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A checklist for building value

First published on FTAdviser: June 11, 2018 by Rory Maguire, Fundhouse

Important work is to be done working with financial advice business owners on the challenging issue of their personal succession. But, perhaps more importantly, it is to make sure their business is valuable, so that they have ownership worth transferring to others.

In our experience, owners that have invested in the following 10 areas of their financial advice business have been able to build material value in their business over the long term:

1. Develop a distinctive value proposition: Looking after people’s financial affairs may feel like a generic activity with little opportunity for differentiation. But, having worked with many financial planning businesses over the years, anecdotal evidence is clear: those that have a distinctive value proposition enjoy more financial success than those that do not and they have more loyal, satisfied clients and staff.

2. Build a distinctive brand: Financial planning feels to us like an under-branded sector because traditionally ‘brand’ has been built around founders. Yet stand-alone brand value is arguably the most powerful determinant that prospective buyers use when calculating the multiples of earnings they are willing to pay for equity.

3. Do marketing that works: In our experience, the best marketers for an advice firm are existing clients. And so, we are not believers in the power of bulk mailers to unsuspecting prospects that end up snared in spam filters. We suggest more targeted brand work, like the investment in brand, brand values, powerful marketing collateral and an office and staff that exudes your brand and brand values.

4. Avoid the founder’s trap: Founders who struggle to let go can be their own worst enemy when it comes to building the value of their business. Building an independent brand requires the founder to want to hand over to the next generation.

5. Put capital aside: We recommend that advice firms invest for the future, by placing capital aside today. Investing in branded offices, marketing collateral, technology and good people may require a long-term view, but we see a strong link between those firms that invest for the future (at the expense of today’s cashflow) and their ability to improve the value of their business.

6. Know why: Focus on questions such as: Why do you do what you do? What’s your purpose? Firms that can answer these higher, often moral questions, give purpose to their employees beyond job descriptions and how much they get paid. And because brands are synonymous with building emotional connections like trust, a deep sense of moral purpose is a powerful way to do this.

7. Have the right people on board: In our experience, if you have the right employees and partners, you will get and retain the right clients.

8. Know your client profitability: Successful advice firms segment the service they give their clients (and the fee). Most have been stung by the 80/20 rule, where 80 per cent of clients represented only 20 per cent of their revenue, and have adjusted their servicing and fees to cope with this reality.

9. Sort the regulatory stuff: We often find that the main anxiety for business owners is compliance or regulatory related. It is also front of mind for any buyers. To sleep well and to avoid any own goals, we recommend spending the money and energy on your governance and compliance.

10. Invest in scale and process: Prospective buyers are very keen to find out how centralised and scalable underlying planning, investment and back-office processes are. They like to see uniformity. Businesses that invest in strong, centralised processes receive higher multiples.

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