TRANSITION TALK

For our clients, the courses of action may differ, but growth is the number one priority. The goal could be to grow and then sell it to a third party for maximum value. Alternatively, the aim could be to create a sustainable enterprise capable of supporting a gradual transfer of ownership, leadership, and responsibility to an internal successor. 

Many advisors arrive on our doorstep using terms like “silo” and “ensemble” to describe to us what they believe they have built. However, these terms merely describe the organizational structure, which is just one facet of the strength of an independent advisory enterprise. These terms are not sufficient for diagnosing ALL structural elements needed to support a sustainable, profitable, valuable enterprise in this highly-regulated and sometimes complex industry. 

Over the years, we have found a simple–and intuitive–shift in terminology to be beneficial to maintain clear communication and alignment  with independent advisors. This targeted nomenclature enables us to offer tailored advice and to be as precise as possible in addressing different areas of growth and sustainability. This clarity also allows us to speak about an owner’s available exit paths and how to leave as many of those options open until they’re ready to take one. 

What have you built?

The industry-specific descriptions that follow are guides for determining where you are today, where you’d like to be five or ten years from now, and what will be required in the meantime: 

•    Job/Book
•    Practice
•    Enterprise

A job, often and appropriately called a book, exists as long as the advisor or financial professional does the work and attends to his or her clients. Whether W-2 or 1099; registered rep or investment advisor; planning or insurance professional, it makes no difference–they can all fit equally well under this category. Owning a book is all about production; in fact, it is about nothing else. Books are transferable and portable which means a book owner can walk out the door and take his or her group of clients with them. Most often, book builders work under someone else’s roof, own none of the infrastructure, and have no real obligations to the business other than to produce and be compensated for the products sold or the advice or planning delivered. There is no need or avenue for internal succession, and any continuity plan is tied to a sale to a third party; profitability is irrelevant at this level. A book, or a group of books, is what most people think of when using the term “silo.”

A practice isn’t just larger and more valuable than a book, it’s stronger. It often involves support staff and an infrastructure, including office assets, technology, and systems of operation. All of these are typically housed within an S-Corporation or an LLC. Practices typically have just one owner or shareholder, but are often accompanied by one or more other producers or advisors with whom they share time, expenses, and support–but not a centralized cashflow.

Books and practices are both one-generational models. Based on our two decades plus of data, we’ve seen that 25% of the industry only own practices, and 70% of the industry only own books. Meaning 95% of independent advisors are one-generational models. Without taking steps to strengthen their practices, these advisors are limited to pretty much two exit options: sell to a third party at career end or lose clients–and value–to attrition as they inevitably slow down. 

If a practice is to grow and evolve into a strong enterprise, it will need to further improve its organization, compensation, and profit structures. This process takes time, intention, and focused effort. That’s why it’s important that business owners take steps to improve scalability and sustainability as early as possible. 
These elements are essential to support sustainable growth and scalability that both necessitate and facilitate a multi-generational team, increased capacity, and improved systems.

An enterprise is the culmination of this work. It is a sustainable machine constantly moving to build upon itself, and–with the right team and ownership–becoming more profitable by the year. An enterprise must have certain foundational elements in place: an entity structure, a proper equity-centric organizational structure, and a scalable compensation system that gives it the ability to attract and retain talent while generating a sufficient profit margin (i.e., 30% or more). The revenue stream may be diversified, but usually about 75% or more is recurring. An enterprise operates with a balanced focus on top-line revenue and bottom-line profits which are used to perpetuate business investment and reward ownership. It gains it momentum and cash flow from revenue strength, and its durability and staying power from its enterprise strength. 

One of the hallmarks of an enterprise is a multi-owner, multi-generational ownership structure securing succession and sustainability. Continuity agreements aren’t just a safety measure; they are a means of internal growth and strength–anticipating the loss of one generation means planning for the success of the next generation. 

Again, our experience and observations show that only 5% of independent advisors own a true enterprise. 95% of the industry are single-owner books and practices; 95% of industry businesses are built to end along with the career of the advisor owner. Where does that leave their clients? Where does that leave the stability of the industry? There are many paths for book and practice owners to take that will help strengthen their enterprises and protect their clients if they start now.

These terms: “job,” “practice,” and “enterprise” aren’t static. They are not set on a perfect formula of AUM, gross revenue, and capacity. These definitions are based on structure, not size. They are based on the ability to perpetuate and support growth.The industry evolves, and with it the impact of different business facets. The creation and maintenance of an enterprise relies on an ownership team that understands what drives business value and what efforts will have the most impact on continued growth and profitability.