From insurers to financial advisers and accountancy practices, the financial sector is an eclectic one and accounts for 20% of South Africa’s economic output.
Africa’s second largest economy has large, sophisticated, well-regulated markets in commercial, retail and merchant banking, mortgage lending and insurance, among many other niches.
The banking sector is governed by the Banks Act 1990 and Mutual Banks Act 1993. Overseen by the South African Reserve Bank, the industry is dominated by four local players – Nedbank, ABSA, Standard Bank and First Rand – with foreign banks also competing for business in both retail and investment services. Retail is dominated by a ‘big five’: ABSA, FNB, Standard Bank, Nedbank and Capitec.
Investment and merchant banking are arguably the industry’s strongest pillars.
The Financial Services Board (FSB) regulates financial businesses other than banks, such as insurers, fund managers and brokerages. The National Credit Regulator regulates the credit industry, including the registration of credit providers, credit bureaux and debt counsellors, and monitors enforcement of the National Credit Act.
The JSE Limited, based in Johannesburg, is the world’s 17th largest stock exchange. Ranked third in the world for securities regulation by the World Economic Forum in 2017, it serves as a locus from which local and international investors find exposure to capital markets in South Africa and the wider African continent.
However, Johannesburg was recently overtaken by Cape Town as the county’s preeminent financial hub in the Global Financial Centres Index.
Types of financial business
Accountancy and bookkeeping businesses, which are numerous in towns and cities across the country, offer strong margins, plenty of repeat business and a significant degree of recession-resilience.
The credit and finance category typically includes providers of financial services like financial advisors, mortgage brokers and insurance brokers; and retailers of financial goods like banks, mortgage companies and insurers. Obviously covering anything that falls outside the aforementioned categories, the miscellaneous category might include things loosely related to financial services like business brokerages or providers of accountancy software.
Essential skills and experience
You should reflect carefully on your own suitability to helming a financial business before you proceed with an acquisition.
In such a diverse sector, the experience and attributes you need very much depend on the nature of the business, as well as whether you’re intent on being a hands-on owner-operator or a hands-off investor.
If you’re not going to run the business day-to-day then the primary prerequisites are plenty of capital, some nous about how financial markets work and sound judgement in recruiting the right people to lead the business.
As a hands-on operator, strong numeracy skills and an in-depth understanding of financial markets and/or the discipline in question are vital.
Whether it’s accountancy or mortgage brokering, some direct experience of the sector might be advisable too.
In such a highly regulated sector, you’ll also need a clean criminal record if you’re to pass muster from a legal perspective.
Buying an established financial business
Providing you buy a successful asset – or one with potential at an appropriate price – buying an established business is generally a less risky undertaking than starting from scratch.
The start-up phase, when a significant number of businesses fail, has already been negotiated. A business model, cash flow, goodwill, a customer base, and trained, experienced staff are already in place.
It’s also typically easier to secure finance since there’s a history of profits and losses to reassure lenders, which prefer lending for a known quantity.
Here are some areas your due diligence might assess:
- Trading history in terms of profits and losses, trajectory of growth
- Operating costs and any debt it carries
- It's business model
- Health of the market in which it operates
- Compliance with stringent financial services regulations and whether it is embroiled in any legal actions
- Qualifications and experience of its staff
It’s worth hiring a lawyer/attorney or business broker with experience of overseeing acquisitions in the financial sector to help you navigate the buying process.