If you’ve spent much time around Portland, Oregon, you know tap houses, microbreweries, and brewpubs are about as prolific as coffee shops. The Pacific Northwest takes their food very seriously, and beer and wine are an integral part of that. In the early days, first-generation craft brewers (and their counterparts in the wine industry) were entrepreneurs or career changers who wanted to break free from the corporate world and be their own bosses. Businesses began in garages and strip malls—small spaces that provided just enough room to get the businesses off the ground. Small brewers, looking to increase scale and reduce their individual costs, collaborated to share expenses for equipment or to piggy-back on each other’s licenses. Founders have shown grit, resourcefulness, and thrift to further their businesses through the first stages. Now, the most successful operations are evolving and acquiring, and the next generation of professionals are entering the industry with specialized degrees and focus on their careers. Meanwhile, boutique and even once “cult” brands struggle to maintain their position amidst stronger competition and a consolidating industry.
Does this sound familiar? The issues of scale, expense management, and growth planning are not unique to financial services. Other professionals begin their businesses with similar limitations, which they must address and overcome in order to reach a baseline of success. Passion and perseverance are powerful fuel, but the challenge comes—for financial advisors as well as craft brewers—in creating a business that can support sustainable growth. Oftentimes, the skills necessary to make this transformation are not innate to the business owner and reluctance to seek help is precisely what hinders their growth or even survival. As entrepreneurs who are passionate about their field, getting outside guidance is necessary to overcome their limitations and see the business into the next stage.
This connection between craft beer and wealth management came up recently up while I was meeting with an advisor passing through Portland. He asked to meet at a tap house to try some local brews and talk about growth plans for his advisory business; above all, he wanted to know how he and his colleagues could hone their acquisition strategy.
I asked him to tell me about their business. He explained that they were a team of advisors, sharing an office space, pooling overhead expenses and piggybacking on each other’s technology licenses; they were fee-based and shared a similar philosophy toward business. They had a tangle of entities to cover various expenses and service lines, but were all essentially paid on an eat-what-you-kill (EWYK) model. They had no single, cohesive enterprise agreement. I considered his structure before I asked him to clarify what they wanted to grow—their individual books, or the larger enterprise? His answer, unsurprisingly, was “both!”
Several years ago, David Grau Sr., JD classified financial advising teams as either “life rafts” or “ships” based on their organization, and this advisor’s group was clearly a flotilla of life rafts. It is easy to think that a rising tide lifts all boats, but this structure has significant weaknesses that can and should be resolved. As I probed further, the advisor I met with admitted he and his colleagues had discussed creating a formal ensemble, but they hadn’t prioritized the move because they didn’t know where to start. What they could agree on was that they wanted to acquire.
Investing in growth as a collection of independent practitioners exchanges long-term durability for short-term gains. Multiple risks arise in taking half-measures. As each advisor continues to run their own business and their own brand, it’s easy to cut themselves free and take a portion of the collective business value with them. On the opposite end, there’s no contract for how succession will occur when the founders start to phase out. But a formal enterprise agreement provides protection and predictability for the advisors working together.
The benefits of creating a sustainable enterprise extend well beyond protecting your acquisition from departing colleagues. As you transform your practice into a business, your compensation structure should shift from an EWYK model to a reasonable, professional salary related to your role. Compensation is typically the largest expense on a company’s P&Ls, and by controlling this expense to a predictable figure, you can create profitability that can be used to support a variety of growth strategies. For example, a reliable profit line supports the enterprises acquisition strategy, both by providing the capital to directly invest in acquisitions or the cash flow to qualify for bank financing. Successors can buy in to the enterprise using profits to fund their purchase, and ease the path to a multi-generational model. Meanwhile, owners earn profits for running a successful business in proportion to their shares, preserving the upside they enjoyed as individuals in the EWYK model.
The work of forming a sustainable enterprise enhances your acquisition strategy in another way: it creates a stronger foundation to recruit and retain the next generation of advisors. Professional compensation and equity pathways are a strong draw for talented professionals looking to advance their careers. Whether recruited directly into your firm or onboarded as part of an acquisition, the enterprise model provides better options to invest their skills. My tap room companion confessed that he struggled with the right way to attract and reward qualified employees, but that this approach made sense to him. Between pints, we explored ways to find young talent who could strengthen his advisory team, and so our conversation expanded into a broad growth plan, supported by a well-designed enterprise.
It’s not uncommon for entrepreneurs to want to grow their businesses in as many ways as possible, but postponing complex changes in favor of what seems simpler is a mistake. For any industry, building a business beyond the founder’s passion and determination often requires outside guidance. Specialized expertise makes it easier to solve unfamiliar problems with innovative answers. If you’re considering acquiring any business asset with peers, it is important to define the enterprise to protect the investors in the event of either success or failure. When the assets are intangible and as easy to move as client relationships, it’s especially important to have sound agreements that create cohesion among the owners.