I am spending quite a bit of time with advisory and investment boutiques (usually between 4 and 10 people) who are facing the reality of new regulation and forming intense competition. I guess this is the new normal.

Looking objectively at their businesses, many of them have sound financial performance to date, and developed a loyal supporting client base, but the issue is where do they go from here.

Typically these businesses have been set up by principals who have had careers in major private banks, and have transported their skills to a smaller, more independent and flexible boutique. They have earned a decent living and enjoyed their jobs. They however know now that they need to make their businesses more efficient to achieve any form of exit, or even to survive, and this is requiring a considerably different skill set and thinking about what they do.

I would say many to date have been ‘practices’ where they have built clients, FUM and income, yet the foundation of this model is set in that a principal or staffer service a number of clients, they enjoy their jobs and juggle a variety of roles of client management, investment management and operations. These sort of businesses may command a multiple of earnings in valuation, or perhaps a FUM related valuation, but with change in regulation, these multiples are declining. To achieve an exit and with an exciting valuation, they have to turn themselves from ‘practices’ into ‘businesses’. This means the very challenging transformation of developing and implementing a set of processes and systems where they are no longer the lynch pin to the business. It means surrendering expertise in their minds and placing into processes and techniques that others can perform and scale.

Whilst some of our clients are well down this path and developing highly scalable portfolio based businesses that I suspect will be exit-able and valuable, the challenge many firms are facing is this transition from practice to business.

In my view a key (and test) to this transition is the implementation of technology and surrounding processes that define what actually investing clients are receiving. If it is so special that only one of the key principals can deliver it then I suspect the firm will remain a ‘practice’ for some time and struggle to grow. However if the staff of the business can take a step back, really rationalise what they do for their clients and implement a systemised process for them, they then have the foundations of creating a scalable business operation.

Next steps then are separation of roles, so instead of each staff member responsible for all aspects of client delivery, generally it is about separating out the client management and recruitment from the investment management. This critical step is often hard, but one that is critical for the development of a scalable business model. To achieve this with business management that can measure the performance of these roles and hold them accountable for their success, then becomes a key next stage.

If you are reading this, feel like a practice, and contemplating how to get to an exit, or how to achieve business growth and scale, feel free to give me a call.