Answer: "The value of our business is (the market capitalization, or number of shares times price per share) and the way we plan to increase that value is (whatever plan they announced at the last shareholder meeting or press conference)."
Now, how would you answer that same question about your business? Hint: if your answer for this two-part question is not crystal clear, you will greatly benefit from what comes next because we will discuss just how to measure the value of your business as a financial professional and how to increase it.
First, you have two types of value in your business-tangible and intangible. Let's take tangible value first. Tangible value can be measured using common financial metrics like assets under management, sources of revenues, number of clients, etc.
The most common practice to provide a ballpark value of the tangible value of your business is to first average your trailing three years of revenue after the broker-dealer override. Then divide that revenue into two buckets. Bucket A is recurring revenue (trails, 12B-1 fees, wrap fees, retainers, etc.) and Bucket B is non recurring revenues (commissions).
Next, multiply Bucket A x 2.1 and Bucket B x 1.1. Finally, add those two numbers together to get the ballpark figure representing the tangible value of your business.
Now, let's discuss intangible value. Intangibles are things that are important to your business, but don't show up on a balance statement. Do you use a proprietary client service model, retainer model or money management model? Are you a superstar, so that if you left, the clients would not want the services you provided from someone else? Does your staff have specialized knowledge that needs to be transferred along with your clients and assets in order to make sure clients will receive the service to which they are accustomed? Do you have a few really big clients and a lot of little clients? What happens if the big clients leave?
Intangible value can be immense. It needs to be measured and valued just like tangible value. I use a knowledge management system to capture that intangible value and systematize it. Advisors are always amazed about the value of the little things they do that they just take for granted.
So, how do you improve the value of your business once you have measured it? Begin by maximizing what you have today. What is your return on assets? That is your revenues divided by your assets under management. The industry average is 119 basis points return on assets.
In my coaching business, I have seen values as low as 50 basis points and as high as 196 basis points. If you are lower than average, is it because you are not providing 119 basis points worth of service to your clients? If so, what could you do differently to increase your clients' perception of the value you provide?
I have never been to an event where the front row is empty. Yet the front row is always the most expensive. Why is that? Wouldn't you think that people would rather save money and buy the cheap seats? Yet, the front row is always full. Do you have a tier of service to offer clients that is the equivalent of sitting in the front row at an exciting event? Can you describe how that service is different and more valuable?
This about how that applies to your business. How will offering a fee-based model be more of a front-row service for the client than a commission-based model? How will paying a 150-basis-point annual wrap fee offer more of a front row experience than a 100-basis-point fee?
What do you think will happen to the tangible value of your business if clients are demanding your front-row experience and feel there is ample value for the fees that you charge, even if they are higher than they are now? What do you think will happen to your intangible value if your clients are getting that front row service and you can transfer the knowledge of providing that experience to your successor?
Yes, it's essential to measure your tangible business value using the common methods on tap. And, it's equally critical to understand and capture the intangible value of your business processes as well as determine how to increase your revenue/return on assets by offering front-row service. If you would like a free white paper on how to build a fee-based business and offer front row service at a premium please send me an email to this address.