"You need to understand exactly what business you are in, and then you must redesign your business to build equity."

From Burger Joint to McDonald’s

By John Bowen

If you were to ask a group of financial planners if they could sell their independent businesses, most would have to answer honestly: no. Some planners have built businesses that earn well over a million dollars a year, but they can't sell their businesses for that amount. Why? Because the painful truth is they don't own businesses—they own jobs.

Let me explain by contrasting two hamburger stands on the same city block. One is McDonald's, the other a mom-and-pop hamburger stand. Let's say the mom-and-pop stand is making more money. Which business is going to sell for more?

McDonald's will sell for a premium. The reasons are simple: All of McDonald's systems are in place, the training is systematic, and if the owners don't show up, it hardly makes a difference. On the other hand, if Mom and Pop don't show up, no one eats hamburgers. Mom and Pop own a job, and it's difficult to sell a job.

So how can you transform your job into a business? First, you need to understand exactly what business you are in, and then you must redesign your business to build equity. The most successful type of business today is the franchise. Forty-one cents of every retail dollar passes through a franchise business. Six cents of every restaurant dollar spent goes into a McDonalds's. What are McDonald's customers buying? Hamburgers. Though consumers can get better hamburgers in lots of other places, what they're buying at the fast-food chain is consistency.

When consistency is missing, your clients don't know what to expect. The trick is to develop a system that consistently delivers the same services, time and time again. In 1987, our firm produced over $7 million in fees and commissions, but our business had no real equity value—we couldn't sell it. Most businesses can sell for some multiple of their earnings, but not when you are the business. If the principals weren't working every day, our business was worthless. We found that by designing the following systems, we were not only able to build equity, but also to double our business each year.

12 Mistakes to Avoid

The following is a list of the 12 biggest mistakes most financial planners make in building their businesses—and what you can do to overcome them.

Mistake #1: Trying to be all things to everyone.

Solution: Decide what specific business you're in.

We decided we were in the specific business of delivering investment services only.

Mistake #2: No written procedure to benchmark for continuous improvement.

Solution: Put everything in writing and go step by step, making constant improvements. Once we decided what business we were in, we were able to create an equity-building business step by step, document the process, and benchmark continuous improvements.

Mistake #3: Limited client-tracking systems.

Solution: Focus. Stop recommending every investment that comes your way. Prepare an Investment Policy Statement for each client.

Before we switched to a duplicable tracking system, we had no way of staying on top of each investment and client. We now handle only nine different investments—that's it. We know everything about these investments, and we've met every portfolio manager. We know these managers as well as we know our own company.

Mistake #4: No consistent marketing plan.

Solution: Instead of being tactical, become strategic.

We work with top marketing consultants to develop strategic marketing programs. Now if something doesn't fit, we don't do it.

Mistake #5: Different investment experience for each new prospect.

Solution: Be consistent.

Today, no matter who a prospect is or whom that prospect talks to in our firm, he or she will have the same experience as the next person. We now even get referrals from our staff, because they know what we are doing and they understand it—they can tell our story.

Mistake #6: Lack of time to think. You're overloaded with work and are just trying to keep up.

Solution: Take the time to be introspective. Make sure everything in your business is consistent with what you want to accomplish. Put important things first.

Mistake #7: Focusing on delivering performance and not on managing expectations. Most financial planners promise performance, which they can't deliver.

Solution: Stop promising to outperform the market.

Today we deliver market returns. By doing that, we've stopped losing clients.

Mistake #8: Providing free financial planning services in hopes of gaining business.

Solution: Build outside strategic alliances to provide extra services.

At onetime, we had four full-time financial planning case writers working for us. We believed we were adding value. However, when we discontinued this approach, we became more focused and stopped being overloaded. Instead, we built strong strategic alliances with outside CPA firms that could help us address financial planning questions.

Mistake #9: The business is focused on you. If you are not there that day, you don't make money.

Solution: Get the focus off yourself. If your business is focused around you, then every client expects to see only you. There's no leverage. By creating a collective group of people providing a service, your clients will be more willing to meet with anyone in your firm.

In the past, we didn't know where our business lives stopped and our personal lives began. A person buying a practice like this would discount it heavily. Instead, we began surrounding ourselves with the best and the brightest people in investment management—on the academic side, in marketing, public relations and software development—increasing our credibility dramatically.

Mistake #10: Focusing on gross revenue, not on net income.

Solution: It's what you take home that counts. Shift your focus to producing profitability.

Early on, we discovered that gross revenue meant very little in terms of building equity. We focused on building a business that had a recurring revenue stream and, more importantly, a predictable bottom line net profit. This built in a significant net profit. Today, a business like ours can sell for 15 times net revenues, or two times gross revenues.

Mistake #11: Not using technology effectively.

Solution: Take advantage of the new paradox. Here, small companies now have a competitive advantage over large companies because they can more easily apply new technology without having to convert cumbersome old systems to new.

We now use state-of-the-art technology and upgrade regularly.

Mistake #12: Few cost controls.

Solution: Design your systems with cost in mind.

In the beginning, we focused entirely on the growth of our business. Later, by designing a system with cost in mind, we became tremendously more effective. We can now budget and track costs for each specific project.

Today we have almost no turnover of investors. We have built in an educational approach that clearly explains what and how we do our business. If a new prospect doesn't agree to work with us for at least five years, we politely excuse ourselves from taking that person as a client.

By getting your systems in place—documenting each step of your operation, taking the focus off yourself, putting in cost controls, being consistent in your marketing plan, and taking the time to be introspective—you can create a turnkey business where someone else can walk in and run your business efficiently. If you follow these steps, in the next three to five years, you too, can build an equity base to your business.

Reprinted from: FINANCIAL PLANNING