PRICE VS. VALUE

By Jerry Butler 

There can be a big difference between value and price. Value is normally calculated on the business’s income and net assets – it is both a quantitative and a qualitative theoretical calculation. On the other hand, price is what someone is willing to pay!! There are many factors that come into play with price. Purchasers can be emotional and irrational when determining the price they are willing to pay but that is what the seller puts in his pocket.

We have all heard the stories of two people standing on the porch of a house in a hot real estate market bidding up the price tens of thousands over the point of realism. Emotion, bragging rights and easy credit! So price and value don’t always line up.
Another factor in price can be the terms of the deal. In the U.S. 98% of sales involve a vendor take back. In addition, most deals in the U.S. have an earn out clause. The vendor is participating in the upside of the business over a specific time period.
Finally, who buys your business can be a factor in arriving at the price to be paid. An existing business may be looking for only assets i.e. only clients while another purchaser is looking for a turnkey operation i.e. name, office, etc. Different purchasers will have different reasons for bidding higher or lower than the theoretical or asking price.

MAXIMIZING YOUR BUSINESS’S VALUE

By Jerry Butler 

INCREASE THE INTRINSIC VALUE

INTRODUCTION

Intrinsic value is the value of a business on a standalone basis. This is a pure investment calculated to not change the basic structure of the business.

In all businesses there are many areas that can be improved to increase productivity and therefore profitability which will increase the intrinsic value without dramatic changes to the business. Some of those areas follow.

BUSINESS STRUCTURE

In Canada, we have a $800,000 capital gains exemption when selling the shares of a private corporation. Despite this potential windfall, most advisors have not incorporated. Even a relatively “small” sale of shares for $200,000 would result in a tax saving of $46,000 at the top marginal tax rate.

It is very important to have a clean Balance Sheet. That is, no personal assets and debt, no outstanding legal notices, report all capital leases, etc.

QUALITY OF YOUR BRAND

The term Brand means different things to different people. What it is – is the perception of what that brand means to others who know you/company. What it is not is something that is there some of the time or not there other times. Therefore, every individual and every entity has a brand – some perceptions may be good, some may be bad, most are probably non-existent. The key in the financial practice business is” what is the perception of those who know the brand?” i.e. the entity. The second and most important part of your brand is “is it transferrable”. If someone buys your business will the brand become theirs? When the brand has a positive value than the buyer should pay more.

A common occurrence in the financial advisor business is to give the business your name. In most cases, even if you have created a favourable brand, your brand is not transferable to a new buyer.

QUALITY OF SYSTEMS

This is a huge opportunity to increase the value of your business. It is so important to have a contact management system in place. This is important from a marketing perspective for clients and prospects, from a compliance perspective and a process in place to keep in regular contact with your clients.

In addition, a software system should be in place to prepare financial plans for clients and prospects. There should also be a system in place to periodically review those plans with clients with the appropriate adjustments made.

These productivity processes can only be in place with current software and current hardware plus employees that can drive these processes.

QUALITY OF CASH FLOW

This is the most obvious area buyers want to examine but most advisors spend very little time improving. Making sure trailer, annual and renewal fees are maximized can increase your income and increase the value of your business.

Knowing the average revenue per client and working to improve it. The average assets per household and the average age per client are very important when evaluating prospective continuation partners.

BUSINESS PLAN INCLUDING TARGET SALES/EXPENSES

Do you want credibility in your business management skills? Show a prospective buyer your annual business plan for the last 3 – 5 years and you’re actual numbers to budgeted numbers. This will show the reader you know how to run your business and hit your targets. It will also tell the reader you are well organized and professional. Plus it shows how productive your business is and details how to
duplicate your success.

FINANCIAL FEED BACK LOOP

Feedback loops are the most successful learning process known. Basically they follow the following process:

1. Identify and quantify the areas to improve.
2. Set achievable goals in those areas.
3. Measure the progress and compare actual to budget.
4. Go back to #1.

I recommend that once you have a comprehensive valuation that identifies the areas that can be improved (Maximizing Value Section) setting the goals and actually reviewing on a minimum of monthly basis will develop productive habits that will continue to increase the value of your business and achieve your goals..

