First-Time Buyer Series: Your Service Model

First Published 10/24/17

In our October 5th article, “What Are Your Criteria, Part 1,” we talked about your Service Model as it pertains to client size and average revenue. Today I want to drill down on this a little and also bring in the subject of your internal metrics.

Remember, from earlier articles that as a buyer, there are three questions that should top all others when considering an acquisition.

·        How much can I afford? (Or how much can I borrow?)

·        When will I have positive cash flow on the acquisition? (i.e., when will it be profitable?)

·        What is the likelihood that the accounts will transition?

Also from earlier articles you may remember that the Sellers’ concerns revolve around:

·        Will I get a fair price for my business?

·        Will the Buyer be able to pay me, especially if the sale is on installments, over a period of years? (This is particularly true if the sale is an internal sale on a Succession Plan.)

·        Will my clients be treated in a way that would make me comfortable if I see them at the golf course in the future?

The answers to virtually all of these questions can be addressed by your internal structure and your Service Model. Every book or article that you pick up on how to sell your practice, (or any enterprise), indicates that the first order of business is to get your firm on a strong footing. In other words, a seller makes his or her business attractive and more valuable, by making it profitable, with clear metrics to determine how much revenue will be produced, year after year. I would submit that this is just as important for the Buyer.

We all know that there are a lot more buyers than sellers in the market today. Would you rather sell to an advisor who can predict his or her income based on the historical metrics of her firm pertaining to cash flow and average client revenue? How about an advisor who can demonstrate how he or she will be profitable in the future based on defined metrics? As a seller, would that make you feel more comfortable? How about as a buyer; would that not give you more confidence in your modeling of acquisitions at different levels?

Most of us began our careers as advisors focused on bringing on as many new clients and revenue as possible. We then proceeded down one of two roads. Some advisors experienced controlled growth, adding the right kind of clients, and staff to support them, with defined roles according to our needs and the needs of our clients. However, some of us simply became “less small.” These advisors added new staff when the paperwork became too cumbersome, with little or no planning, leading to a “pass the buck” mentality among staff members. These advisors keep filling the funnel with almost any client that will bring in revenue. (Due to this fact, later in their careers, many advisors lament the fact that they have a number of clients that they would rather divest themselves of.) This approach works out until something, anything, happens to slow down the progress of bringing in new business. It becomes more difficult to stay ahead of the expenses. Maybe a product or service they were selling became more difficult to sell. Maybe a prolonged illness. I cannot tell you how many advisors I speak to in a year that tell me that their income went down dramatically because they were ill for 3-4 months and they did not have a contingency plan.

A couple of years ago, I conducted a 2-day class for a group of fee-only RIAs. Each of the 30 advisors produced in excess of $750k in revenue in the previous 12 months. At least one-half of them produced more than $1.5 million. I asked a simple question at the beginning of the session. “How many of you can tell me what your level of profitability was last quarter?” Most advisors in the room looked at me like a deer in the headlights. They knew their revenue level, but not their profit level. This was particularly true when they applied the value of their time. Only one of this group of relatively high producers could tell me. They were not watching the metrics; or at least the right metrics.

The difference between a practice and a business is often nothing more than determining the important metrics of your firm and paying close attention to them. Knowledge of these critical measurements will tell you how you are doing:

·        How you are spending your time.

·        How your staff spends its time.

·        When it is time to hire another staff member.

·        By setting Standards of Performance, metrics will tell you when to hold someone accountable and perhaps when it is time to cut someone loose.

·        The type of client that is accretive to your firm, and those that are wasting your time. (Sans the metrics, you often fool yourself.)

·        How to plan expenses and how to determine which expenses give you the biggest bang for the buck. Example: How many of your clients actually read that newsletter you send out each month? Is the expense in time and money worth the return you get? Perhaps, or perhaps not.

·        Am I ready to create a Succession Plan? Here is a hint, Succession Plans can and should be growth plans.

·        Am I ready to buy? What size is the book of relationships I can handle profitably?

The point here is that if your house is not in good order, and on solid ground, introducing a couple of hundred new clients will not be accretive; it will be distracting. If your firm is solid, you look more attractive to sellers, and also lenders. When you look at acquisition possibilities, you will have a much better idea what you want, what you can afford, and what you will be able to integrate into your firm. You are growing, not just getting “less small.” When you decide to acquire, you move from running a practice to an enterprise. Before you take this step, it is highly recommended that you stary running a business.

Casey M Corrie