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John Bowen

Recapturing the American Dream

Ten key strategies for maximizing the value of your practice.

May 5, 2008
by John Bowen, Jr.

Many a recruiter has dangled the promise of unlimited income potential to new entrants into the financial services industry. You've heard it before — you decide how much money you want to make and how soon you'll make it. With just a bit of hard work the theory goes you can achieve the good old American dream. As it turns out, many CPAs have realized only one part of that dream — the hard work part.

Simply adding additional clients to your book of business won't enable you to achieve success. The real change will come from creating value inside your business. CPAs can do this by making their practices worth buying. Even if you have no desire to sell your firm, you want to build it up as if you are going to sell it. This business valuation strategy maximizes your firm's value while improving your quality of life.

The most effective way to do this is to build a template for systems that deliberately create value. At my firm, we specialize in helping advisors construct this kind of template to realize the all-important value that remains untapped in their businesses.

Building Equity Value: 10 Key Strategies

One of our consultants, Mark Tibergien with Seattle, Wash.-based Management Advisory Services of Moss Adams LLP, worked with us to develop 10 key value-building strategies that you'll want to implement.

  1. Plan ahead. Regardless of whether or not you are going to sell your practice, you must understand how your firm will be valued and design it accordingly. You can create huge value for your investors, your employees and yourself by developing the systems early that foster the creation of equity.
  2. Maintain good financial records. As we evaluate acquisition candidates for our firm, we find that nothing kills a purchase faster than a lack of good financial records. We're always surprised when CPAs and financial advisors can't even produce monthly reports of what they've budgeted and what they've actually spent. Any potential buyer will gauge the credibility of your financial statements by the firm that prepared them.
  3. Be profitable. Never forget you're running a business for profit. It's fine to do pro bono work, but you must understand when you are doing pro bono. Make sure to do most of your work at a competitive rate. Think long-term profits versus short-term transactions, and focus on free cash-flow as your primary determinant of value.
  4. Make yourself dispensable. Build a client base that is transferable. There's nothing more important in both the creation of equity and improvement in your quality of life. If you build a system that revolves around you, it's impossible to transfer the business to anyone else.
  5. Monitor key ratios. Focus on the three ratios: assets under management, revenue and free cash flow. Other important indicators to review include the number of new and closed accounts, additions and withdrawals, average fees, errors and cash position. Graph these key indicators over time so that you can see any trends developing that require your action.
  6. Apply business management techniques. The most valuable assets you have are your employees. Most financial advisors are so busy trying to build their businesses that they all but ignore their staff. Help your employees help you by keeping them informed of what you are trying to achieve and by setting goals for them. Make sure these goals are specific, measurable, achievable, results-oriented and time-bound.
  7. Maintain service, responsiveness and consistency. This business is all about strong client relationships. Hold client meetings on a regular basis, preferably quarterly. Failing to initiate client contact is the kiss of death in the asset management business. If you do not provide added value, there is no reason for the client to continue to pay you. If there's no reason for the client to continue to pay you, there's no reason for a buyer to pay much of a premium for your business.
  8. Identify the right buyer. There are three types of buyers. The first (and worst) is a balance sheet buyer, or someone who will pay for your business based on your balance sheet alone. For example, a financial advisory firm with $100 million in assets will often have less than $100,000 of book value or tangible assets. The only time you should consider a balance-sheet sale is if you are in financial distress.

    The second type is a financial buyer. This buyer is attracted to your business for the income stream it can provide, so your valuation is simply a present value calculation of the future income stream, discounted for the business risk inherent with any small business.

    The last type is a strategic buyer — a buyer interested in dramatically leveraging their profitability by including your business. Such a buyer needs your business and is willing to pay a premium for it. Since each type of buyer has his or her own agenda, you need to understand this motivation and make sure it's closely aligned with your own.

  9. Facilitate the transfer. Don't kid yourself that you can sell your business and be out in 90 days. Figure that, at a minimum, you will need to stick around for two years. More often, you'll be locked in for four years. Make sure that you plan a timetable to accomplish your goals. If you're thinking of retiring in the next five years, for example, you have only one year to get your business in shape to sell.
  10. Get help. Creating value in your business and then selling it represent significant and important decisions. If you choose to pursue the American dream, get professional help. Align yourself with a CPA who understands business and valuations and, even more importantly, is familiar with mergers and acquisitions.

Focus on Maximum Value

Whether or not you are ever going to sell your firm, focus on creating maximum value as if you are going to sell it. By following these rules of enhancement, you can design your business to maximize value and achieve everything you've ever dreamed about for you and your family. Most importantly, all of this can be accomplished by serving your clients well.

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John J. Bowen, Jr. is the Founder and CEO of CEG Worldwide, LLC, a leading research, publishing and consulting firm serving independent financial advisors, CPAs, insurance representatives and registered investment advisors. Download the latest research from CEG Worldwide or learn more about our coaching programs for financial advisors.