HOW I MADE MY BUSINESS THE WAY I ENVISIONED

By Jerry Butler 

INTRODUCTION

I entered the industry in 1994. I left a position where I had above average earnings after completing an MBA. I was doing very well with this particular company but thought I could make a fortune in the investment business. I went to a bank owned firm, got tremendous training and made 1/3 of what I was making!! I spent 7 years there and though I built my income back up to where it was when I left I was probably considered a below average producer but more importantly I did not enjoy what I was doing.

I proceeded to spend an uneventful another seven years in the industry where I was making a living but certainly not kicking butt. I remembered thinking – “Great – I have worked my way up to average!!” Not exactly what I had in mind in my late 20s and 30s when I was attending post secondary classes for 15 years.

QUEENSTON CONSULTING – THE START

They say 90% of success is recognizing an opportunity and I got an opportunity where, once I dug into it, I “thought” I had something special. I was approached by an advisor team I knew to mine my contacts and see if I could find a seller. I did some research and discovered no one in Canada was specializing in selling advisor’s businesses. I got very excited and exited from a couple of businesses I was involved with and jumped into trying to find financial advice businesses to sell.

The one thing I had learned as a “financial advisor” is a great relevant education does not create a line of people dying to do business with you.

I went through the following process to “build that better mouse trap!!”

(i.)        SWOT – (strengths, weaknesses, threats and opportunities) of my skill set and this particular opportunity. As I am want to do – I started with Weaknesses. Terrible sales person. A bit arrogant i.e. know it all (I may not have lost this completely).  Strengths – education, analytical skills, not afraid of work. Opportunity – average age of advisors (old but getting older – more about this later) and no competition but I also recognized that the threat was a very low barrier to entry. All you need is a telephone.

(ii.)       I designed my Business Model to fit my strengths and the opportunity as I saw it. The key to me was to mass market to my target because I quickly recognized that I was looking for a needle in a very large haystack. My plan was two-fold – 1. build a very large data base and use email blasts to find that needle and go and speak to anyone anywhere in Canada. I gave presentations from coast to coast. The goal was to create “interest” from marketing to the data base so that people would want to speak to me. I quickly recognized that interest was created from having sellers and using content – my knowledge of what financial advice businesses were selling for.

(iii.)      Clearly defined target market. I now think this is the most important factor in a successful business (besides executing). My target market was financial advisors and it was easy to find names and numbers on the internet as they are trying to find clients so usually make their contact info available. We have since taken a few other steps including mining Linkedin, etc. When I was a financial advisor my target market was people with savings wanting advice. There is no clear way to know where they are – not location and not even profession.

(iv.)      Strategic / Game Plan. This is so important for me for a couple reasons. I knew I needed to have both financial objectives but also the activities I needed to do. I needed a measuring stick to recognize what has to be done to hit the financial objectives. So I started an “Inventory of What Matters”. These are the variables I thought I needed to achieve my objectives. What I did not know for a few years is that it also allowed me to spot trends. For example – assume your experience tells you that you need to speak with 10 people to find 1 prospect and you need 10 prospects to make one sale. So you keep up what you a

TODAY’S ELITE ADVISORS

By Jerry Butler 

Introduction

This paper is partly based on the book “Best Practices for Elite Advisors”  (Oechsli Institute) and Queenston’s experience buying, selling and valuing financial planning businesses since 2012.

Current trends in the Industry clearly point to:

• The phasing out of the one-dimensional investment advice model in favor of a more holistic planning approach.
• The client-advisor relationship expanding from purely business, to business and
• Affluent families, including spouses and children, becoming more involved in the advisory relationship.
• Technology improving advisor productivity, financial planning, and the overall client experience.

At a glance, none of this appears revolutionary. It seems like common sense. Yet when you take a closer look at the general population of financial advisors, it becomes apparent that common sense isn’t always common practice.

We’ve organized the overview of Elite Advisors into the following categories:

1. Wealth Management
2. Practice Management
3. Client Loyalty
4. Business Development

NOTE: An Elite Advisor business model will make your business worth twice as much as the traditional business model.

