You can't pick up
a Wall Street Journal on a given day without
finding that that someone has sold a company. Most
of the time you can't pick up one of the trade
magazines in our business without finding a
broker-dealer, an RIA or a mutual fund company
that has been bought by another. The number of
people willing to buy a business makes you realize
the value of owning one.
Do you have a
business? Maybe you do. Maybe you just think you
do. Whatever you do, don't be caught up in the B
Myth.
What is the B
Myth?
The B Myth is my
terminology for a situation where brokers,
financial planners or investment advisers are
under the illusion that they have a "business"
when in actuality all they really have is a job.
As John Bowen, a senior consultant in this area,
says, "If you build a system which revolves around
you, it is difficult to transfer the business to
anyone else. You own a job, and it's hard to sell
a job."
Yes, I know. When
you went in the financial-services business
someone told you that you were in business for
yourself, that you were building something for
yourself. In truth, that's what you may have
done-built something for yourself-which nobody
else wants because it has little or no value to
anyone but you. Beware the B Myth!
Some of you may
be thinking that you've heard of this B Myth
before. That's because I took a concept that
author Michael Gerber outlined in his best-selling
books, The E Myth and The E Myth
Revisited, and applied it to our industry. The
sad fact is many financial planners and financial
advisers are suffering from the illusion that they
have a business. In fact, what they have is an
unreliable stream of income, a lease, some
employees, a group of clients, some commercial
software, and some fixtures and equipment worth
only 25 cents on the dollar.
The reality is
that the stream of income is a mixed bag of
financial planning fees you earned,
commissions you generated, and a slice of
RIA fees that is growing slowly and is dependent
upon your efforts to sell the client on
this way of doing business. Your assistants or
employees may not know what to do unless
you are around to tell them and might
scatter to the wind if they thought the business
was for sale. Your clients think you walk on water
because you have convinced them that you
are what's indispensable rather than the
advice they receive. In this scenario, hopefully
you have been a good saver because there will not
be much equity in your "business" to sell.
Building a
Real Business
Have I given you
some food for thought? If so, here are some of the
things you can do to make your "business" more
attractive to a potential buyer, more reliable for
your clients, and in the process more valuable for
yourself-whether you ever sell it or not. A good
friend of mine (let's call her Jane) who sold her
investment advisory practice in California offers
some key points to create maximum value in your
business.
·
Accept the fact that making your business
attractive to a buyer and building value normally
takes some time. Time to streamline operations and
build teamwork among staff; time for you to aid in
the transition of clients after the business has
been sold.
·
Don't make your clients suffer under your own
"myth of indispensability." Being indispensable
leaves your clients vulnerable when you're away
for any reason. Instead create systems within your
office that deliver whatever you deliver in a
consistent way regardless of whether you are there
or not. That's what successful franchises
do.
·
Understand that a knowledgeable potential buyer is
looking for a documented stream of revenue over a
period of time. Different revenue streams have
different values. Commissions and one-time fees
have much less value than consistent
investment-advisory fees or mutual-fund
trails.
·
Keep good records. Valuing your business can be
tricky. First ask yourself what you would
reasonably pay for what you have. Then consult
with a professional. Mark Tibergien of Moss Adams,
LLP in Seattle stresses the importance of free
cash flow, or the net profitability of your
business adjusted by fair market compensation for
you and any other principals. You'll need two to
three years of financial records to prove
profitability and determine free cash flow.
Falling victim to the
B Myth is easy to do but also avoidable with some
awareness and planning. Do you want to own a
business rather than a job? Then do what Michael
Gerber suggests: Think about your practice as if
it were the prototype for a network of 5000
outlets. At McDonald's, the franchise owners don't
flip the burgers, but the franchises have
tremendous value because they have installed the
systems that turn out a very consistent product or
service in the absence of the owner. Something for
you to
consider.
