There have been considerable changes in the way wealth management businesses have been valued in recent years, largely as a function of regulatory changes, margin pressures and industry ‘supply chain’ dynamics that come around from the above and also the introduction of innovations and technologies.
When I talk with M&A folks, one of the primary discussions is about whether a wealth management operation is a ‘business’ or a ‘practice’. Often it is not clear what the difference is, but when considered it has critical implications on valuations. My quick summary is:
Practice: something that is set up around key founders / principals and they remain critically involved in its operation and functioning. Focus is usually on income and profit within a level of capacity often suits the owner’s ambitions, character, professionalism, and lifestyle. Often a practice is valued more by the founders / principals than a third party.
Business : something that is set up with the goal to implement scalable, repeatable processes that generate value regardless of the owners of the business. It’s about people and processes that can be replicated and operated that can be scaled to meet market capacity. A well-run business is often portable (regardless of owner) and can be valued, and hence can be sold to realise the value to the owners
One of the critical aspects of the mindset of business vs practice is that of process orientation and being able to define what the processes do independent of key people. This is about systemisation, it’s about building platforms and ways to do things often with automation and use of technology.
There is also the human side of this also, and tests are often about how important the founder / principals are to the business, can the business operate without them (and hence is it worth anything if they leave).
Observations are that practices are valued at a much lower profit and earnings multiples than businesses. So if you are going into business to create value, have you asked yourself:
- How do I implement what I do in a systemised and scalable way
- Is what I do to keep me occupied, make me feel good, or is it something that can be replicated to create value
When it comes to portfolio management, there are very highly skilled portfolio managers who are great at looking after client investments, a great starting point for practice. The question that begs though is can what they do be systemised so that one can scale and build a business out of it ?
In many cases, we find that the key limitation in having the defined and repeatable processes for managing portfolios is the technology and software to support this in a way that can be configured for the wide range of client-specific situations (and hence many resorts to excel). But just imagine if you could have a scalable repeatable process for managing client-specific portfolios with scale. Just imagine what this can do for growth but also valuation ?