Wealth Management

It’s been over a decade since elite advisors became early adopters of comprehensive wealth management. This requires continuous learning — an ongoing expansion in both the depth and the breadth of their knowledge about, first, the affluent investor and, second, the complexities and nuances of true wealth management. The need to learn continuously has prompted elite advisors to surround themselves with knowledge workers (former sales assistants who’ve become CFPs, practice managers, relationship managers, etc.). They also develop working relationships with outside experts.

Services the Affluent Want

Regardless of whether a particular wealth-management solution is profitable, time -consuming or enjoyable, elite advisors deliver what affluent clients need and want. We’ve said it many times, but our research on today’s affluent is clear: They want a solutions provider to oversee multiple aspects of their family’s financial affairs, and the affluent woman of the household wants to be involved. “Solutions provider” is precisely the role that elite advisors play. Equally important is the fact that they are proactive in making certain they’re working with both spouses.

As we list the spectrum of wealth-management services, remember the following: Although these are areas in which affluent investors want advice and guidance, the process of delivering them is very fluid. We’re living in a globalized and digitized world, one where change has become the norm. With that caveat, think in terms of whether you have the expertise within your firm to deliver all of these services. If you don’t, that’s okay, but you’re going to need to coordinate with appropriate outside experts.

10 Key Wealth-Management Areas

The following are 10 key wealth-management areas pulled straight from our many years of research on the affluent. The majority of today’s affluent clients want these services. Your firm may be offering some or all of these, but as you read each one, make note of your current offering in each area and determine any necessary action steps.

1.Banking Services; 2. Insurance Planning; 3. Asset Management; 4. Cash Flow Management; 5. Education Planning; 6. Tax Planniing; 7. Retirement Planning; 8.Estate Planning; 9.Charitable Giving; and 10. Generational Planning.

Themed Review Meetings

Instead of having clients attend meeting after meeting with the same agenda (or no agenda), many elite advisors are holding three to four “themed” reviews throughout the year, with an agenda that specifies which area of the client’s financial life will be addressed at which meeting.

Creating themed reviews benefits financial advisors on two fronts:

■ Positioning as a Wealth Manager – Clients today are more aware of the value they’re receiving. When an advisor can help them in many areas, they’ll perceive him or her as a comprehensive wealth manager, not just an investment advisor, and will turn to the advisor for multiple services. Affluent prospects will also want to see a concrete example of a financial advisor’s comprehensive wealth-management services, providing tangible evidence of his/her ability to deliver.

■ Structure – The advisor is able to ensure that every affluent client is offered a full array

of ancillary services: scheduled meetings with outside experts, reviews of old insurance policies, meetings with the children, etc. This structure provides the professional platform upon which an advisor is able to demonstrate his/her value.

We recognize that every financial advisor has different areas of expertise and different processes for working with clients. That’s fine. The secret is fitting service elements into a clear process that both clients and prospects can understand.

In creating a series of themed reviews, the first step is to analyze everything currently being done for top clients. Next, determine what else could be done for them. The third step is to decide when each element is analyzed or reviewed with the client. All of this culminates in a written outline that can be given to each affluent client and prospect.

Example: A series of three client reviews scheduled throughout one year

(Actual agendas would be more detailed, based on each financial advisor’s specific

wealth-management process.)

Review 1—Portfolio Review

• Asset Allocation
• Performance
• Fee Discussion

Review 2—Financial Planning

• Financial Plan Update

Net Worth Statement Update

• Changes to Your Financial Life (inheritance, marriage, etc.)
• Family Discussion (kids and/or parents)

Review 3—Risk Audit

• What-if Scenarios
• Wills
• Estate Planning
• Insurance (life, health, disability, long-term care, etc.)
• Outside Experts – Current professionals used and ratings for each professional (1–10 scale)

Done properly, themed reviews should be command performances — opportunities for the advisor to display his or her broad expertise and/or wealth of knowledge on a variety of subjects. This knowledge can be naturally woven into an advisor’s marketing/branding and professional services.

Wealth Management Key Takeaways:

• Wealth-management solutions are always changing, so you need to always stay ahead of the changes.
• Being capable of providing a service is very different from actually providing the service. What is your process for delivering each service?
• Themed reviews are an excellent way to add structure to your process. Three reviews per year, with three distinctly different agendas, help you provide a clear, comprehensive approach.
• Print a copy of your client review agenda for use with prospects. It’s tangible evidence of what you do.
• Engaging the spouses of your clients can be hard work, depending on your proficiency with this in the past, but it’s well worth the effort.
• Calling non-participating spouses and asking them, “Is there anything on your mind financially?” is a great way to begin the relationship-building process.

