Business Brief

Small business owners, especially those in the service industry and particularly in the professional space, encounter a significant obstacle in converting the value they provide to clients into value for their own businesses.

Even financial advisory practices that appear to be thriving may not be desirable from a capital valuation standpoint. This is undoubtedly something the business owner should be cognisant of should they be considering an exit or succession plan, whether through the sale of the practice to an external party or even to an internal successor, over time.

It is essential to note that we are discussing the distinction between a succession plan and a business continuity plan. These two concepts are often confused, but they are distinct considerations. A continuity plan mainly focusses on the business’s capacity to continue operating in the event of unforeseen circumstances affecting the owner. On the other hand, a succession plan is a more long-term perspective aimed at ensuring the business's sustainability beyond the owner's working life while still allowing the owner to derive some value from the business.

Whether preparing the business for sale to an external party or selling an equity stake to an internal key individual, it is in the owners’ best interest to optimise the valuation of their practice. Note that we are not saying maximise but instead focusing on optimisation. It is possible in the short term to maximise a valuation result, but one typically risks potentially compromising longer-term sustainability.

In valuing a financial planning practice, it is customary to consider both quantitative and qualitative metrics. While the quantitative measures are typically more apparent, such as revenue streams, cost of operations, and profitability, their accuracy relies on well-maintained records. These metrics would enable the calculation of net asset value or earnings multiple.

The qualitative metrics though, can either support the ability to obtain a favourable premium or result in applying a less favourable discount and should, therefore, be carefully considered. There are many sides to running a successful business. In this two-part series, I will highlight some key best practice principles. These include:

Principle 1: A clear value proposition

Creating value for the target market is essential to any business's existence. However, it is alarming how frequently advice businesses fail to articulate this clearly to themselves, let alone their clients and prospects. Even when businesses do understand their value proposition, they often do not document or formally present it to their clients and prospects.

For many reasons, most members of the public do not separate the financial advice industry from the product provider industry. As a result, it is critical to be clear about what your business does, what value it creates, how it does so, what services are offered and how it is not only different from your competitors but also from the product providers. Remember that your product is not the life policy or retirement annuity you are presenting but the advice and recommendations you make.

An excellent way to think about this and to strategise with your team – and it should be with your team – is to consider an event that would suddenly result in your business immediately ceasing to exist. Who would miss you? Why would they miss you? Ensure you document and present the answer to your clients and prospects who must understand it. Doing so gives clarity to yourself, your staff and your clients. It sets you apart from competitors and provides a clear value description for a potential business partner or successor to ensure culture and value alignment – two critical success factors in any successful business merger or acquisition.

Principle 2: Trust is everything

Trust is an essential building block of a healthy relationship. When people trust their advisers, they tend to open up more and be more authentic and vulnerable. This leads to a deeper understanding between the two parties and creates a stronger bond.

Furthermore, people are more likely to refer advisers that they trust to their friends and family. This is because they want to share the positive experience they have had and help others benefit from it as well.

Moreover, when advisers have the trust of their clients, they are better equipped to add value to their lives. They can make more informed and personalised recommendations, offer more valuable advice and create a more meaningful impact on their clients’ lives.

This reinforces the cycle of trust and deepens the relationship between the adviser and their clients. In the end, trust is not just a foundation but also a critical factor in building long-lasting relationships.

An upfront confidentiality agreement – signed as a part of the initial engagement process before any work is undertaken – has demonstrated its effectiveness in enabling people to feel more at ease with sharing the essential information required for advisers to maximise the impact of their proposals and recommendations. Although it is part of the compliance documentation, explicitly including this document as a part of the initial interaction sends a clear professional message and helps to establish trust.

Information that is proactive, timeous, consistent and relevant reinforces your brand promise and further enhances the growth of these trust levels. Inviting selected clients to participate in client focus groups and forums allows them to provide feedback on their experience of your services and give recommendations on possible improvements.

According to Business Health in Australia*, financial advisory businesses that communicate with their top clients more than ten times per year are 43% more profitable than those that do not. In addition, those who get formal feedback from clients on their experience and expectations are 76% more profitable than those who do not.

Charles Green’s trust equation is a handy tool to show how trust can be built. He says trust is a combination of how credible, reliable and intimate – or how safe you feel with a person – divided by the self-orientation of the person – are they focused on their interests vs being genuinely interested in you and your success.

In essence, according to this equation, any behaviour that puts the adviser’s interests before those of the client destroys all trust, irrespective of how competent and reliable the adviser is or how strong the relationship might be.

If your clients trust you, they will trust that you are making the right decisions in their best interests. This makes transitioning to a new business owner far smoother and seamless, increasing the likelihood of business being retained, an attractive proposition for an acquirer.

Principle 3: Solution for everything, but not for everyone

As we grow and evolve, we must recognise that we cannot be everything to everyone. Instead, we must decide strategically where to focus our efforts and who we serve. While offering a broad range of services may seem appealing, narrowing our focus to a clearly defined group of ideal clients can be a game-changer. By doing so, we differentiate ourselves from the competition and develop unique strengths and expertise that make us the go-to experts in our field. This, in turn, creates natural barriers to entry and makes our business an attractive proposition for potential partners or investors. In short, being strategic about our focus enables us to capture the full range of opportunities available while achieving a level of specialisation that sets us apart.

The nature and definition of the chosen ideal client could vary based on several factors such as demographics (income and occupation), psychographics (personalities, interests and values) and behavioural (e.g., specific life events). A typical example would be to focus on professionals and then a subset thereof, such as professionals heading into retirement. The most interesting ideal client definition I have come across is an advisory business focusing on couples where the wife is the primary breadwinner. Analysing your existing client base will give you an honest insight into your typical profile client type. This is a great place to start.

The research done by Business Health indicates that financial advisory businesses that segment their client bases are 47% more profitable than those that do not. It, however, does not stop with simply segmenting the client base. One needs to go further by effectively implementing a differentiated service strategy. Doing so increases the impact on profitability to 60%. This acknowledges that clients are paying different fee levels and deserve service levels appropriately aligned to the fees paid to the practice.

A critical part of this is to assess the cost of these services provided per client segment, thus ensuring alignment in how that allows the profitable operation of the business. It is all too easy to provide clients with services that cost more than the revenue they generate.

One of the biggest challenges faced by financial advisers is time management. This principle provides the seeds for the solution by ensuring the focus is in the right places and on the right things, thereby maximising return on time and effort. It is not an easy concept to implement, especially if we have good relationships with some of our clients who do not necessarily pay us much. However, it is an essential business imperative to have clearly defined boundaries and alignment between services provided and revenue generated.

Read Part 2 of this discussion in the June edition of Business Brief.

* Reference: Business Health (Pty) Ltd: Advice Practice Profit Drivers: Stats & Data for Australian Practices, Jan 2022

By Grant Newland-Nell: National Practice Development Manager

PPS is a licensed insurer conducting life insurance business, a licensed controlling company and an authorised FSP.

Disclaimer: Kindly note that this does not constitute financial advice; the information provided is purely informational. In terms of the Financial Advisory and Intermediary Services Act an FSP should not provide advice to investors without an appropriate risk analysis and thorough examination of a client’s particular financial situation. The information, opinions, and communication from the PPS Group or any of its subsidiaries, whether written, oral, or implied are expressed in good faith and not intended as investment advice, neither do they constitute an offer or solicitation in any manner.