What’s your advice business worth (to someone else)?

This is the first in a two part-series of articles that examines the sale of financial advice firms. In this initial article, we consider the various valuation methods that can be used to place a value on your business. Next month we’ll take a look at some of the ways that you can (positively) influence that value.

How to value your business

There are many methods that are used to value businesses, however the most common methods are,

  1. A multiple of recurring income
  2. A multiple of EBITDA

We’ll examine both of these in turn.

 

A multiple of recurring income

This is still the most widely used valuation method, and it is certainly the one used in casual conversations among advisers. This is the basis that is quoted in relation to any “buy back” agreements in place in the market. This basis is popular because of its simplicity, and also because a potential purchaser will be satisfied that they are buying a future income stream. The value of the business is not skewed by a huge uplift in new business sales (and attaching initial commissions) in the year or two before the sale of the business.

Of course the next question is – what’s the multiple! And that’s really where the negotiations start. This will be determined by a whole range of elements including;

  • The business retention strategy in place and the actual retention record of the business. This is a critical factor for would-be purchasers.
  • The compliance profile of the business – are the systems in place robust or is it all a bit lacklustre, with potentially significant hidden problems down the road?
  • The synergy between the seller’s business and that of the purchaser. This includes target markets, systems and the ability to easily integrate the two firms. These factors may make one potential purchase a better prospect than others, as the purchaser may gain more from synergies and be willing to pay a higher price.

 

Multiple of EBITDA  

The simple calculation based on recurring income is not deemed sufficient in all situations. For larger firms, a more refined calculation method is often deemed necessary, and this is where the multiple of EBITDA (Earnings before interest, tax, depreciation and amortisation) comes in, as this takes a much broader view of the business as a whole and looks at the actual profitability of the business.

When this calculation method is used in relation to smaller firms and where the business owner’s salary is the main overhead, EBITDA is often adjusted by removing the owner’s salary from the calculation as this can often significantly skew the EBITDA figure. With the salary excluded from overheads, a prospective purchaser can get a clearer picture of the real profitability of the business.

 

Payment Terms

Usually when an advice business is sold, there is a handover period where the previous owner remains with the business for a year or two to ensure a professional handover of the clients to the buyer, and to assist in the retention of those clients.

As a result, the payment terms usually include some of the purchase price to be deferred – maybe with half paid up front and the remainder paid in tranches over the following two years. There will typically be penalty clauses if the retention turns out to be lower than anticipated. These terms are really important, as they align the interests of both the buyer and seller towards a smooth handover with high retention rates.

 

Make the process easy

Due diligence before a sale is key. Once any confidentiality agreements are in place, it is really important that the required information is easily accessible to a prospective purchaser. If they feel they have to drag the information from you, they will wonder what you are hiding. So make sure you are capable of providing the required information before you start seeking out a buyer.

Equally, be realistic in your price expectations. While of course you may not choose to take the first offer that comes your way, don’t hold out forever for that elusive windfall sale price.

 

These are thoughts solely on the financial side of selling your business. In a follow-up article, I’ll look at steps you can take to actually increase the value (and more importantly the price!) of your business.

Just bought a business? Turning 2 into 1

So you’ve made the big move… Your business is in growth mode and you’ve decided to accelerate that growth by acquiring another advice business that’s for sale. The price has been agreed, as has the structure of the deal relating to the earn-out period and terms for the owner of the acquired business.

While this is a big step and great progress to get to this stage, there’s still a lot of work to be done. Because according to a 2017 Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent! A very scary figure… Now of course this figure applies across all industries and you can argue that’s it’s different when buying another financial advice business. But there is still lots to consider if you want to integrate the acquisition successfully and maximise the value of the deal. So where do you start?

 

Have a very clear strategy

Of course you likely will have given this a lot of thought before you get anywhere near the integration phase. Hopefully you have a very clear vision of what you are setting out to achieve. Does the acquisition simply increase the number of clients of your business, or is it opening up new markets? Is it giving you capabilities in new areas of financial advice, or is the acquisition delivering significant cost savings when the two businesses are put together?

Know where you are going and what it is that you are trying to achieve, as your strategy should be the guiding “North Star” for your integration process.

