"Advisors who build enterprises understand that to be successful over the long run, they have to manage their companies as great businesses. In fact, they consider themselves businesspeople first and financial advisors second."

Building Equity

By John Bowen

The struggle for success is one of the biggest issues I encounter every time I meet with advisors. Regular readers of my column know that, overall, a relatively small number of advisors enjoy the highest level of professional success. Most have moderately successful practices—and too many don't generate substantial profit at all, once you adjust for fair compensation for services rendered. For them, an advisor's life can be a real grind.

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So what can you do if you're unhappy with where you are professionally, or if you just know that you're capable of more? There is one component to success that triumphs over all others: building equity within your company. The biggest difference between very successful advisors and their peers is that the top people in the business do all they can to create true, demonstrable value.

The upshot: Everything you do should be aimed at creating and continually enhancing the value of your firm in the eyes of a potential buyer. This is true even if you have no intention of selling. By operating your business as if you are going to sell it someday, you'll improve the quality of your business—and your life.

FROM BOUTIQUE TO ENTERPRISE

Most advisors operate on what I call a "boutique lifestyle" business model. With this approach, all of the day-to-day operations of the firm—from client service to administration—revolve around (and are dependent on) one or two principals. Without their presence in the office, quality can suffer and inconsistencies can crop up, both in the client experience and in various types of decision-making.

This was the case at my old firm, where a few of us were the business. If we didn't work every day, the business was worth little. Because its success relied entirely on a handful of people, it wasn't the type of business for which a buyer would be willing to pay a premium. Once we were gone, there would be nothing to ensure that the practice would continue to be a strong and viable entity.

Advisors in this situation who want to maximize their equity value need to make a fundamental business-model shift and redesign their practices to operate at the "enterprise" level. A firm that runs as an enterprise is characterized by three main qualities:

• There are systems in place that ensure consistency across the firm.
• The firm doesn't depend exclusively on a single person for most or all of its success.
• The firm focuses on serving one type of individual—a clearly defined, ideal target client.

Essentially, advisors who build enterprises understand that to be successful over the long run, they have to manage their companies as great businesses. In fact, they consider themselves businesspeople first and financial advisors second.

PUTTING SYSTEMS IN PLACE

By using systems in your practice and communicating them across the organization, you'll help ensure a consistent client experience. These systems will decrease the firm's reliance on you for all of its success—thereby freeing up more of your time and enhancing your firm's tangible value.

Systematizing your entire business is obviously a big step, so it's helpful to organize your efforts into two categories: client experience systems and business systems.

Client experience systems. Client systems will look outward. These systems should address, in a step-by-step fashion, client acquisitions—how to acquire new clients through referrals, alliances with other professionals and group presentations. You'll also want systems for how to deliver service. These systems should ensure that every client has the same overall experience. Create benchmarks, such as client surveys, to regularly assess client satisfaction. Finally, you'll develop communication systems that spell out how clients want to be contacted, how frequently you should contact them and what should be discussed.

Business systems. By contrast, business systems will look inward. You will design a formal hiring process for finding the right candidate the first time, setting goals and strategies for your firm, evaluating employees, determining compensation, facilitating effective communication among staff, incorporating technology into the firm, handling compliance and so on. This is where you'll address the full range of daily duties that help create strong management, profits and equity over time.

These two types of systems will allow your firm to operate at the highest possible level by ensuring consistency. There are two main benefits: Your firm will be successful even if you're not there every day making it happen, and you'll create a turnkey business that someone else can easily take over if the time comes—making your firm more valuable than it would be otherwise.

THE RIGHT CLIENTS

Implementing systems—especially client systems—will be a lot easier and more effective if you focus your efforts on serving a select group of clients who are ideal for your business. In addition, by sharpening your focus on the right type of clients, you'll strengthen another key driver of equity: your profits.

Most brand-new advisors will accept just about any business—if a person is breathing, he or she meets the requirements for a qualified prospect. This approach may work temporarily. In most cases, however, advisors find themselves working hard to serve clients who are unprofitable. And by always jumping from one opportunity to another, you'll never fully establish yourself among any single community of prospects.

Worse, by trying to work with all kinds of different clients with a wide variety of needs and financial situations, you have to create multiple service models—the antithesis of a highly systematic approach. There simply aren't enough hours in the workweek to provide highly customized service to so many different types of clients without sacrificing meaningful profit.

Therefore, one of the smartest moves you can make to generate stronger profits, systematize your business and build equity is choosing to work only with ideal clients—those with similar needs and goals that you can serve using a single, high-quality and streamlined service model. This will give you the benefits of scale, while still allowing you to provide the personal service that your clients expect. It also will be highly appealing to a potential buyer.

Who are your ideal clients? Look for subsets of affluent clients whom you enjoy working with and who are well suited to your talents, skills and interests. If your specialty is in small-business-related issues and you're a boating enthusiast, for example, look for prospects in your geographic area who are both successful small-business owners and boat owners. The key is to focus narrowly on a niche and be as specific as possible in terms of industry, occupation, company and location.

EQUITY EVIDENCE

Another important point about generating equity is that you must be able to prove it exists at your firm. It's amazing how many financial advisors don't stay on top of their firms' progress. Nothing will kill a potential deal with a buyer faster than poor or nonexistent records. Therefore, keep track of where you are in the following four key areas:

• Your cash flow. Maximizing cash flow and profit margins is the best way to enhance your firm's value, as those factors are what potential buyers care about most. Obviously, it's best if you can show that your cash flow has grown and margins have expanded in a straight, upward direction.
• Your clients. Can you show a pattern of client satisfaction and retention? What about a strong tendency for your clients to make referrals? And to work with multiple people at the firm? Here's where your annual client surveys, as well as a highly systematic process for client management, will come into play.
• Your company. Be ready to show high employee retention and satisfaction, as well as turnover patterns. Be able to point out employees who have moved up in the ranks to senior positions. And show the systems you have in place that make daily operations faster and more efficient (for example, client relationship management software).
• Your competition. Have your competitors called to ask to join your practice? Do you have a business model that your competitors can't figure out or replicate?

Finally, keep in mind that growing equity in your firm doesn't happen overnight. It's a process that you need to build on with the business decisions you make every day. That's why it's absolutely vital that you get started on the path to creating equity right now. Whether or not you ever plan to sell your practice, making the smartest business decisions along the way will help you achieve what we're all looking for—maximum success.