The Equity-Centric Business Model

Friday, May 21, 2010 17:44
The Equity-Centric Business Model

I am always amazed by the fee-only planners that we work with who begin every conversation with, “We are a unique business model…”  There are some truly unique and ground-breaking business models out there, but most financial advisory practices share many fundamental revenue and operational components – and that’s a good thing.  Predictability translates into more available successors and continuity partners, relevant comparable sales data, and lower-cost valuation and succession planning solutions.  

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One of the most common elements we see from one advisory practice to the next (at least those with a value of $1 million or less) is a reliance on one advisor. The clients are routed through this primary advisor, as are the referral sources, and marketing efforts, and operational decisions.   We often refer to this as a “virtuoso” or silo business model.  For many advisory practices, this is the goal, and the end result.   I know for a fact that this type of business model has value, sometimes significant value – there is nothing wrong with a one-owner financial advisory business, unless and until something happens to the owner (think car accident, cancer, stroke, illness, or similar health crisis for the advisor’s spouse or child). 


For this reason, the process of “equity management” I’ve referred to in previous postings often provides the option, perhaps the impetus, of shifting to an equity-centric model, one capable of outliving and outperforming the founding owner.  Consider the potential value added by creating an entity – a corporation or an LLC.  Did you know that 100% of the businesses we work with that have a value over $10 million are set up as entities?  Over 80% of the advisory businesses we’ve valued at $1 million or more are corporations or LLCs.  This is a very important concept to grasp if you’re serious about building a real business.    


People die, but a business can live forever, or certainly beyond a single owner’s lifetime.  With proper planning, and in an entity form, a business can be gradually transferred from one generation to the next. An entity structure provides options and choices.  What better industry in which to do so than financial services, where the coordinated transfer of equity from one generation to the next is often the centerpiece of daily planning discussions. The equity story unfolds the importance of creating a firm built and owned by multiple generations at one time, serving multiple generations of clients.  That’s value that successors pay for value that is reflected in the equity you’ll receive upon retirement. 


Many advisors feel that they simply do not have the necessary people or other resources needed to build their practice into a business. Others simply are not comfortable with the idea of being anything other than the “virtuoso” and would feel uneasy sharing that role. Others fail to understand the value and differences of these unique models. But understanding the different models is not about promoting one over the other. The goal, through careful analysis, is to determine where an advisor is today, and where they ultimately want to be at some point in the future.


Early succession planning may be one of the keys to bringing this decision of choosing a business model to the forefront. Recognizing the value of practices, coupled with an industry-accepted method for determining and monitoring that equity, is changing the way that advisors view their livelihood. It is bringing about an “equity centric” view, which is valuing not only the accumulation of clients and revenue, but also the operational systems and professional staff that an advisor builds as well.  It’s about building a unique business – one that can outlive you, as well as your clients’ children and grandchildren.  It’s not that hard to do.


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