There is no clearer sign of an industry’s attractiveness and future prospects than its ability to attract capital and talent.
Despite the complexity of Australia’s tax, pension and social security system which underpins the demand for professional advice, the financial planning industry struggles to secure the support of serious long-term investors. This has hindered the formation of large, sophisticated professional consultancy firms.
What venture capitalists are looking for can be summed up by growth opportunities and margin opportunities.
Unfortunately, a few major headwinds continue to affect the industry’s ability to deliver them, namely an overly strict regulatory regime and reputational issues. Both of these issues need to be resolved to attract the kind of capital needed to drive this fledgling profession forward.
The Treasury Board Quality Review promises a more principles-based approach to regulation and, if efforts to remove barriers to entry for advisers and licensees are successful, a stronger reputation in will ensue.
Assuming these two things happen, capital will flow back into the industry. It will then be up to business owners to demonstrate their ability and ability to deliver growth opportunities and margin opportunities.
One of my previous Columns describes the attributes of the ideal financial partner.
To summarize briefly, there are basically two types of capital: patient and impatient.
Patient shareholders are focused on long-term value and therefore provide stability through the economic cycle. This is a major benefit as it allows management to focus on building great businesses.
Impatient shareholders, such as traditional lenders and private equity, focus on high returns in the short term. Their motivations run counter to the motivations of most small and medium-sized businesses.
This column focuses on what financial advisors need to do to build a world-class business that can attract the perfect financial partner. We believe that the company of the future will have five key elements: a compelling shareholder value proposition, a customer value proposition, an employee value proposition, a defined enterprise architecture and a strong culture, proven through clearly articulated values and behaviors that are monitored and measured.
This column – the first in a series on the business of the future – focuses on the shareholder value proposition.
The table below outlines an attractive shareholder value proposition.
Table: What the property looks like – Shareholder value proposition.
|Mergers||One every three years|
|Acquisitions||One every three years|
|Customer revenue growth||6.5%|
|Earnings before interest, taxes, depreciation and amortization (EBITA)||30%|
|Net profit after tax (NPAT)||21+%|
|Dividend payout ratio||80%|
|Excess cash||At least one month of running costs, including salaries|
|Staff cost rate||45%|
|Occupancy cost rate||seven%|
|Marketing cost ratio||4%|
|Rate of endettement||Step >3|
|Average revenue per partner/senior advisor||Accounting from 1 to 1.5 million dollars
Financial planning from $750,000 to $1 million
Growth inspired by MAO
Very few, if any, consulting firms have all 14 characteristics, but the firms of the future will tick many of these boxes. Most importantly, they will have a plan and focus on achieving that plan. At the top, they must above all have a clear growth strategy.
There are only three ways to grow: mergers, acquisitions and organic growth.
Every business, regardless of size, should have an idea and preferably a formal plan for all three areas. For some, this plan may consist of focusing on one or two areas and doing nothing in the third.
Traditionally, mergers and acquisitions have been grouped together, hence the abbreviation M&A, but mergers can be very different from acquisitions. A merger can be a non-monetary transaction. The most successful mergers are those where the two entities know each other well and share common values and motivations.
Acquisitions, on the other hand, are almost always debt-financed and subject to a competitive bidding process.
Both strategies are important and linked. Mergers increase a company’s balance sheet, which allows for acquisitions. The companies of the future understand the power of mergers and acquisitions to accelerate growth.
They also understand the importance of organic growth.
Strong and consistent organic growth is an indication of a company’s competence and capability. It tells potential equity investors that the market wants to buy what a company is offering. It’s the ultimate show of strength.
EBITA is another key metric that funding partners will look at. Companies of the future will have an EBITA target of 30% or more.
Often, investors will look beyond a company’s EBITA margin to see the performance of each frontline resource. They can go further to look at the profitability of each underlying customer.
An experienced finance partner can help businesses mine this type of data to truly understand their business profitability.
By 2030, when the majority of baby boomers will retire, many consulting firms will face major challenges such as succession planning and generational transitions, alongside growth.
Meeting these challenges will require capital.
In order to raise the necessary capital, business owners will need a compelling shareholder value proposition to turn the heads of investors, especially those who are patient.