Building value into your business
With RDR dealt with there is a clear opportunity to build value into your business, says David Shelton of Stoke Bishop Associates, independent consultant to providers and distributors in the advice market
Advice businesses that prepared well for the requirements of the Retail Distribution Review (RDR) recognised that it is all about good business practice. The same is true of TCF in that both initiatives concentrate upon clarity of service, transparency of price and effectiveness of delivery. Indeed, there is a tangible financial prize for well-managed advice businesses that have dealt with RDR and survived through the recession: There will be fewer advice businesses operating in a market where demand is strong and rising. That is a recipe for profitable trading conditions in the short- and medium-term and increased business values in the longer-term.
Why is this? Quite simply the outcome of RDR is that firms now have a clear no nonsense relationship with their clients and, like all other businesses, a single service structure and price list that all their representatives offer. The firm controls its revenues having moved out of the artificial world of commission where a third party decides on income. This is truly a world of retailing and running businesses in a more competitive and dynamic market.
At the same time the capital adequacy requirements are leading to more financially robust firms that will be far more attractive to acquirers from inside and outside the sector.
There is little argument that, in these circumstances, values can only go one way for modern advice businesses that have embraced the changes.
With RDR dealt with there is a clear opportunity to build value into the business. If we have a few years with no major regulatory initiatives and the economy slowly improves we will have circumstances that are favourable to profitable growth. How can firms take advantage of this? As always, effective planning and concentrating on the key issues will provide a structure and some clarity about what to do. Identification of the drivers of value is a good starting point and these are summarised in the chart (below).
There should be no major surprises in this list as it includes characteristics of well run businesses on the left and the opposite on the right. However, the value that is placed on each of these drivers is likely to change. Of particular importance is recurring revenues, where one would expect the multiplier applied to ongoing adviser charging to be lower than fund based revenues. This is mainly because adviser charging can be switched off as opposed to traditional commission that has tended to be received year after year.
This generic list is a good framework but each firm will have particular attributes or detractors that must be accounted for. A detailed value audit is the essential starting point to identify exactly where the business stands on the vital areas that influence value thereby influencing succession planning and the range of options that owners will have when the time comes to sell. This is not just a case of scoring the individual value drivers on a 10-point scale but getting under the skin of exactly what is going on and making a detailed assessment backed by evidence. This is like an advanced strengths and weaknesses analysis but more forensic and closer to due diligence. The value destroyers are equally important because they need to be dealt with if value is to be maximised.
As with all exercises of this nature the issues that need to be managed emerge naturally. The more difficult stage is confirming what to do, who will do it and by when. However, this is straight forward business planning and successful firms have no problem in implementing change, mainly because they concentrate on the priorities and get on with the task. However, there is one additional consideration that is vital to good value planning. It is the ambitions of the principals and the vision for the business. In most cases these are inextricably linked with personal and business issues needing careful consideration. In essence, partners need to share their personal financial and exit ambitions as far in advance as possible to enable the changes to be managed and planned for – particularly the financial issues. In many ways this determines what the business needs to achieve in terms of growth, turnover, recurring income, productivity and scale. It is obvious that the personal ambitions will only be realised if there is a clear value based business plan that leads to the required business outcomes. That is a real incentive for serious business planning which, of itself will contribute to value.
The process for this is relatively straightforward and provides a framework to make sure nothing important is missed.
Following the detailed value analysis, which can be used to determine an initial financial value, the key value issues must be confirmed and agreed upon by all principals. The business vision must deal with financial issues but it is essential to include people, clients, infrastructure and management to ensure that the desired outcome is both realistic and achievable. Finally the implementation of any changes needs to be planned in detail to make sure that the opportunity is realised and all the time spent on planning delivers a tangible outcome. There are no short cuts to this exercise but it does not have to be a great burden if it concentrates on the right issues and is managed within a structured framework. It is good practice to use an experienced manager without direct ownership or an external party to facilitate this exercise and, in particular, draft the plan and implementation projects that support it. This makes sure there is clear action to move the plan forward and build upon the detailed planning that has taken place.
Finally, if you don’t have a plan it is important to start the work as soon as possible. This is a time of transition for the sector so care will need to be taken with draft valuations and analysis of the longer-term effect of the RDR changes. However, this should not be an excuse for putting off the exercise – there will always be major changes and it is a question of taking a judgement on their likely impact as opposed to waiting for stability, which never comes!
For more information go to: http://www.stokebishopassociates.com