Overview of Ensemble Business Structure

By Jerry Butler

A.  FIRST STEPS

Before getting to the nitty gritty the following topics should be discussed with possible partners if they have not been discussed yet.

1. Discussion of strategy – why combining?
2. Discussion of personal goals
3. Discussion of data – financials, processes, etc.
4. Business planning – what will a business combination look like? How will it conduct business? What business model?

B.  DIFFERENT BUSINESS STRUCTURES

There are three main business structures:

1.) Solo – exactly what it states. One advisor.

2.) Silo – this is a Partnership (formal or informal) with some expenses shared but basically the Revenue and Expenses flowing through to each Advisor’s bottom line.

3.) Ensemble – this is a formal Equity Partnership. It provides for both a Partnership’s and a Shareholder’s Agreements.

C. KEYS FOR PARTNERSHIPS

Leverage – the combined business can use economies of scale and synergy to create a more efficient organization. Eg. Instead of two administration assistants maybe one administration and one a marketing assistant.

Sharing – strategy, clients, profits, staff, decision making and most importantly compensation.

If these two things can not be clearly attained then do not proceed.

D. WHAT WE KNOW ABOUT ENSEMBLES

Fastest growing business structure in the US.

1. 1. Growth in Revenue much higher than other structures.
   2. Built in effective Continuity Plan, Succession Plan and Exit Strategy.
   3. Economies of Scale and Synergistic opportunities. Sharing resources. Different markets. Different specialities.
   4. Efficiency and effectiveness should increase as more time spent in front of clients and prospects.

E. BUILDING AN ENSEMBLE STRUCTURE

1. 1. 1. Define roles and responsibilities of each Owner.
      2. BUSINESS MODEL – woefully overlooked by most financial advisors this is a key to get everyone on the same page and increase the value of your business.
      3. Clearly defined service processes for each task – i.e. everyone does administration, service, sales, technology, etc the same way.
      4. Create and manage job descriptions.
      5. System of accountability – measurable and reviewable.
      6. Develop departments and responsibilities:NOperations; Marketing/Business Development/Relationship Management; Insurance; Investment; Financial Planning; Tax (?); Estate Planning; etc.
      7. Non discretionary expenses vs discretionary expenses.
      8. Inventory of what matters – eg. What, besides the obvious, do you want to track? Client contacts; appointments, # of sales, new money, clients, revenue per household, etc. (measurable and reviewable)

F. FIRST THINGS FIRST

The order of issues when determining if this will work – as everyone has to be on the same page – is to deal with the following items in the following order:

1. 1. 1. Compensation
      2. Structure – Silo, Profit Centers, True Ensemble
      3. Equity

i.)         Compensation

Compensation expectations is a way to determine if this particular arrangement is going to work. If there are unrealistic expectations – you’ve got a problem.

Partner outline of a typical Ensemble:

Salary / Draw / Bonuses – 40% of Revenue.

Administration / Overhead – 42% of Revenue.

Operating Profit – 18%.

Salary / draw of owners becomes a fixed overhead expense so like paying the rent and employees should come from recurring revenue and/or line of credit.

Bonuses – can be structured to either reward those individuals who have brought in new business. Eg. 50% of new commissions / clients / AUM; etc. Profit Centers can be defined and bonuses paid on that revenue.

Operating Profit – can be paid out as a bonus or as a dividend – or left in company.

ii.)        Structure

Jumping into an Ensemble especially one where the advisors are not bringing similar size businesses and business models to the table can be a littler daunting. Everyone comes to the table knowing how much money they made last year and they do not want to take a financial haircut.

A strong consideration should be a better business, better growth, more flexibility and more net worth in the long term.

A natural progression could be to build the base of a traditional Ensemble but operate as a Silo structure.

iii.)       Equity

Determining the initial percentage split of equity is a complicated process generally speaking. It is difficult to be based on sales, profits, recurring revenue, client demographics, valuation, etc. The reason is that there are many factors to consider when considering a partner besides their business. That can be certain skill sets that will be effectively used in the partnership to generate growth.

In fact – all of the above should be considered and dealt with up front.

G. REASONS BUSINESS PARTNERSHIPS FAIL

1. 1. Lack of Planning.
   2. Feelings of inequity.
   3. Compromise instead of consensus.

H. BUSINESS PLAN

i.)         The Team Responsibilities and Roles

ii.)        The Business Model

1. 1. • Vision, Mission and Values
      • How model works
      • Value Proposition **(very important)
      • Target Markets
      • Marketing Plan and Processes
      • Key resources and activities

iii.)       Financial Analysis

1. 1. • Breakeven analysis
      • Sales projections
      • Capital spending
      • Operating costs
      • Funding requirements

iv.)       SWOT

1. 1. • Strengths
      • Weaknesses
      • Opportunities
      • Threats

v.)        Implementation Roadmap

• • Projects
  • Milestones
  • Roadmap

vi.)       Risk Analysis

• • Limiting factors and obstacles
  • Critical success factors
  • Specific risks and countermeasures