I concluded last week’s post (Understanding the Evolution: From Book of Business to Enterprise) with a question – “What have you built?”

Did you reflect on this question? If not, I urge you to do it now. It’s only when you understand what you have built that you can begin to strategically plan for the future. Knowing your current position on the continuum from a book of business to an enterprise is crucial for identifying the next steps needed to enhance your firm’s structure, scalability, and valuation. Reflecting on this question allows you to recognize areas for improvement, set clear goals, and develop a roadmap to transform your operation into a more valuable and resilient entity.

Another key question is – Are you building a book of business or a practice or a business or an enterprise. There is a huge difference among these four. Most founders in our industry focus primarily on building revenue. They understand this concept. The goal here is straightforward: Add new clients and retain all the clients.  However, many struggle to build enterprise strength or even a true business. This challenge has a direct impact on valuations. So, what have you built and what do you want to build?

Building a successful firm isn’t just about generating revenue and acquiring clients. It’s about creating a sustainable, and scalable operation that can thrive independently of any single individual. This transition from a “book of business” to a “practice,” then to a “business,” and finally to an “enterprise” is essential for building something that is beyond you and for achieving higher valuations and long-term success.

The Challenges in Building Enterprise Strength

Dependency on the Founder

“The business is dependent on me even though I have a team,” said Alok, a financial professional from Delhi. One of the most significant challenges in moving beyond a book of business is the founder’s dependency. When a firm relies heavily on the founder for client acquisition, client relationships, service delivery, and operations, it limits scalability and increases risk. Buyers and investors see this as a vulnerability because the firm’s success is tied to one person.

Even when you have a team like Alok, it’s important to assess the kind of people you have in your team. Are they independent? Can they acquire ideal clients on their own (and in your absence)?

Solution: Start delegating responsibilities and building a team. Develop a second line of leadership and empower them to take on critical roles. This reduces dependency on you and builds a more valuable firm.

This is easier said than done. This requires a vision, a commitment to building a scalable operation and real capital (money, time, attention, and focus). It requires you to invest in your firm. Sometimes founders don’t have the drive, the time or the skill sets to make these investments.

Lack of Standardized Processes

Many small firms lack standardized processes, leading to inefficiencies and inconsistent client experiences. This hinders growth and reduces the firm’s attractiveness to potential buyers.

Solution: Implement standardized processes for client onboarding, service delivery, compliance, and other critical operations. Documenting and optimizing these processes ensures consistency and improves efficiency.

Limited Technological Integration

In the digital age, leveraging technology is crucial for scalability and efficiency. However, many founders/firms are slow to adopt new technologies, which again hinder growth and competitiveness.

Solution: Invest in technology to streamline operations, enhance client experiences, and improve data management. Most firms have their data on multiple systems and excel sheets. None of them talk to each other. Tools for CRM, financial life planning, portfolio management, and client communication can significantly enhance operational efficiency. Having a world class technology platform is invaluable.

The Importance of Valuation Metrics

As your firm evolves from a book of business to an enterprise, understanding valuation metrics becomes crucial. Valuations are typically based on revenue multiples or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples, depending on the firm’s maturity and structure.

Books of Business and practices are often revenue models. What I mean here is that they aren’t built for profits. The focus is on the income of the owner.

Book of Business

• Valuation: Often valued at 1 to 2 times annual revenue.
• Challenge: High dependency on the founder makes client retention uncertain if the founder exits.

Practice

• Valuation: Typically, 2 to 3 times annual revenue.
• Benefit: Shows elements of scalability and sustainability beyond the founder, with a small team supporting various functions.

What is being sold in both the above cases is assets (or revenue).  There is no sale of stock or profits. Therefore, the focus of valuation is more on the revenue.

Businesses and Enterprises on the other hand are built for profitability. Thus, the valuation approach focuses on the bottom line. Generally, what is being sold here includes all the infrastructure, technology, intangible assets, expenses, and liabilities.

Business

• Valuation: Generally, 3 to 5 times annual revenue or 6 to 10 times EBITDA.
• Benefit: More substantial organizational structure, distinct roles, and robust processes reduce risk and enhance scalability.

Enterprise

• Valuation: Can range from 8 to 16 times EBITDA or more.
• Benefit: Extensive organizational footprint, strong brand recognition, diversified ideal client base, and a solid team make it highly attractive to buyers and investors.

Moving from a book of business or a practice will take 5-7 years or more. The effort, however, is worth every bit. Beyond the financial reasons, this also helps you avoid burnout and enhances the overall quality of your professional life. By building a scalable and resilient operation, you create a more balanced workload, allowing you to focus on strategic growth and personal development. Additionally, this transformation can lead to better client relationships, and a legacy that extends beyond your individual contributions. In essence, it’s not just about the financial gain but also about creating a sustainable and fulfilling professional journey.

Building for Your Future: Strategic Steps

1. Developing Leadership

Investing in leadership development is crucial for creating a sustainable enterprise. Identify and nurture potential leaders within your firm, providing them with opportunities for growth and development.

2. Enhancing Client Relationships

Strong, enduring client relationships are the cornerstone of a successful financial firm. Focus on delivering exceptional client experience, service, and value to build trust and loyalty.

3. Building a Strong Brand

Invest in building a strong, recognizable brand that resonates with your target market (or your niche). A strong brand in your niche enhances client trust and attracts new business.

4. Focusing on Growth

Implement strategies to drive growth, such as improving your closing ratios, getting 100% wallet share, entering new markets, developing innovative service offerings, delivering a wow experience, and expanding your centers of influence. Growth is a key driver of higher valuations.

Real World Examples

Example 1: The Journey of Firm A

Firm A started as a small book of business with a sole founder managing all client relationships. Over time, the founder invested in building a team, implementing standardized processes, and adopting new technologies. This transition allowed Firm A to scale its operations, reduce dependency on the founder, and enhance client service. Today, the firm is even able to acquire ideal clients without the founder being involved. Firm A is valued at 10 times EBITDA, reflecting its robust organizational structure and growth potential.

Example 2: The Journey of Firm B

Firm B began as a practice with a small team supporting the founder. By focusing on leadership development, expanding service offerings, and building a strong brand, Firm B transitioned into a full-fledged business. This evolution attracted new clients and improved client retention, significantly increasing its valuation. Firm B is now considered a leading player in its market, with a valuation of 15 times EBITDA.

What Have You Built?

Understanding the evolution from a book of business to an enterprise is crucial for enhancing the valuation of your firm. Each stage reflects a different level of maturity, complexity, and scalability, impacting how the operation is valued in the market. By strategically evolving and focusing on leadership development, client acquisition, client relationships, service expansion, brand building, and growth, you can build a sustainable, valuable, and highly attractive operation.

The question remains: What have you built? Are you operating a book of business, a practice, a business, or an enterprise? Recognizing where you stand and taking strategic steps to evolve can significantly enhance your firm’s value and ensure long-term success.

In the end, building enterprise strength is not just about adding clients and revenue. It’s about creating a scalable, and valuable operation that can thrive independently of any single individual. By focusing on what truly matters—leadership, client relationships, service expansion, brand building, and growth—you can transform your firm into a robust enterprise that commands high valuations and achieves lasting success.