 

Build a very robust plan

You need to have an integration plan for every area of the business. If you want the integration to be successful, this plan has to be developed carefully and thoroughly, building a clear roadmap for every key service area – your advice process, your service proposition, your compliance process and right through to your HR processes. You have to ensure that you have the required resources in place to actually develop and follow through on this plan.

If instead everyone just blindly “hits the ground running”, there is a strong likelihood of a significant fall-off in performance and even chaos a little bit down the road! To avoid this, give some thought to the following areas before you set out to integrate the two businesses.

 

Consider culture

This is an area that the leader of the business needs to consider carefully and be very involved in. Are the cultures of the two organisations similar or are they quite different? What is the desired culture of the merged operation going forwards and what are the main steps to help you to start building this culture? This will need clear leadership and involvement of all of the staff.

 

Good integration takes time and focus

It won’t just blindly happen. Your carefully developed plan will need to be delivered in a structured way. This will take the time and focus of some key people – maybe you, maybe members of your team. You need to recognise the cost of this as the focus of these people for a period of time will be on integration of the two businesses, rather than increasing the income of the business. However this short-term cost will definitely pay dividends in the longer-term.

 

Who are the right people to carry out this work?

If you want the integration to happen successfully, you need to have the right people carrying it out. There can be a temptation for the leader of the business to lead the integration work. However it may be that their attention is better spent elsewhere, for example leading the commercial focus of the business for a while and guiding the expectations and requirements of clients and business partners. The leader of the business should be close to the integration, but does not necessarily need to lead it. Sometimes there appears to be an “easier” solution and the integration process is passed to someone who “is not that busy”, but who may be completely unsuited to the role. This is a recipe for disaster.

The integration role is best carried out by someone who is very structured in their work and who is capable of keeping a project with multiple strands on track. If they have very high credibility in the office and strong relationships with colleagues, this again significantly enhances the likelihood of success.

 

Follow through

Finally, don’t get side-tracked by current business pressures, see the integration through to the end. That is not to say of course that you won’t change tack at times, but when this happens, tweak your integration plans rather than leave them behind.

 

A good integration process will help you ensure a successful result after your acquisition. Follow it through relentlessly and you can reach out confidently towards your goals.

“I know someone who’ll charge me less”

You’ve all been there… the fight over price. You know you’re right for the client, you can add a lot of value, but you can see there is an immediate issue niggling away. You probe the client and they say something along the lines of, “Let’s cut to the chase, what do you charge as I’m talking to another adviser who will manage my assets for 0.25% p.a.”?

Assuming you charge 0.5%, 0.75% or even 1% p.a., what do you do?

 

1. Now’s not the time for negotiation

The fatal mistake is to start negotiating your price now. After all, the client has absolutely no idea what they are paying for at this stage, and the value that they will get from working with you. Obviously you can’t ignore the question, but the answer needs to be along the lines of, “I can hear that our price is a key consideration for you. Let me set out what we do first, as there are a range of different options available to you”.

Don’t let yourself get dragged into a price war at this stage!

 

2. Go through your normal initial meeting process

This is where you take control of the meeting again. Rewind the meeting to understanding the client’s objectives (through careful, open questioning) and then presenting how and what you do. This is where you set out your advice process, your annual review meeting process and the ongoing service packages that you offer. Assuming you offer differentiated service levels for different segments of clients, your client will now see what you have to offer at different price points. If the client wants rock bottom pricing, well then he / she will see that they won’t be getting a premium service at that price level.

In order for your competitor to offer such a low price, they are probably not promising anything! So the other advantage of taking the client through your approach is that it will demonstrate the significant advantage of working with you as opposed to your competitor.

 

3. Be firm and brave!

Stand by your pricing as a premium advice provider. Acknowledge that you are more expensive; your client will actually respect you for this. Yes you can have lower cost packages, but within these the client should be left in no doubt about what is included and more importantly what is not.

What if the client looks for your premium service package for a lower cost? Well then you’ve a choice to make! Yes, you can be flexible, but I suggest only if there is a good reason… maybe the client is an important access point to an attractive target market, maybe you see broader opportunities with them. Don’t just agree without a reason, or otherwise you will simply start dropping your price at the first hint of a push-back from anyone. Sometimes it’s better to walk away, rather than agreeing to a price that doesn’t make economical sense to you.

