South Africa boasts the largest, most sophisticated financial services sector in Africa. And the best way into advisory, insurance, accountancy or wealth management sectors, in many respects, is to buy an established financial business.
The potential benefits – such as having customers, revenue streams and employees already in place – are as attractive to lenders as they are to would-be owners, who therefore often secure loans on better terms than counterparts starting a business from scratch.
But this is all contingent on buying the right business at the right price – and you need the requisite personal qualities too.
Financial skills and experience
The skills, experience and qualifications you need to thrive in these fields depends on the type of business in question, and whether you intend to be a hands-on operator or hands-off investor.
But one thing is true across most industries that involve handling or advising on financial transactions or decisions: regulations are typically stringent, which is truer of South Africa than other African countries. So you may need certain accreditations and qualifications, while a clean criminal record is usually a must.
But if you lack experience in the relevant fields then you can partner with, or recruit, at least one person with industry experience. In fact, entrepreneurs who have occupied senior commercial roles in other sectors can often thrive by bringing an outsider’s perspective.
Types of financial business
Deciding which type of business suits your skillset and operates in a flourishing or promising market will help you narrow your search. If you want strong margins, clients on retainers and a service that most businesses use, you could do worse than buying an accountancy firm.
Financial consultancies, meanwhile, can command high fees since their clients, whether individuals or businesses, are often cash-rich and willing to pay handsomely for the prospect of even greater returns.
You might think about the impact of trends in technology. Insurance brokers have seen their dominance eroded by price comparison websites, for instance, but many have adapted their business models to continue thriving.
Mortgages are too complex for most house buyers to navigate themselves, so mortgage brokers are less impacted. The same applies to business brokers, who also guide clients through the sales process (indeed, it’s worth appointing one yourself).
Giving credit to low income people locked out of conventional sources of borrowing, the microfinance, or microcredit, sector nevertheless has its critics, but remains an intriguing field for innovative, socially conscious entrepreneurs.
If your skills lie in areas other than finance, then you might be more interested in businesses like debt collection agencies or developers of accountancy software.
If buying an established independent business lowers your risk – providing you find the right business – then buying a franchise offers additional guardrails. Comprehensive training and ongoing support from head office is a boon if you lack a background in dauntingly complex, tightly regulated financial products.
At the time of writing, one financial services franchise resale is up for sale at R250,000 on this site, with sales revenues of R1.4 million. Another, microfinance franchise, meanwhile, is selling for R400,000 with sales revenue of R700,000, and promises the lowest interest rate nationwide for customers and low overheads for franchisees.
The big cities are, naturally, a magnet for financial services firms and a gateway into global capital markets.
Cape Town, for instance, features among the world’s top 100 cities for fintech ecosystems along with Johannesburg, which is also home to Africa’s biggest stock exchange.
High street businesses serving local businesses, like accountancy firms, however, will pop up for sale more evenly around the country.
Valuing a finance business and conducting due diligence
A business valuation expert can advise you on whether a vendor has valued their financial business fairly. A multiple of net profit is generally involved and will vary depending on the business’ strengths and the fortunes of the wider sector.
Once you’ve agreed a provisional price with the vendor, you need to conduct due diligence, which involves scrutinising areas like:
- History of profits and losses and projections for future performance
- Operating costs and any debt carried
- The business model
- Compliance with financial services regulations and whether it’s embroiled in any legal disputes
- Qualifications and experience of its employees
- Technology and business processes
- The condition of any premises involved
- Trends in the financial market in question
If the due diligence process uncovers any hitherto undisclosed problems, then you’re wise to negotiate the price downwards, or at least request warranties and indemnities that mitigate the risks.
However, if the seller is reluctant to renegotiate, or your findings are particularly egregious, you are within your rights to walk away from the deal and look elsewhere.