Considering a financial planning practice loan? Whether you’re eyeing an existing portfolio or dreaming of a dedicated business space, this guide breaks down the details to help you make informed decisions. 

Understanding Loan Limits: 

• Client Portfolio: Borrow up to 70% of the purchase price, or 2.25x recurring revenue, or 3x earnings before interest and tax (EBIT), whichever is lower. 
• Freehold Property: Borrow up to 70% of the purchase price for a standard commercial property. 
• Security: Leverage the financial planning practice, director guarantees, tripartite with the Australian Financial Services Licence (AFSL) holder, or dealer group. 

Additional Loan Information: 

• Working Capital: Access business overdraft facilities and fit-out finance. 
• Loan Duration: Principal and interest paid off in 10 years; interest-only for the initial year (with at least 50% of the debt repayable in 5 years). 
• Experience Requirement: At least 5 years in the industry, with 3 years in a managerial role; a comprehensive business plan may be required. 

Tips for Approval: 

Over the years, lenders have become more stringent in assessing financial advisers. Regulatory changes, like the Future of Financial Advice (FoFA) in 2013, shifted the industry to a fee-for-service model. Lending criteria now often considers proposed Loan to Value Ratio (LVR) or multiples of recurring revenue or EBIT. A robust business and personal financial position, along with 5 years of industry experience, strengthens your approval chances. 

Independent Advisers vs. Dealer Members: 

Independent financial advisers may face stricter lending conditions, potentially limiting borrowing to 50% of the practice’s purchase price. This is due to the higher compliance risks and costs associated with maintaining an AFSL for independent advisers. However, finance options may still be available, especially with evidence of recurring revenue and compliance with regulatory standards. 

Valuing a Client Portfolio: 

Banks assess the interest coverage ratio (ICR) and consider financial benchmarks like profitability, minimum annual revenue, profitability of renewable income, and gearing. The stability of the planning practice and its operating history also play a role in approval. 

Choosing a Practice: 

When evaluating a practice, consider why it’s being sold, client concentration, and whether a transition period is offered. A diverse client mix and a stable, compliant practice increase approval likelihood. Seek independent experts like accountants and solicitors to review financials and negotiate agreements. 

Buying an Existing Book vs. Starting Your Own Practice: 

Starting your own practice allows more decision-making freedom but carries a higher risk of business failure. Buying an existing client book involves higher upfront costs but taps into established expertise, potentially generating cash flow from day one. 

Lease Agreements and Final Tips: 

If leasing premises, negotiate for flexibility. Check for liabilities on the balance sheet and ensure a clear understanding of what’s included in the purchase. Include safeguards like restraint of trade clauses and seek guarantees regarding liabilities. 

In summary, a financial planning practice loan can be a strategic move for growth. Careful consideration, planning, and expert advice contribute to a successful acquisition or business start-up.