 

4. Make sure you can deliver… and prove it

If you want to charge higher prices than your competitor, you have to able to deliver more. So it is very important that you can actually deliver what you promise. The last place you want to end up in is the dreaded “over-promising and under-delivering” experience for clients. This is the certain road to losing clients.

Of course your prospective client won’t have experienced your service at this stage of your relationship. So this is where you need to be able to call upon the experiences of other satisfied clients to add validity to your promises. This is where those client testimonials, LinkedIn recommendations and case studies of previous work come to the fore. They paint the clear picture of what your prospective client can expect.
5. Add value beyond the sale

Finally look to add value beyond the sale. Are there services that you can offer to your client that sit outside of your service packages? Maybe you can provide a willing 2nd opinion on any broader issues they might have in relation to financial planning? Maybe you can give them access to a broad network of business professionals that can help them in running their business? Or maybe you can refer some of your contacts to them as potential clients?

 

At the end of the day, you’ve a choice to make. Is your competitive advantage based on offering your services at the lowest price, which ultimately will be a race to the bottom? Or can you offer superior value and build your business around delivering this value, at a higher price? The choice is yours!

 

5 myths about financial planning businesses

I’m finding that more and more of my time is being spent helping advice firms reposition themselves as true financial planning businesses in the eyes of their clients. It’s extremely interesting work, as it always results in the adviser taking a really deep look at their business, as we carefully then figure out how the business will look differently in the future, and the steps that need to be taken to get there.

 

I’ve noticed as I’m doing this work that there are a number of myths that seem to crop up regularly and make the change quite daunting, that need to be gently taken apart and pretty much discarded! So here goes with the 5 myths that raise their heads most frequently.

 

 

Myth #1: My biggest challenge is how much to charge

This pricing challenge is where the conversation between the adviser and me often begins, along the lines of, “I know what I want to do going forwards, but I just don’t know how much to charge and if I can get this piece right, I’m grand!” You actually have a far bigger challenge in identifying how and where you add lots of value to your clients, and then being able to communicate this effectively and in an engaging way. The prize though for doing this work is that when you are crystal clear on the value that you’re providing, and you can get this across to your clients, you suddenly get a new-found confidence in the whole area of pricing, which then pretty much falls into place – trust me!

 

 

Myth #2: Commission is bad, fees are good

Now this is certainly not going to be a strident defence of commission. Because in my eyes, that simply is not needed. Commission is a method of payment that can and should be used to remunerate an adviser for the advice that they give. As are fees – an alternative method of payment. Both commission and fees have their advantages and their drawbacks. They both have their place, each suiting different scenarios.

 

Where commission has earned itself a bad name in the past is around the (lack of) transparency with it. This has been addressed somewhat with commission disclosure and indeed more recent regulations. But when you think about it, this is more an issue of adviser behaviour that a flaw in the payment system. When you are completely transparent with your client about the level of commission you are earning on products, it is an effective means of being remunerated.

 

 

Myth #3: Niches are not a viable strategy

I’m not a financial planner but I think I can talk from experience on this one… When I set up on my own and told friends and colleagues that my business was going to be aimed solely at financial advice firms, I was told I needed my head examined! “Having a target market of only about 1500 firms is just too small” (no it’s not) and “advisers won’t pay for outsourced services” (oh yes they do) were probably the 2 most common refrains.

 

Niche strategies bring challenges in being able to demonstrate expertise in your chosen niche and you also need to be able to reach your chosen market. But they also make life very easy… Imagine if I was trying to write this article to appeal to financial advises…. and accountants, lawyers, shopkeepers and rock stars! Suddenly it becomes very difficult to actually demonstrate your engagement with their specific issues. So if you have a specific customer / market expertise or a product area advantage, it may well be a viable strategy to become the kingpin in that market segment. Don’t rule it out!

 

 

Myth #4: There’s still a strong future for product-led advice

A bit of a tricky one, because there probably IS still a future for product-led advice. But it’s likely to become a steeper and steeper climb in the future. The winds of change just don’t auger well for advisers who position themselves as “product solvers” rather than providing comprehensive financial planning and advice.