1. Practice Management

Elite advisors run their practices like a business. For them, practice management is really all about managing a business in the most efficient and client-centric manner possible. Their mantra has become “delivering Fairmont service with FedEx efficiency.”

Although every elite advisor has a unique business, the following are practices common to the majority:

■                      Clients segmented into two service models: Platinum & Gold (>80%)

■                      Clear roles and areas of responsibilities (>80%)

■                      Effective weekly team meetings (>80%)

■                      Clear communication within the team (>80%)

■                      Established policies and procedures (>80%)

■                      Fewer but more affluent households (>70% <200hhs)

■                      75% or more of their revenue is recurring (> 80%  )

Practice management is a work in progress, even for elite advisors. Every time a financial advisor introduces a new service, adds to staff or makes any type of change, it’s important to revisit all policies and procedures, and make sure everything is linked and everyone is on the same page. Are roles and responsibilities still clear? Should we eliminate a certain procedure? These are some of the many questions that must be asked.

Working with Support Personnel

Support personnel have always presented a conundrum for financial advisors. Changing the titles from sales assistant to more professional varietals such as client associate, client service associate, etc., rings hollow without corresponding structural changes.

Rarely, if ever, can affluent expectations be met without first- class support personnel committed to delivering Fairmont service with FedEx efficiency. We consider this level of support indispensable for advisors who are serious about achieving long-term success.

The relationship between the elite advisor and support personnel is a partnership. They work well together, have clarity regarding roles and responsibilities, lines of communication are open, and are on the same page when it comes to relationship management and relationship marketing. Elite advisors have mastered the art of delegation and empowerment, and their support personnel are consistently up to the challenge.

Practice Management Key Takeaway

• Discuss assistant’s performance regarding the area’s of importance. There should be an overall discussion about team performance. What could be     done better? Have assistants self evaluate on each criteria. Compare results of advisor score and assistant’s score.

• Weekly team meetings. Elite advisors conduct meetings with all personnel weekly. The meetings are same day / same time every week with an Agenda.

• Celebrate successes. Whenever there are successes – spread the word – celebrate. Look for opportunities to give positive reinforcement

• Client Loyalty Elite advisors rarely lose clients. There are two major trends that have occurred:

1. Gender Shift – Women are now more involved in their family’s financial affairs. Elite advisors make it a priority to have a strong relationship with both spouses of a household.

2. Relationship Shift – Skepticism and distrust is so prevalent that today’s clients want to know their financial advisor on a personal level. This is a trust issue.

Both of these trends are having an impact on loyalty. When they are addressed, loyalty is strengthened. When ignored, loyalty weakens.

Client Profiling

The objective is to interact with clients on both a professional and a personal level. The professional side includes in-person reviews, effective practice management, problem solving, personal communication, proactive financial advice, etc.

Personalizing the relationship is a relatively new concept. It needs to involve all staff. Those items that are important to the client should be communicated to all staff. E.g. hobbies, events, family, etc.

This information should be gathered through communication not filling out surveys or questionnaires. “Catching up” meetings can reveal many informal but important information including referrals.

Client events are an important component of the relationship marketing that works so well with clients and prospects. They provide an informal setting for clients to meet other like minded clients and become more comfortable with advisor / spouse and staff.

Social networking is also and important component of relationship marketing. Facebook, Linkedin, Instagram, etc..

Any thoughtful gesture is an excellent way to express “I listen”. Personal touches surprise and delights clients.

Client Loyalty Key Takeaways

• Investment performance is important but getting to know clients personally is the key ingredient in building loyalty.
• Elite advisors put structure around relationship management. There is a plan for client lunches, thoughtful gestures and social gatherings.
• Intimate client events are a great way to strengthen loyalty.
• Have contact points with both spouses – business and social contact points.

1. Business Development

Clients do not trust advertising or what people they don’t know tell them BUT they do trust the opinion of people they know. This fact has resulted in the most successful business development discipline – Relationship Management and Relationship Marketing.

