With consumer demand for advice outstripping supply, many advice businesses are rapidly scaling.
A result of growing scale is often declining earnings before interest, taxes, depreciation and amortisation (EBITDA) margins. This is so common that many believe it’s inevitable. But why is this so and does it have to be?
Fast growing businesses often plateau and even struggle for periods. Sometimes it’s because of market changes but all too often it’s a case of increasing complexity.
As businesses get bigger and evolve, many outgrow the leadership that established and led them through the early stages of growth and success. Founders are often not the right people to take a business to the next stage, simply because it’s not what they love to do.
They’ve built a successful practice over many years and have ambition to achieve more but many prefer to focus on engaging with clients.
As a result, an interesting trend is emerging amongst scaling firms. They are bringing in leaders with corporate experience and skills. These are the types of leaders who are more attuned to running large organisations than small practices.
That said, there are also advisers who love the challenge of evolving into a CEO and learning how to run and scale a business.
Whichever the case, corporatising a mid-tier advice firm requires the owner/s to make a choice to either be a great adviser or be a great CEO. At scale, they cannot do both.
Successful CEOs understand that scaling and corporatising requires different choices and skills around operational efficiency, risk management, people leadership and strategy. A declining EBITDA margin is not inevitable, demonstrated by at least some the many thriving large advice businesses.
The biggest obstacle
Arguably, the biggest challenge of corporatising is overcoming the small business mindset.
The small business mindset says, do everything yourself or hire friends and family. It’s the reason why principal advisers can often be found lurking in the back office.
The small business mindset runs into problems when it doesn’t deal effectively with the ‘Peter principle’, a concept in management that observes that leaders are promoted based on their past success in previous jobs until they reach a level at which they are no longer competent. Everyone has a ceiling where their current knowledge and ability plateaus and they must re-invent or cease to be competent.
Cybersecurity is an obvious example. In today’s operating environment, a cyberattack is one of the key risks facing businesses. A breach has the ability to cause significant business disruption, compromise private information and data, impact clients, attract regulatory attention and penalties, and destroy a business’ reputation.
Yet, many advice businesses don’t have adequate cybersecurity and risk management systems in place. There are no incident response or business continuity plans, and too much faith is placed in paper-based attestations, often given to them by a licensee or external consulting firm.
Eliminating principal dependency
At the end of the day, corporatisation is about having formal systems, processes and frameworks in place to deliver advice efficiently in a consistent and methodical way. It is about protecting a business and its people by identifying and managing risks.
The biggest risk inside most advice businesses is principal dependency. The most successful businesses have made the advice relationship transferable between advisers and support staff.
By doing so, they have significantly increased the capital value of their business.
But for the average advice business, too much knowledge resides inside a principal adviser’s head.
While this enables them to quickly and easily identify an ideal client, scope their advice needs, and accurately determine a fee that will not only cover their cost to serve but that the client is willing to pay, it also keeps a firm heavily principal dependent.
If there are no methodical, documented processes for performing critical tasks like developing terms of engagement and pricing, it is difficult to efficiently develop and skill up-and-coming advisers and staff.
In a corporatised business, processes are standardised and repeatable, enabling them to be performed by multiple people, if needed.
Make yourself replaceable
Right now, there is an enormous opportunity for advisers to scale their businesses.
This opportunity is being created by favourable demographic trends, rising demand for advice amidst a shortfall in supply, and growing awareness of the attractiveness of the advice margin, which is bringing capital into the market.
Furthermore, the sector’s attractive growth profile is underpinned by regulatory tailwinds.
Corporatised businesses are ideally positioned to capture value from these themes.
For those seriously thinking about scaling up, the current consolidation phase is expected to continue for some time and the industry’s supply and demand imbalance will take years to address, serving as extra motivation for savvy entrepreneurs.
However, disruption is coming.
The conditions that have created this opportunity guarantee that more players will enter the advice space, including digital solutions. Those likely to be impacted the most will be small, sub-scale businesses that are principal dependent.
If your mission is to corporatise then the ultimate goal is removing key person dependency which, at the end of the day, is a much more enjoyable way to operate your business.
