As advisers you have the job of measuring value: The value of assets, the value of a trade, the value you bring to your relationships with your clients. But the ultimate value, that all of these things build to, is the total value of your business.
A financial advisory firm's business is measured in several ways, and a recently prevailing one is what's known as enterprise value. Enterprise value is the theoretical takeover price for your firm in the event that you are selling it. It varies significantly from standard market capitalization because it takes into account more measurements of your business, including debt and what might be considered by some to be less tangible measurements of your firm's success.
For advisers, this means calculating a very different kind of value and understanding that value needs to be consistently and conscientiously contributed from the moment they start building their business, not when they're actually ready to sell it. This forward-thinking mindset is similar to how we encourage advisers to think about succession planning. Succession planning is crucial for advisers who, rather than selling outright, want to maintain the structure of their business long after they are around to do so themselves, by passing it onto trusted successors.
While it's important to give serious consideration to whether you want to pass your business on to successors or determine its enterprise value in order to sell it, the decision doesn't need to be made immediately. In fact, the preparation and thinking a wealth manager undertakes to position his or her business for determining enterprise value requires many of the same actions and ideas as positioning a business for sustainability through succession planning.
The following steps can help you increase your potential in either situation:
• Understand that the business is bigger than you: As a solo entrepreneur or even as a leader of a team in which you are the top producer, it's convenient to see the success of your business as directly proportionate to your personal success. However, this view hinders your ability to plan adequately for succession or to be attractive to a potential buyer. You must understand that your business is bigger than you. Your clients must understand that the relationship they have with your business overall is much more important than any relationships they have with any one individual employee.
• Hire and develop the next generation of professionals: Whether you are planning for succession or hoping to sell your business, you need to have significant human capital in place. Bring on a next generation of advisers who are willing to learn and apply the knowledge they have from their own experience to better the business and carry on the value you've created. These advisers must be as invested in the success of your business as you are as the founder, because they will either be leading it into a sale or into another generation of production.
• Create a brand that can evolve through generations of employees: You need to take into account that in order for the value of your business to be attractive to potential buyers, or to a next generation of successors, it needs to appeal to a younger generation of employees who are as invested in seeing the business' value upheld as you are. This way, the value of the brand becomes a contribution of all involved and is carried forward with that vision in mind. This also makes a business much more appealing to potential buyers in the case of a sale because it evokes a sense of deep-rooted consistency and strength in its mission and vision.
• Create a service model that evolves through generations of clients: Similarly, you need to develop a brand that is sustainable and will appeal to each successive generation of clientele. This is heavily linked to creating a team of professionals within the next generation and will ensure that your business maintains the mindset necessary to transition with the generational and economic shifts that occur in financial services, which affect the mindset of your clients and centers of influence.
• Remember that your business is business: Too many wealth management firms focus on the talent of their employees in terms of their investment and financial planning capabilities. They fail to pay attention to the perspective that's necessary to create a business that is sustainable or ready for sale. Often this takes the objective eye of an outside participant who has the best interests of the founder or seller of the company in mind. A business consultant or an executive coach are critical partners in this process.
Whether striving to prove the value of your business to potential buyers or potential successors, these are aspects of planning that need to be taken into consideration early on.
Ray Sclafani is the founder and chief executive of ClientWise, a business and executive coaching firm working exclusively with financial professionals and teams.