Affluent clients discover their financial advisor through some form of personal introduction. In today’s world of distrust, a personal introduction is a statement of trust. The key is to be where you will get that personal introduction.

Elite Advisor Marketing Activities

Successful advisors execute the various relationship marketing methods and they do so consistently.  Strategic alliances, social prospecting, indirectly generated referrals, personal introductions and intimate events result in new clients. You want large accounts? Indirectly generated referrals are by far the best method of catching the whales!!

Successful business development is a result of proactive and consistent behaviour. Have a plan to address the successful activities in the previous paragraph and work the plan.

Personal Introductions

NOTE: Referrals and personal introductions are not the same thing!!

A general request for referrals is usually met with a blank stare – asking a good client to bring their friend Joe Smith to the next event the advisor is hosting is more likely to result in a personal introduction. The statistics show that clients are 77% likely to introduce this way but are 73% uncomfortable when generically asked for a referral.

The vast majority of venues where these personal introductions take place is in social settings either hosted by the advisor or by the client. Elite advisors do their homework and know what circles their clients travel in and take advantage of social settings to get introduced.

Business Development Key Takeaway

• Establish annual new client / AUM goals.
• Identify affluent prospects connected to affluent clients with whom you would like an introduction.
• Incorporate a system for asking for introductions in a social setting.
• Identify professionals who work with affluent clients.
• Create a relationship management strategy for these professionals including social and business relationships.
• Make your expectations known and accountable.
• Weekly meetings should have business development agenda items.

Conclusion

Clients expect more than knowledgeable and competent; they have to know their advisor has their best interest at heart.

Those of you who know me know that I have touted Relationship Management as the most valuable business model. Do what you do best and contract out or hire people to do the other important variables. Managing the relationship is a full time job when done correctly.

A quick review:

• Develop a relationship with both spouses.
• Expand the relationship to include a social component.
• Clients have to feel they know their advisor on a personal level.
• Clients want a solutions provider to oversee multiple aspects of their family’s affairs.
• Superior service administration is critical – attention to detail, close communication, accountability and training.
• The best defense for losing a client is proactive offense.
• Have a Relationship Management and Relationship Marketing Plan.
• The above can make your business worth 4 to 5x

DEMOGRAPHICS & STATISTICS

By Jerry Butler 

INTRODUCTION

The financial product business is one of the most unique businesses in the market place today. There are very few businesses available that will pay the owner recurring income just for being the owner!! In addition, those clients can be sold additional products.

A consortium of technology companies recently purchased bankrupt company Nortel Networks for
$4.5 BILLION. Why would anyone spend billions for Nortel? Because Nortel owns 6000 patents that are or could be leased out. Recurring income is generated only because you are the owner – this is a very desirable business model. In addition, they can develop those patents into their own product line up.

Financial advisors are now starting to treat their business as a business and are creating wealth for themselves and their families. The next step is to do some formal Succession Planning.

DEMOGRAPHICS

The average age of an advisor in United States is 52. It is probably similar in Canada. The baby boomers are starting to get into their 60s and thinking about selling/retiring. Oftentimes, advisors plan on slowing down or semi-retiring. All of things indicate Succession Planning should be considered in order to
maximize the value of their business.

STATISTICS

According to the Canadian Federation of Independent Businesses in a large and comprehensive survey of Small and Medium Enterprises:

• 34% of business owners plan on selling in less than or equal to 5 years.
• 32% of business owners plan on selling in 6 to 10 years.
• 52% of businesses have no Succession Plan.
• 38% have a “plan” but nothing in writing.
• 10% have a formal professional Succession Plan.

In the U.S. for every financial advisor business listed for sale there is an average of 50 offers (F P Transitions). I think this is even higher in Canada as our market is even more undeveloped. The average age of a seller is 58 and the average age of the buyer is 48. FP Transitions handles 500 transactions a year so they have statistically significant numbers. 98% of all sales in the U.S. involve a
vendor take back. Most deals also involve an earn-out clause. Queenston’s experience is similar. Deals in Toronto have resulted in 100’s of interested buyers.