 

It is very hard to demonstrate real value when simply picking a product or fund etc., you are always at the mercy of new competitors seriously disrupting the pitch (think Vanguard in the USA & UK) and it’s very hard to build long-term trusted relationships based on product picking alone. Technology has the potential to significantly disrupt product-led advice and your price will be constantly under pressure from commission transparency (a good thing!) and possibly future regulation. So while there may be some road left for advisers whose business model revolves solely around product selling, I think it’s likely to be a tough road.

 

 

Myth #5: It’s too hard to change direction

Well the proof is in the pudding! We only have to look around and see the financial advice firms that have completely reinvented themselves in all four corners of Ireland. There are many firms who have worked extremely hard on building their proposition, have developed a multi-channel range of tools to communicate this proposition in a comprehensive and engaging way and are now reaping the rewards of stronger client relationships and higher income streams that they can more easily seek and justify.

 

Yes the work takes structure and focus, and requires thoughtful analysis of your own capabilities, market opportunities and client segments. But when done well, this work is also hugely rewarding and insightful. And this in turn leaves you with a business that you are extremely proud of and re-invigorated to reap the full potential of your hard work.

 

So if you’re transitioning your business to a full lifestyle financial planning business, don’t believe the myths and instead continue to work on building that future-proofed business that you want.

Can niche strategies work for financial advisers?

This is a question that occupies a lot of thinking time of many advisers today, as they contemplate their future client acquisition strategies. While we are seeing some advisers setting minimum hurdle sizes with new clients (either in assets under management or agreed fee levels), let’s be honest, many advisers are generalists, welcoming any prospective clients into their business. So it’s a valid question – is a niche strategy a viable business model for advisers?

I believe that if carried out in a very structured way, it can be a very viable strategy.

Let’s start with a definition of niche. One I came across described it as, ‘denoting or relating to products, services, or interests that appeal to a small, specialised section of the population.’ The scary part in reading this is the piece about the “small, specialised section”, as this leads people to think that their base will be too narrow to make it sustainable.

 

Niche strategies can make life easier!

I tell this from personal experience. When I decided to strike out on my own 6 years ago, this issue was the one that gave me the most headaches. Would I concentrate my proposition and ultimately my sales & marketing efforts only on financial advisers? Or would I offer my services to any client that I could get?

I went for the niche strategy, focusing my efforts solely on financial advice firms. My target audience was immediately narrowed to only hundreds of firms, rather than tens of thousands of potential customers. That was scary.

But what was far easier was connecting with this group. Rather than trying to appeal to everyone, and probably not connecting with anyone, I could focus all of my efforts on a specific group of people. This made it easier in developing my sales propositions, writing website content, producing newsletter and blog articles. I can communicate with a clear target in mind, and my messages as a result are a little more personal to my audience. On the other hand, when you are trying not to exclude anyone from your sales and marketing efforts, it’s very difficult to connect with people.

Yes, a narrow niche strategy is hard at times, and when business goes a little quiet the temptation is always there to broaden my marketing into other markets. But doing that will dilute my presence in the narrower (financial adviser) market. And just because you target a niche only, it doesn’t stop you working in other markets. I’m currently working with a fantastic construction company, who saw what I was doing with financial advisers and asked me to bring those skills to their industry. It’s a big challenge for me working in an industry that I’m not immersed in, but that challenge is making the work very interesting and enjoyable. But staying focused on my niche in my sales and marketing efforts will generate the lion’s share of my work, and is the right strategy for me.

 

What are viable niche strategies for financial advisers?

Financial advisers who have gone down the niche route successfully have tended to do so by focusing on one (or sometimes more) of the following,

  • Demographics: Focusing on specific age categories, gender, social grades (e.g. ABC1’s)
  • Employment sectors: Focusing on the public service specifically, sectors within the private sector, specific occupations.
  • Geography: Focusing on clients within a certain geographic area only
  • Product lines: Focusing on developing expertise and leadership positions within specific product areas or dealing only with clients who require full financial planning relationships.

 

What are the main steps in building a niche strategy?

