What to Expect When You Are Expanding, Evolving or Exiting
In this series of three Actionable Tips, I’m going to discuss the concept of partnering with another advisor, and buying or selling a financial services practice. Pareto Systems has developed and refined a process to help an advisor be best positioned to multiply the value of his or her business upon partnering, buying, or selling, and to expect a predictable and profitable outcome. If you are considering partnering, buying or selling in the future and would like to arrange for a complimentary 45 minute strategic planning conversation with me, contact Michelle at 1.866.593.8020 ext 1260 or via email at firstname.lastname@example.org.
Knowledge is knowing a tomato is a fruit. Wisdom is not putting it in a fruit salad.” - Miles Kingston
For years we’ve been reminding advisors that one of the primary qualities that separate the best from the rest isn’t in what someone knows, but rather in their commitment to well thought-out action. Knowledge is being aware of something, but wisdom is knowing how to act on something. We’ve seen time and again advisors who know what they should be doing, but simply don’t act. Common sense isn’t always a common practice.
In last week’s first tip in this series outlining our Multiplier Method, I discussed how some partnerships lead to a 1+1= 3 outcome while others lead to a 1+1= 1.5 outcome. I also mentioned the difference between buying or selling an actual business as opposed to just a book of business. Again, the objective for two people partnering is to multiply their outcome with focused effort and leverage. For the seller the objective is to multiply the value of his or her asset when selling all, or even just a portion, of their business. And for the buyer, he or she wants to multiply the value of their acquisition as quickly and predictably as possible.
In these next two tips, I’m going to discuss:
- Establishing a Fit – identifying an alignment of interests when collaborating,
- The Retirement Red-Zone – deploying a process to multiply your value,
- The Acquisition Red-Zone – deploying a process to fast track the transition and multiply your profitability,
- The Why and How of Business Transitioning – the seller’s legacy and the buyer’s future,
- The Clients in the Middle – positioning everything as a service and executing with precision, and;
- ·3 Steps to Client Transition – a time-tested approach to Ramp-up, Launch and Follow-through to ensure a soft landing and successful on-board.
There are universal issues that apply to both the buyer and seller when it comes to identifying an alignment of interests between the two advisors. I’ll be following a dual-track as I address these issues so that they apply to both parties.
Don’t Get Faked Out
From a philosophical perspective, one of the most important qualities in an advisor is in having a mindset that says “My goal is not to see how big I can get, but rather how small I can stay.” That sounds like a contradiction from a buyer’s perspective. Why else would someone want to buy a business other than to grow, rather than do it methodically and organically? It’s still a great idea to accelerate growth through acquisition but the focal point should be on the quality of the clients, not the quantity. An advisor who was disciplined in only attracting advisors who were a good fit rather than accepting anyone with a pulse, is the ideal advisor to purchase a business from. The same holds true in terms of selling a business to an advisor with a similar mindset because ultimately you know your clients will be transitioned and on-boarded professionally and will enjoy a very soft landing thus ensuring the sellers legacy in the process.
Consistency is Crucial
Advisors who tend to consistently attract the same type of clients in terms of average asset size and other commonalities is another item on the ideal alignment checklist. The average size of the client and the platform they are on, is more important than the overall amount of AUM the selling advisor has.
Within the Same Firm
For a variety of reasons it is also a good idea to align with an advisor within the firm you are with. That’s not to say that there can’t be exceptions, but the clients have a degree of comfort and familiarity with the firm’s systems and procedures, and fewer disruptions in terms of trust, optics and deliverables contributes to the clients’ confidence in the transition.
Maverick Talent vs. Documented Procedures
The ideal business to acquire, and the ideal advisor to sell your business to, share a common thread in terms of a good fit: they operate a business on a foundation of best practices. The business is not in their heads, it is documented in a playbook. There is an allocation of time that is tied to client classification and a service matrix. Compliance history is solid because clients are receiving proactive and reactive service that is consistent. The advisor uses a CRM that ensures that relationship history is archived and KYC (Know Your Client) is accessible easily.
How Did They Start Relationships?
The ideal financial services professional uses a fit a process rather than a sales process. He or she doesn’t try to convince someone to become a client, he or she establishes an alignment between the person’s needs and the advisor’s solutions. Their clients are enlightened and in sync with the advisor’s mindset about wealth management. Other questions as part of the dual-track due-diligence process are:
- What is the client acquisition history in terms referral genealogy?
- What percentage of their clients were referred from the 20% who generate 80% of the business vs. from the 80% who generate just 20% of the business?
- What percentage of their business was organically acquired vs. absorbed from within the branch or acquired by purchase?
- Were cold-calling, mass marketing and seminars used to acquire clients?
- What percentage of their clients are actually partial customers who dabble with other providers vs. fully empowering clients?
- What is their process to communicate their services professionally to consistently attract new money as it goes into motion?
- Do they have meaningful “two-way street” relationships with accountants, lawyers and other partners?
Fees vs. Commissions
Many people have oversimplified this by saying that the best business to buy is one that consists of clients who have bought-in to a fee-based compensation model. What it really comes down to is the degree of communication the advisor has used and their consistency to ensure the clients are competitor proofed making them either fee-worthy or commission worthy. Whether they receive commissions for advice, or fees for management, is secondary. The bottom line is there will be more sellers than buyers and consequently there will be many fee-based businesses for sale in the future and not all of them will be worth acquiring.
Entering the Retirement or Acquisition Red-Zone
Whenever we coach an advisor on performing solid due-diligence on a potential buyer or seller, a common response is as follows: “This sounds like work!” And it is, but use the potential of a multiplied ROI as the beacon that helps you see past the hurdles and noise that will try to conspire against you. Much of the value of the business you are trying to acquire or sell is intangible and abstract especially if it isn’t defined or documented. Get out in front of the process, get your intellectual properties out of your head, and subscribe to the maxim that says “Done is Better than Perfect.” As I’ve said before – and contrary to the old cliche – time is NOT money! Your time is more valuable than money because once it’s spent you can’t earn it back. Invest your time in a process and put the odds in your favor. We’ve seen first-hand where an advisor invested 6 to 12 months of sweat equity into the business to position it to be sold and then multiplied their outcome meaningfully. We’ve also seen how a well prepared acquisition and methodical transition multiplied the profitability of the combined practice measurably as well. Either way, deploy a process and execute with precision and you will unlock more value.
In next week’s third and final installment of this series of tips, I’ll be talking about the 3-step process when executing the transition:
- The Ramp-up – being prepared with a methodical transitional process that will build predisposition and buy-in for the clients involved.
- The Launch – a sequential approach to communicate the process to clients and position it as a benefit and service to them.
- The Follow-through – how to fast-track clients to advocate status and uncover untapped business through an empowerment process
Continued success! Retirement photo courtesy Jim the Photographer / Flickr
A key step in our approach at Pareto Systems is conducting a 45 minute complementary evaluation call with financial advisors who are considering hiring us to help them achieve their goals. If you would like to talk to Duncan to discuss your vision for the future and outline what you aspire to achieve, contact Michelle at 1.866.593.8020 ext 1260 or via email at email@example.com. Regardless of whether there is a fit, the conversation will be of value in and of itself.
Learn more about Pareto Systems
Watch our 5-minute introduction video on our homepage to learn more about how we work with advisors to have them run a more profitable and efficient business, and how you can take steps to explore if our process is a good fit for your objectives.
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