers eager to invest in and back the entrepreneurial capabilities of the adviser-owner financial planning businesses in Australia. Like any partnership there first needs to be an alignment of values and culture, along with clarity over why both parties are entering the arrangement and what outcomes they desire. 

The arrival and growth of capital is a sign of an attractive and positive market, which is great news for advice business owners.  Now that we are close to ten years into this growing market there are many owners who have lived with their ‘capital partner’ for long enough to share the reality of what the marriage is really like, long after the wedding and honeymoon.  

Encore has clients in various capital partnerships and while some are as in love as the day they met, not all are happy marriages and the path to separation is similar to unscrambling an egg. 

As alternative solutions, firstly considering investing in organic growth, considering strategic partnerships that don’t require equity, or looking at debt funding before trading away equity. 

Secondly, understand what the capital partner and the advice firm really want from the relationship, now and in the future. Make sure it aligns with what’s important to you, your people, your clients, your brand, your legacy and what you enjoy doing on a day-to-day basis. 

Finally, do your homework. Research the different models in the market, speak to other business owners who’ve entered these arrangements, not the ones the capital partner refers you to.  

It’s also important to read the fine print. Plenty of promises are made, but when disagreements take place, the contract is what counts. 

Originally published in Professional Planner.