Posts Tagged ‘Stage Of Development’
Wednesday, July 25th, 2012
by Bob Simpson, Synchronicity Performance Consulting
Last week, I posted an article “Building a $100 Million Business – Setting Goals”. Many of the concepts discussed in this article apply to businesses at any stage of development but the strategies and tactics to achieve the goals are quite different for a business that has achieved $100 million in assets under management and has set it sights on $200 or $250 million.
The major difference is that a business on its way to $100 million can be managed by a single professional and is much more focused on growth, whereas a $100 million plus business requires that more resources are focused on client retention and satisfaction and a team of professionals is required to manage the client relationships.
In January, I posted an article entitled “What Is The Compound Growth Rate Of Your Business and What Is That Costing You?” I inserted a spreadsheet that allows you to enter information about your current business and what-if scenarios based on compound growth rates. In our example, a $62 million AUM business growing at a three-year compound growth rate of 7.43% will grow to $127 million compared to $384 million at 20% compound growth over a ten-year period. Pre-tax income for the 20% growth business is an astounding $8.8 million greater than the 7.43% growth business, assuming sale of the business at the end of the period. Spend a few minutes and do the calculations for your business.
The problem with $100 million plus businesses is that they hit a ceiling of complexity that slows growth. You are generally dealing with large numbers of clients and have more staff to manage. As a single professional, you are pulled in too many directions and you simply run out of time.
If, as a result, you can’t dedicate the time necessary to build and strengthen relationships with your best clients, your business growth will decline at a time that it should accelerate. Industry studies show that a high percentage (60 to 80%) of new clients come from client referrals so it is logical that the more clients an advisor works with, the more referrals he should receive. But growth rates decline as businesses mature.
A $100 million advisor that we worked with told me in a meeting that when he was new in the business, he provided all his clients with great service but as his business matured, he was unable to dedicate the time to his best clients and client referrals had almost stopped. As a result, his growth stopped. By making a few simple changes, he was able to break the logjam and his business exploded to over $300 million over the next four years.
The process of developing a Sustainable Growth Curve for a mature business is of equal importance to a newer, developing business. Your Sustainable Growth Curve is simply the number of ideal clients and average AUM per client today, plus a series of three-year targets through to your ultimate goal. The following tables are examples based on a 15% vs. 20% growth rate for a $100 million business:
* Benchmarks have been rounded to the nearest $25 million
In both examples above, we have increased the number of clients by 25 over the three-year periods but we have higher average AUM per client in the 20% growth example. We prefer to increase quality of clients vs. quantity of clients to protect capacity.
Setting your 3-year benchmarks is only a starting point. AUM can be converted into revenue by applying an average fee-rate. You can take this a step further by applying industry statistics to estimate your major expenses. Three major expenses incurred by advisors are offices expenses (10% of revenue), staffing (20%) and business development (5%). These can vary based on the style of firm you clear your business through.
The biggest shift that a firm needs to make to sustain growth in a mature business is the shift from a solo model to an ensemble model. A study by anthropologist Robin Dunbar reports that the maximum the number of people that a person can know and keep social contact with is 150. So, somewhere between 100 and 150 clients, you need to take on an additional professional and assign relationship management responsibility and make the shift to an ensemble (multi-professional) model. I will discuss this in a future article.
By taking a few simple steps, you will be able to break the logjam and get your business on a more positive growth path:
- By identifying the number of ideal clients you work with and average AUM per client, you can find your location for your present condition on your Sustainable Growth Curve
- Take steps to simplify your business and reduce non-profitable clients to recover capacity
- Identify the number of clients and average AUM per client for a single or multiple three-year benchmarks
- Assign an average fee rate and estimate your revenue for each benchmark
- Estimate your costs using industry standards and estimate your profitability for each benchmark
- Develop Client Relationship Management and Business Development plans to retain and attract clients meeting your Sustainable Growth Curve standards to achieve your goal
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Tags: 100 Million, Assets Under Management, Bob Simpson, Business Goals, Business Growth, Business Sale, Business Week, Client Relationships, Client Retention, Complexity, Compound Growth Rate, Few Minutes, Growth Business, Large Numbers, Satisfaction, Scenarios, Setting Goals, Spreadsheet, Stage Of Development, Synchronicity
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