The bottom line is right now there is a huge overhang on the buyer’s side. We are currently in a seller’s market yet most advisors do not go to the Open Market when selling. It is safe to say this is costing sellers tens and hundreds of thousands of dollars! This overhang will not last as there are many more
advisors in their 50s and 60s than there are in their 30s and 40s.

The time for Succession Planning is NOW.

DEFINITIONS

By Jerry Butler & Martin Luc Derome

There are a few pieces of the Queenston Proprietary Process that need to be defined:

(a.)  Balance Sheet Adjustments: This industry’s assets are made up of 90%+ of intangibles most of which is embedded in the value but not on the Balance Sheet. All valuations and transitions are done, even on a Share Sale, by removing cash, accounts receivable, real estate, debt and any payables. This will leave the hard assets of furniture and equipment which is a small fraction of the value and deemed not material.

(b.) Comparable Company Multiples Approach:  This is less of a nominal valuation and more of a selling price estimate. A comparable company multiple is the process of comparing the company being valued with recent transactions of similar companies. Queenston has the most experience and the greatest access to transition values in the country. We use a range of values based on recurring revenues and a percentage of assets to arrive at an average between the two.

(c.) Discounted Cash Flow Method of Valuation: Present value of future cash flow from operations. Queenston uses EBITDA going forward and applies a WACC rate to arrive at a valuation.

(d.)   EBITDA: Common valuation acronym of Earnings Before Income Taxes Depreciation and Amortization.

(e.) En Bloc – refers to the value of 100% of the company.

(f.)  Income Statement Adjustments: Adjustments are made to normalize the Financial Statements. This is done in an attempt to arrive at the Owner’s Discretionary Earnings. This allows Queenston to compare different businesses and business models in the same industry (financial product distribution industry) to each other.

(g.) Industry Averages: The averages are taken from a Study that Queenston purchases every year of a comprehensive survey of the industry in the US. Though the operations in Canada are different they are not so different that the numbers are not relevant. We use the industry averages to compare to the client company to see if there are any glaring differences. This comparison helps us when doing the Queenston Appraisal Analysis Table.

(h.) Manager Market Income: This is an estimate of what it would cost if the advisor did not own the book and did not have to pay the expenses. Similar to an advisor at a bank owned IIROC firm. We use 25 – 35% of revenue.

(i.)  Micro Caps: Most businesses especially with one owner operator in the financial product distribution industry would be classified as being a micro cap size. Mid market size is generally sales of $5,000,000+. This creates several material differences in valuation theory from the standard methods used.

(j.)   Owner’s Discretionary Earnings: This method has become very popular in the US especially when valuing small businesses and professional services. It is relevant as it is a cash flow model that can be applied when considering acquisition debt and an income to the buyer. It is defined as the earnings before:

k.)  Income Taxes: The term “income tax” refers to a type of tax government impose on income businesses and individuals within their jurisdiction generate. By law, taxpayers must file an income tax return annually to determine their tax obligations.

l.) Non-operating income and expenses: Non-operating income and expenses are most likely to be one-time events, such as loss due to asset impairment.

m.) Non-recurring income and expenses: A nonrecurring expense is a cost the company incurs irregularly.

n.) Depreciation and amortization: Amortization and depreciation are non-cash expenses on a company’s income statement. Depreciation represents the cost of capital assets on the balance sheet being used over time, and amortization is the similar cost of using intangible assets like goodwill over time.

o.)  Interest expense or income: Interest expense is the cost of borrowing money, while interest income is the money you earn from investing. Interest expense is typically tax-deductible, while interest income is taxable.

p.) Owner’s total compensation for those services that could be provided by a sole owner/manager.:  Owner’s Total Compensation refers to the payments made to owners of businesses for providing services which could be provided by third parties. Owner’s compensation is one of the areas where adjustments in the comprehensive income statement are common because most often, owners’ compensations do not reflect prevailing rates on the market.

(q.) Professional Service Practices: These types of businesses are characterized by types of assets, dependence on the Professional, licenses, limited life of the practice and different value drivers than a “standard” business.

(r.)  Queenston’s Appraisal Analysis Table: This part of the process is designed to give an appropriate multiple to apply to the Owner’s Discretionary Earnings. This analysis is an integral part of Queenston’s proprietary process and draws on our experience from the valuations and transitions we have done. It is adapted from the West and Jones, “Handbook of Business Valuations” (John Wiley and Sons 1992) to be specifically applied to the financial product distribution industry.

