Get maximum value from your financial intermediary practice

Gareth Stokes, FAnews Online Editor

To extract the maximum possible value from your practice you need to understand the “value” concept. It’s a concept Ian Middleton, managing director at practice management business Masthead, wrestles with on a daily basis. His presentation at the Masthead

Value depends largely on perspective. A property investor might look at the actual capital value achieved on his assets over time, but a financial intermediary will probably assess the concept from a customer perspective. “In this case value stems from the inputs and the interactions that you have with your customers over the lifetime of their relationship with your business,” said Middleton. Whatever value you attach to your practice, the true test of “value” will be what the market is prepared to part with for it. “What is a willing buyer prepared to pay to a willing seller?”

Building a practice for maximum value

There are many steps a financial services intermediary can take to build his/her practice to a higher value state. “For us building a business is about the end value being more than the beginning value!” said Middleton. You can measure this value by revenue, by number of customers or by some other measure, provided you strive for two outcomes: that the end value is always higher than the start value – and that the value is built for you own account.

The value concept is one of the main reasons individuals chose the independent intermediary route over the “tied” agent path in the fist place. A tied agent measures success based on how many calls they make in the week, their closing ratios, whether they make it to the merit list, etc. Observes Middleton: “These agents are driven by targets which ultimately roll up to the holding company and the shareholders of the company!” An independent financial intermediary must possess an entrepreneurial business mindset to thrive.

Putting a price on your business

Masthead has gathered information from hundreds of “real life” financial practice transaction and is well placed to spot the financial and non-financial factors which drive business valuations higher. Middleton talked the audience through a couple of the “must haves” to ensure practice owners extract the best possible value from their businesses.

At the very least a practice must maintain three financial disciplines: understand the nature and source of revenue; manage expenses and maintain positive cash flows. The fundamental valuation technique involves discounting future cash flows to a present value. And that makes it difficult to put a price on a business which is essentially an upfront commission shop with a database of customers. What value do you put on a hundred names which might (or might not) use your services at some future date. You should therefore strive for a diversified annuity income stream including asset under management fees, as-and-when commissions, renewal commissions and fees. In each case these revenue streams can be discounted to a present day value! A good way to work out whether your practice is on track is to ask the following questions: Do you know what you earned last month? Do you know where your income came from? Do you know what you will earn at the end of the following two months and for the next year? If you answer each of these in the affirmative then you have a good chance of calculating a fair value for your business.

Expense management is just as important, because the profitability of your practice hinges on the ratio between turnover and expenses. “You have to understand what it costs to get new business and service existing business,” said Middleton. This requires a superb knowledge of business processes, including knowing how much time you’re going to spend on administrative functions, servicing existing clients. And at all times remember the important phrase: Cash is King! “You can be rich on a balance sheet and still go out of business!”

Make sure your systems in place

Can someone walk into your practice “cold” and continue the business? The non-financial systems you put in place will add thousands to the eventual valuation of your practice. You must, for example, dedicate enough time to operations, planning and business profiling. It’s not sexy stuff – observed Middleton – but the boring admin pulls the value of your business down if not properly attended to. At the very least you should make sure your customer database is captured and maintained using appropriate technologies.

Make sure your customer data is segmented so a prospective buyer can easily establish your best customers and the rand value of their business. Now – more than ever – it’s important to back up this data and put in place the safeguards required by various customer protection legislations. Remember, your customer data is among the most valuable assets in your practice. The documentation of business processes is critical too. Financial planning, advice, new business and existing business processes should all be clearly set out. Your business plan must show a clear understanding of your business, including your business culture. Other winning strategies include appointing staff with the appropriate skills and attitude to match your practice’s business culture.

You can also add value by avoiding risk. Risk in financial services intermediaries stem from companies and product and from processing and admin. Middleton said companies should take proper care when partnering with product providers. By partnering with a questionable provider you introduce risk to your businesses’ reputation – not to mention the legal liability in the event your due diligence is found wanting!

Four simple steps

“Building value takes hard work and courage,” said Middleton. “It takes time and tough decisions.” He offered a “four point’ plan to ensure any practice stays on the value track. You should build a sense of mission, lead the charge from the front, be obsessed with world class technologies and never believe your own PR!

Editor’s thoughts: Being an entrepreneur is not just about “making” your paycheque on a month to month basis; but about building something of value. If you’re plugging away year after year without consideration for long-term objectives it’s time for a rethink. Are you doing enough to maximise the long-term value of your financial services practice? Add your comment below, or send it to gareth@fanews.co.za