Are you building a sales practice or a business? It’s important to consider the road ahead for your business and the consequences that can emerge when you don’t focus on corporate sustainability. You need to focus on building a business that is sustainable and sellable as opposed to keeping a sole focus on getting sales in the door. Fees are declining, and if they are the only factor that supports your business, how would anyone be able to take over once you retire? As the hit song goes, “hit the road jack, and don’t you come back.”
If the revenue you generate within your business is dependent on you continuing to work the business every day, this presents a major challenge. I’m sure you would like to know how you can maximize your current income (sales) and still build a business (equity) that can be sold down the road. Can you confidently say that you would be able to sell your practice for what you feel it’s worth? The honest answer is that most business owners would have to say no. Many business owners have built businesses that earn well over $1 million per year but have little inherent equity. It seems that most don’t own businesses, they own “jobs.”
Is your main revenue source from commission-based sales?
You may want to convert that to recurring fee revenue. Let’s face it, everyone has eyes on your clients but it’s important to keep your eyes on the roadmap ahead because corporate America is targeting the financial services business as the high-profit sector of the future. Commissions are heading toward zero since technology, such as online trading, has continued to advance. Some companies have opted to lower their commission fee per trade, or worse, opted to do away with commission-based trading altogether.
Business models today are shifting towards the independent planner/investment advisor model which is based on providing turnkey financial advice and management…for a fee. It’s important to not only offer turnkey financial advice and management but to build trusted relationships and act as an individual who is a knowledgeable professional within your field.
Don’t be the guy or gal who can sell anything but your business.
Commission-based businesses have little value to anyone other than the salesperson. Don’t get stuck going the route of immediate gratification by closing the door on gratification for investing in your future. The only income source attractive to a buyer is the equity trails your business leaves behind from recurring income. If your business was dependent on you, the owner, hitting the road and repeating the sales effort, that means you would have to continue to work for your business. Recurring revenue streams are of much more value than non-recurring streams when it comes to building a business.
Are you ready to change the structure of your organization from a sales practice to an actual business?
You can increase the value of your practice by making one simple change. Say you invest $30 million in mutual funds that generate a trail commission of 25 basis points ($75,000 a year) and put it under management at a one-percent annual fee, you would still bring in $300,000 a year but in recurring revenue. This alone would increase the value of your business to about $580,000 because a buyer would not only pick up the commission trails, they would pick up $300,000 of sustainable fee-based revenue.
Next, I suggest transferring your client relationships from you as an individual to your business. Buyers want to be sure that the revenue will be there even after they’ve purchased the business from you. In a commission-based practice, the client retention level is low. Converting from commission-based revenue to fees can increase client retention levels from 15 to 50 percent.¹
The most important roadblock to overcome is institutionalizing your business. Empower your organization to deliver value-added advice and service to your clients. This can help drive higher client-retention and allow your clients to see the value in your business as a whole and not just you as an individual. It’s important to formulate a strategic business plan and formalize best practices.
Can you confidently say that you can leave your business in the dust and not look back in your rearview mirror? Buyers are looking for businesses that do not function from being owner-dependent. It’s important to take the emotion out of it and deflate your “can do all” attitude so that your employees can confidently handle client service and planning on their own.
It’s time to reconsider the road ahead for your business. Are you putting too much focus on hitting the pavement to generate sales? Are you and you alone the core value of your business? You may want to pump the brakes on your commission-based business and make sure you develop a sustainable business by creating best practices that will allow your employees to add value to your business once you’ve hit the road. It’s time to focus on the important aspects of building a business and establish a solid foundation for your business.
For more business-building tips and insights, check out our podcast Bull|Bear Radio.
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Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice or trade recommendations.
¹ Schreiber, Jr. “Building a World-Class Financial Services Business.” 2001. June. 18