If you decide to go down the niche route, first of all you need to do some research about your target niche. You need to understand the numbers of target clients (is the niche large enough to sustain you?), think through how you will access them and consider what opportunities are available to you to market to them effectively. You need to also think deeply about the problems that you will be able to help them to overcome, and how you will communicate and demonstrate your capabilities to that segment of the population in an engaging way. Because at the end of the day, you will live or die by whether your target customers recognise that they are dealing with a specialist in the particular niche or not.

 

Niche strategies are certainly not right for every financial advice business. However for some, they just might be the best way to fully leverage a unique strength or opportunity of your business.

Is your website punching its weight?

Financial brokers today recognise the importance of having a really effective website. After all, it’s the first touch point that many consumers have with your business. If you’ve a fairly basic website or one that hasn’t been revisited in a while, here are some tips that can double or more the effectiveness of your website!

 

Make it Easy to Navigate

Don’t make the user have to “work out” where to find the information they are seeking. Make the navigation so simple that a complete technophobe will find their way around it! The main navigation bar, which to my mind should always be at the top of the page and not down the side, is really critical. It is through this that most users will enter the site from the homepage, so think this through very carefully. Think very carefully of what to include on this, as it typically will only cover 6/7 site areas. And then consider very carefully what you are going to call each section. Use standard terminology that makes sense to people, such as About / Our Services / Contact Us / News or Blog.

 

Focus on Financial Planning

I look at a lot of financial brokers’ websites. Probably the biggest bugbear that I have is the lack of focus on financial planning. This is the extremely valuable skill that you bring to your clients, helping them identify their financial objectives and then finding and implementing the best solutions to help them achieve those objectives.

However many websites talk only about financial products. This makes you appear as a hard-edged salesman, selling the latest and greatest products, not doing justice to your skill at all. I strongly suggest that you develop a very prominent, specific section in your website about financial planning and explain the value that you will bring to clients.

 

Reduce the Amount of Content

Yes, this is not a typo! Obviously this may not apply to every website, but in the main, too many of them are packed out with superfluous content. While it might please you seeing lots and lots of pages with long explanations and technical details about every product available, frankly the user will just get bored. And boredom is fatal on the web as the user just leaves your site.

Use your Google Analytics to identify your poorly performing pages from where people are leaving the site. You will often see that these are long technical pages. Either shorten them or get rid of them!

 

Update your News Section / Blog regularly

This is one of the most valuable areas of the site for a number of reasons. I’m not talking about taking a newsfeed from some online source or sending links to other people’s content. This section is for regular and relevant blog entries that educate users and demonstrate your expertise and these play a number of valuable roles. First of all, they draw people to your site after you share a link to a useful article you’ve written. This of course in turn opens up the possibility of the user finding out more about you and the services you offer.

Google loves fresh, original content. In fact new, authentic content that engages users and in turn is endorsed by them through sharing it, liking it or commenting is one of the most important drivers of bumping you up the search results. This is of course on top of the value that clients and prospective clients will get from knowing that you are a Financial Broker with a finger on the pulse and demonstrating your expertise and ability to solve their problems.

 

Have Clear Calls to Action

Users will come to your site for a range of different reasons. Some may be simply browsing around, others may be looking for specific information, some may want to buy and may be looking for your phone number. Try and appeal to all of them by having a range of Calls to Action. The last group are easiest – make sure they can easily see your phone number without having to go looking for it! For the others, have Calls to Action that will enable them to stay in touch with your business, even after they leave the site. Do you make it easy for people to connect with you on LinkedIn from your site? Make it easy for them to subscribe to your newsletter. Maybe offer an online Chat facility to answer their questions there and then.

 

Mobile is Key

More than one third of searches happen now on mobile devices. Your site simply must be responsive, ensuring that it is easy to read on a phone or other device. People today have lost patience with having to “pinch” the screen to go looking for the information that they want – this results in a terrible viewing experience. Responsive sites alter the screen layout to suit the device on which it is being viewed – a “must have” today.

Also in relation to mobile, if someone is looking at your site while out and about, very often they are simply looking for contact details. So again make sure your phone number is very visible.

For some Financial Brokers, these changes will mean a few hours work. For others they might mean a new site. For everyone though they are worth it. Research of financial brokers is happening more and more online so you want to make sure you are demonstrating why you are the best choice for prospective customers!

Image courtesy of angus campbell king