I ended my previous post on “Succession Planning and M&A Simplified” with the following paragraph:

“Most people are looking at some AMC valuation metrics and coming to conclusions on their firm valuations. This is a naïve way of looking at it. Building real value in your business and making it transferrable is art and science both. It is time you invest in learning about building a real and a valuable wealth management firm of the future.”

This post will focus on the areas you should be investing in to build real equity value but before that it is important to bust at least 2 myths (there are many more).

Myth 1 – My business is worth 5% of the assets or My business is worth double-digit multiples of EBITDA or PAT.

First understand that the AMC business is a very different business. An important distinction is that it is a business where there are people, teams, skillsets, distribution capabilities, brand, technology, and many other things. I am excluding the fund management capabilities and skills here to enable you to think differently. There are hundreds and thousands of crores that have been invested in most of these firms.

On the other hand, most IFA firms are driven by individual professionals who play the role of everything in the firm. They have team members who are in back office, operations, and document collection. Even when there are multiple partners, the same structure is at play.

There is no serious investment in people, processes, technology, client acquisition skillsets, marketing, sales, scale, efficiency, world class client experience and in building a solid business.

As financial professionals, we all know if you do not invest in something, there is no real value that is built up. Thus, the key question to ask yourself is “Am I really investing in building this business?”. If the answer is “Yes”, the next 2 questions to ask are:

1. How much have I invested in the business?
2. Where have I invested in the business?

Myth 2 – My business is being acquired or My company is being acquired.

Again, if you have to exit this business, what is really being acquired.

Let us face it, your company name has no value to the acquirer.

ARN – No Value

Logo – No Value

Brand – No Value

Your Brand (You as the person) – has value if you have built a reputation and business in a certain niche (not to mention that most clients value you). In 99.9% of the cases, there is no thoughtful work done here so again, most folks are not able to monetize on this value if any.

Team Members – Are they acquiring clients? Are they independently handling clients without your intervention? – For most firms, this answer is a NO.

TEAM – How do they all operate together? Are they able to transform lives or make a happy difference in the lives of people?

The only value that most people see is in the Assets Under Management and Cash Flow. If you have built a practice/ business that is focused on these metrics alone, then you have destroyed value in your firm as you have failed to capitalize on the real foundational elements of this business.

Most firms in our space unknowingly destroy value as they grow. It is perfectly possible that you are growing AUM, yet you are destroying value. Let me give you an example.

There is a firm with Rs. 140 Crore of Assets. On the outset, many might think this firm is successful. There are 7 team members. This friend has an RIA Model where he is not charging adequate fees but is signing up clients (because of low fees). He is unable to attract talent because he is not charging enough fees. He also has a distribution business through a separate division. Clients are spread across both. The team is confused about the offerings and the business model too. He is frustrated too.

Now if you were the acquirer, what are you really acquiring. RIA Business or a Distribution Business or Both. You will be surprised to know that there are 3 different valuation methods for these 3 different types of businesses (RIA, Distribution and Hybrid). Each type of firm comes with its set of nuances, complexities, and compliances.  Who are you really trying to be here? Everything to everyone. I am not talking about just 3 different numbers; you can arrive at 100s of them using excel sheets or rudimentary methods such as % of AUM or Earnings Multiple. I am talking about the elements of value in these 3 different types of businesses.

Some of the value creating elements of your business are:

1. Client Acquisition Skills (without you)
2. Type of Clients in the firm – HNI, Affluent or Retail. You can also segment by age to figure out whether they are in the accumulation stage or withdrawal stage.
3. Relationship that you have built with them – Transactional, Product, Technical or Trust based. If you have built a Trust based one, you should then have 100% of Client Assets. If you do not then there are competitors already within the client account and this business is at risk.
4. Referrals – This is the single most growth tactic of most firms – How strong is this for your firm? How many brand advocates/ambassadors do you have?
5. Marketing Capability and Assets
6. Niches – Are you dominant in a niche? In such cases, you might be strategically valuable to someone.
7. Your Value Proposition and the difference you make in their lives. Are you managing money or are you helping people live the life they have imagined with their money?
8. Are there any distinct competitive advantages that you have like signing up a client in 90 minutes or delivering a virtual financial experience? Is the firm innovative? Does the firm invest in new initiatives, new products and is forward looking? Speed of decision making, and implementation are also competitive advantages.
9. Growth Metrics of the firm – How strong is the growth visibility of the firm and growth prospects? The best firms have outstanding growth prospects. There are times when such firms too hit growth barriers. These firms know how to overcome growth barriers by investing in the firm.

All these elements are built by investing in People, Processes, Team, Technology, Marketing and Client Experience.

Additionally, one of the key things to remember is “Who will acquire my firm? Who will I be attractive to?”. Well, this is not the way to build a firm but many folks in other industries do that. My mantra is simple (but not easy) – “Build a world class firm and be the best in what you do. Everything else will simply follow.”

Finally, the time to start building equity value is not when you are 60 or when you think of succession planning.

Like everything else, the best time to do this was Yesterday. The second-best time is NOW.