(s.) Recurring Revenue: For the purpose of the valuation of a financial product distribution business this refers to trailers, renewals and fees.

(t.)  Repeatable Revenue: Certain financial products/strategies generate on-going revenue by the nature of that type of business. Examples include term life insurance; GICs; PAC plans or consistent large RRSP deposits.

(u.)   Special Interest Purchaser: Purchaser who expect to enjoy post-acquisition net economic value-added by combining the acquired business with their own. Consolidation of two businesses in the same industry can result in economies of scale, synergy and cross selling. 90%+ of transitions (not including inter-generational) involve two existing businesses. A Special Interest Purchaser will usually pay more than a new entrant.

(v.) Weighted Average Cost of Capital (WACC): When developing a discount rate to apply to an economic income flow available to invested capital (equity plus long term debt), the present value discount rate is a weighted average of the costs of debt and equity based on a relative proportion. Most transitions are done with 0 – 25% equity and 75 – 100% debt. To be conservative Queenston usually does the weighting 50:50 with an Equity cost of 20 – 30% depending on transition risk and a Debt cost of 5 – 10% depending on available credit. This would give a range of WACC of 12.5 – 20%. For our purpose we ignore income tax effects.

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

A Better Business Model – working with an ICPM

By Jerry Butler

Consider the following trends in our Industry:

• CRM2 and a movement to a fee based compensation model
• In fact a movement to 100% transparency of ALL client costs including those of the manufacturer – mutual funds, proprietary products, etc.
• Downward pressure of fees / commissions and increase in Dealer split and fees
• Smaller advisors are being hammered by Dealers
• Increasing AUM becoming imperative

Consider the evolving expectations of clients:

• Clients are expecting Holistic financial planning including estate and wealth transfer

1. Expect more advice from their advisor for less fees

• As clients age they are expecting their family to become more involved with the decision making process
• Business owner clients expect their advisors to be involved with the succession planning process of their business

Advisors? Keep up with changes or risk losing the value of your business:

• Increasing costs – declining revenue streams – more demand on time
• Selling all products to all people no longer a viable or valuable business model
• More technology needed to keep up
• Traditional sales / prospecting methods don’t work

Solutions:

• Specialize in one product and/or change business model to a Wealth Manager
• Work with specialists – Portfolio Managers, Insurance Specialists, Accountants and Lawyers etc (some even have Chartered Business Valuators work with clients for succession planning)
• This business model gives the advisor more time to develop relationships with clients and prospects and achieve all the objectives of CRM2 and the evolving expectations of your clients

Benefits of working with an Investment Counsel Portfolio Manager:

• 100% transparency of fees
• Possible direct tax benefits
• ICPM responsible for KYC, risk assessment, paperwork, etx.
• Fiduciary responsibility not just appropriate product recommendations (Big difference and a huge selling feature for clients)
• All investment products available including risk adjusting private equity investments
• ICPM s have both education and experience requirements that advisors do not require PLUS need provincial securities regulator approvals
• Advisor does not have to be licensed with a Dealer

Queenston is working with KAI Asset Management at http://kaiasset.com/

KAI differentiates from other PM’s in the following manner:

• They give their referring advisors more latitude in account size and portfolio fees
• Share fees 50:50
• Develop a personal relationship with referring advisors
• Make opening accounts with clients very easy for advisors
• Info about the Portfolio Managers at http://kaiasset.com/founders/
• For those advisors committed to a long term relationship with KAI they may also offer the following:
• 4 – 5x recurring revenue to advisors exiting their business;
• Develop a matching program for young advisors and older advisors for a continuation plan and an exit strategy;
• Monetize your business with a 20% of the value tax deferred “deposit”;
• Share purchase plan;
• A buyout if you get hit by a bus
• Check out their portfolio design process at http://kaiasset.com/core-portfolio/
• The Advisor Tool Kit is at http://kaiasset.com/advisor-partner-program/

To discuss further how a transition to a Wealth Management business model can greatly benefit you and your clients – give me a call or respond to this email.