Many financial services businesses focus on revenue strength while downplaying–or ignoring–enterprise strength. However, revenue strength and enterprise strength are both critical to the growth and sustainability of a business. When revenue is the sole driver of your value, you’re leaving money on the table and jeopardizing the long-term success of the business.
Since revenue and enterprise strength influence the value of your business in different ways, it's crucial to understand these differences and why balancing the two is so important. While clients, fees, and assets under management (AUM) pay the bills, the absence of a solid business infrastructure will put a company's longevity at risk. Whether you’re determined to create explosive business growth or have a sale–external or internal–on the horizon, knowing how to position your company now can result in a higher return on your efforts and investment for the years to come.
Revenue vs. Enterprise Strength
Revenue strength represents the source, quantity, and quality of your cash flow. This includes your active income generated based on advisory fees, commissions, and other financial planning services. Revenue strength accounts for your team’s compensation and other business expenses. Revenue strength represents the top-line accounting of the business.
It's the value of your book.
Enterprise strength pertains to relationships with your clients and your team, as well as the infrastructure of the business that supports those relationships. This includes team size, service proficiencies, compensation structure, technology, and operational procedures that affect the scalability and sustainability of your business.
Enterprise value lies in how well the business supports the production of top-line revenue and how it flows through the entity. It streamlines the production of revenue and creates bottom-line profitability for the business which supports its investability and provides the means for it to continue growing.
It's the value of your business.
Revenue strength and cash flow provide the fuel to enhance enterprise strength and create profit. In turn, enterprise strength protects revenue strength and enables it to be more efficiently produced. The two facets are equally important to the prosperity and longevity of the business.
Balancing Strengths for Better Business Value
When the time comes to sell your company, your business valuation isn't determined solely by cash flow, but rather by the combination of its revenue strength and enterprise strength. If both are strong, the result is a higher assessment of business value and a higher asking price.
Ultimately, third-party buyers tend to weight the value of the book of business higher in acquisition. However, as more savvy buyers are leveraging their acquisitions with a goal of gaining talented team members and existing operational efficiencies, they are unlikely to ignore enterprise strength. The transferability of a business’s enterprise strength increases the retention of institutional knowledge and improved client transition rates.
Internal transitions, where the sale is made to a talented, next-generation team member, have the benefit of a shared understanding of the business's enterprise strength. While the new owner is not likely to invest in weak cash flow, they will be more concerned with of the endurability and long-term trajectory of the firm.
In any transition of ownership–whether internal or external, all at once or gradually over time–the balance of revenue strength and enterprise strength is critical. The level of impact that each one has on business value is determined by the goals and situation of the transaction at hand.
How Your Strengths Work Together
Monitoring and building up both revenue and enterprise strength are critical in every situation, whether you’re in “grow mode” or looking ahead to plan for your eventual exit. Understanding the current level of both strengths within your business can help you determine where to focus efforts that will result in the best returns on profit and value.
Nurturing these strengths in tandem can create a synergistic, upward cycle of improvement. For example, if your business is facing capacity challenges, you might hire additional team members and enhance the technology you're using to operate the enterprise. This would allow the business to service a greater number of clients more efficiently and to increase revenue.
Alternatively, a cash flow challenge might be solved by improving the structure of the organization itself and centralizing revenue and expenses within the entity rather than having siloed advisors. This reorganization would create more predictable expenses, increase tax benefits, and improve overall profitability.
Knowing your strengths and how they support each other can help focus your business enhancement efforts. Your growth and exit goals will affect the weight of these strengths in the context of business value.
Using Benchmarks to Strengthen Your Business
In-depth valuation and benchmarking assessments can help you evaluate your business's revenue and enterprise strengths by comparing key indicators to other industry leaders or companies of similar size. You can then use these insights to identify opportunities that lead to strength gains, and take action to prioritize your investments of effort and money into targeted areas of your business.
Outline your current organizational structure–pinpointing strengths, weaknesses, and challenges. Establish metrics based on top-performing firms and industry peers so you can measure your progress. Monitor your ongoing performance. Adjust efforts as necessary. Repeat.
It’s important to gain a clear view of each type of strength and how they work together within your business to cultivate growth, sustainability, and longevity.
Four over two decades, FP Transitions has dedicated itself to elevating businesses like yours. Our integrated team of experts provides end-to-end solutions that all start with comprehensive valuation and benchmarking reports to assess appropriate value, identify key performance indicators, and determine the most impactful areas of improvement. These observations, paired with expert guidance, empower you to turn insight to action by highlighting specific areas of focus and next steps for enhancement to align strategic plans with overall business objectives.