Structure, Sustainability, & Acquisition Strategy

Take a look around your hometown. Your favorite places: the coffee shop, bookstore, brewery, dry cleaner, and salon that you frequent on a pretty regular basis are all small business–or at least started that way. Just like you. These founders had a dream and a desire to be their own bosses and make their work something they enjoy doing. Many started in small spaces, just enough room to get the business of the ground. They relied on grit, resourcefulness, and thrift to further their businesses through the first stages. Now, the most successful independent operations are evolving and growing their teams, but many struggle to maintain their position amidst stronger competition, an uncertain economy, and consolidation trends.

Does this sound familiar? The issues of scale, expense management, and growth planning are not unique to financial services. Other professionals begin their businesses with similar limitations, which they must address and overcome in order to reach a baseline of success. Passion and perseverance are powerful fuel, but the challenge comes in creating a business that can support sustainable growth. 

Oftentimes, the skills necessary to make this transformation are not innate to the business owner and reluctance to seek help is precisely what hinders their growth or even survival. As entrepreneurs who are passionate about their field, getting outside guidance is necessary to overcome their limitations and see the business into the next stage.

One of the primary ways that wealth management businesses are looking to boost growth is through acquisition. But this can be a difficult endeavor for smaller practices. We’ve had the conversation quite a few times: an advisor-owner working in a small practice wants to know what they and their colleagues can do to better hone their acquisition strategy.

When we ask them to tell us about their business, a common scenario they describe is a team of advisors, sharing an office space, pooling overhead expenses, and piggybacking on each other’s technology licenses; often they are fee-based and shared a similar philosophy toward business. However, instead of a centralized entity, they have a tangle of entities to cover various expenses and service lines and are all essentially paid on an eat-what-you-kill (EWYK) model. There is no single, cohesive enterprise agreement. 

And when we ask them to clarify what they want to grow—their individual books, or the larger enterprise? The common answer, unsurprisingly, is “both!”

Several years ago, our founder David Grau Sr., JD classified financial advising teams as either “life rafts” or “ships” based on their organizational structure, and the advisor groups were talking about here can be clearly defined as a “flotilla of life rafts.” It is easy to think that a rising tide lifts all boats, but this structure has significant weaknesses that can and should be resolved. Especially if growth through acquisition is a primary objective. 

One of the biggest reasons these advisor-owners haven’t created a formal ensemble, isn’t because they lack the intention to, what they lack is knowing where to start. And when you don’t know where to start, more often than not, the snag gets ignored until it’s a roadblock to what you need or want to accomplish. In this case: acquisition. 

Investing in growth as a collection of independent practitioners exchanges long-term durability for short-term gains. Multiple risks arise in taking half-measures. As each advisor continues to run their own business and their own brand, it’s easy to cut themselves free and take a portion of the collective business value with them. On the opposite end, there’s no contract for how succession will occur when the founders start to phase out. But a formal enterprise agreement provides protection and predictability for the advisors working together.

The benefits of creating a sustainable enterprise extend well beyond protecting an acquisition from departing colleagues. As a practice is transformed into an enterprise, the compensation structure should shift from an EWYK model to a reasonable, professional salary related to the role of the advisor within the ensemble. Compensation is typically the largest expense on a company’s P&Ls, and by controlling this expense to a predictable figure, profitability is created that can be used to support a variety of growth strategies. For example, a reliable profit line supports the enterprises acquisition strategy, both by providing the capital to directly invest in acquisitions or the cash flow to qualify for bank financing. Successors can buy in to the enterprise using profits to fund their purchase, and ease the path to a multi-generational model. Meanwhile, owners earn profits for running a successful business in proportion to their shares, preserving the upside they enjoyed as individuals in the EWYK model.

The work of forming a sustainable enterprise enhances acquisition strategy in another way: it creates a stronger foundation to recruit and retain the next generation of advisors. A well-designed enterprise that creates profit and elevates business value. It creates a stable mechanism for professional compensation and equity pathways which are a strong draw for talented professionals looking to advance their careers. Whether recruited directly into the firm or onboarded as part of an acquisition, the enterprise model provides better options to invest the skills of new talent.

It’s not uncommon for entrepreneurs to want to grow their businesses in as many ways as possible, but postponing complex changes in favor of what seems simpler is a mistake. For any industry, building a business beyond the founder’s passion and determination often requires outside guidance. Specialized expertise makes it easier to solve unfamiliar problems with innovative answers. If you’re considering acquiring any business asset with peers, it is important to define the enterprise to protect the investors in the event of either success or failure. When the assets are intangible and as easy to move as client relationships, it’s especially important to have sound agreements that create cohesion among the owners.