Bureaucracy, mediocrity and internal politics. These are some of the negative things people bemoan about larger businesses.
However, size can have advantages to. It usually comes with a clear strategy, documented processes and policies, better access to capital, and a more structured approach to growth.
For these reasons and more, many small-to-medium enterprises (SMEs) aspire to scale up and, for lack of a better word, corporatise.
Another important reason is that corporatised businesses with standardised and repeatable processes, clean and accurate data, and robust governance and risk management, are more valuable and attractive to prospective buyers and strategic partners. They’re also attractive to employees.
In financial advice, more businesses are scaling, as heightened regulatory scrutiny and rising compliance costs put pressure on businesses to drive efficiencies and improved client outcomes.
The profession’s talent shortage, and supply and demand imbalance, is also creating opportunities for businesses to grow organically and through M&A, and leverage technology and automation to deliver advice at scale.
While corporatisation is less about size and more about structured and efficient operations, it makes it easier for businesses to grow and scale.
But corporatisation isn’t for everyone.
There are broadly two types of advice businesses in the market: small founder-owned and operated practices, and larger businesses with multiple advisers and shareholders, professional management, and a robust, resilient operating model.
Both models carry different risks.
Generally, small founder-led businesses are principal dependent and serve the needs of that individual, commonly providing employment for family members, distributing all profits and dividends each quarter, and enabling lifestyle choices.
Building and running a successful scaling business requires a lot of hard work and significant ongoing investment in people, systems, processes and technology, which many people do not have the skill, experience or risk appetite to undertake.
While risk (and reward) is spread across numerous shareholders in larger businesses, in founder-led businesses, it primarily sits with the principal adviser.
This model carries significant key person risk, including the risk that, when it comes time for them to retire, there is no real succession plan.
As a result, client books are commonly bought and absorbed by another firm because there isn’t a profitable, sustainable operating model for someone to buy and takeover, leaving employees, clients and equity owners exposed.
Fueled by ambition
The founder-led business model suits many advisers. It is a popular choice and has been the dominant model for decades, but the demand for advice and growing technology innovation is maturing business models. The industry is shedding its cottage industry roots, transitioning into a profession, and there is increasing number of large businesses.
This trend is underpinned by favourable structural and demographic tailwinds, and capital flowing into the industry, which is fueling ambition.
Many advisers, particularly younger advisers, want to build a business of significant capital value, and create a lasting legacy.
They want a business that will endure beyond them, which is only possible if it can scale and operate without them.
That effectively requires corporatisation.
But before heading down this path, advisers need to consider their medium-to-long-term goals.
They need to think about what they want to achieve professionally and personally, and whether they’re prepared to give up owning and controlling 100 per cent of something to own a smaller slice of a much larger and potentially more valuable entity.
That said, scaling up isn’t only about creating a valuable asset for sale. It also removes key person dependency, spreads risk and reward, and relives pressure on principal advisers. It can provide security, continuity and community, making the journey much more enjoyable and satisfying.
Lean on your partners
Corporatisation is foreign to some advisers because they have never worked inside a large organisation. They have never had to adhere to formal policies and procedures around things like pricing, procurement and HR. They have never managed large teams or reported to senior management or a board.
For those who do have a corporate background, most have never led a corporation.
How then can they scale and corporatise their business?
The biggest challenge is overcoming the small business mindset which says I can do everything myself or hire family and friends to help.
Business owners run into problems when they don’t deal effectively with the ‘Peter principle’, a concept in management that observes that leaders are promoted and promoted until they reach a level of incompetence. Everyone has a ceiling where their current knowledge and ability plateaus and they must re-invent or cease to be competent.
Advisers who are focused on scaling their business need to find partners that can help them develop and execute their strategy and manage growth.
They need people, be they internal or external, who can help them increase their capability and capacity, drive digital transformation, and effectively manage the various risks facing advice businesses including financial risk, regulatory risk and operational risks like cyber security threats.
Scaling up may not be for everyone but for those looking to make the transition, it has the power to transform businesses, accelerate growth, and reward business owners.
Nathan Jacobsen is the chief operating officer of AZ NGA and CEO of Vital Business Partners.
