Is it possible to provide great value and service to your clients but still end up missing opportunities with these same clients? Sadly, as the following case study illustrates, the answer is yes. 

Louis Packer’s financial planning practice was stagnating and beginning to lose long-term clients. He was dismayed and baffled: Clients often said that his firm offered great service at a fee equivalent to those of other financial advisors is his community.  

When one of Louis’ long-time clients, Audrey, called to say that she was switching advisors, Louis finally had the courage to ask, “Why?” 

He discovered that Audrey wasn’t leaving for lower fees and better service. She was attracted to one of his competitor’s approach—an approach that Louis didn’t provide.  

Audrey explained that she was switching to a financial planning firm that offered a service that she wanted and needed—a service that Louis did not. Audrey was interested in exploring ways she could exit her business while maintaining her lifestyle.  

In this blog, we will discuss how Louis’s competitor attracted Audrey, but first let’s review what most professional advisors provide: regardless of our profession, we provide the same process, products, and service as our competitors provide (or promise to). 

Just like Louis, each of us believes that our process, products, and services are better than the rest. But what Louis learned the hard way was that clients don’t (or can’t?) appreciate marginal improvements in process, product, and service. They can, however, appreciate how we differentiate our practices from those of our competitors.  

Just for a moment, step back and ask yourself: How is your practice different from your competitors’? Put another way, what do your competitors offer that could attract your clients and possibly already has?  

Using Louis as an example there are several possibilities: 

• Lower fees: Cost is a practice differentiator, but not one you likely want to pursue, much less maintain. And, as Audrey illustrates, cost is not the primary draw that attracts successful owners to professional service providers. 
• Niche services: e.g., Exit Planning or qualified plan design. 
• Niche products: e.g., Alternative investments. 
• Niche industry: Practice focused on clients in a specific industry: e.g., Steel building contractors. 
• Different fee structure: Value-based billing instead of AUM (Assets Under Management) fee or hourly.  

Whatever attracted Audrey was something that differentiated her new firm from Louis’s firm and his competitors. That sounds a lot like a competitive advantage.  

The lesson here for us as advisors is that if we are to maximize the growth of our practices, we have to charge less (low-cost competitive advantage) or provide something viewed as more beneficial to owners than our competitors provide (differentiation competitive advantage). 

Which leads us back to the question: How do advisors retain their existing clients and attract new ones? 

One approach advisors use to answer this question is to be acquired by a larger organization, e.g., a regional CPA firm, larger RIA, financial planning practice or law firm. These larger firms offer the specialized services business owners seek. Being acquired is a viable and common solution, especially for those interested in exiting their practices! 

A second approach requires advisors to differentiate their practices by acquiring expertise, tools, processes and/or products that clients want and need and that competitors do not offer. Remember, clients don’t buy our services because they like them. They buy them to solve a problem or seize an opportunity. Your differentiation proposition must do one or the other. 

A third approach is to acquire new, often larger, and more profitable clients. This strategy also requires you to differentiate your practice from competitors.  

With the exception of rolling your practice into a larger organization, an ideal strategy to create a competitive advantage based on differentiation is to enhance your core offerings and become a skilled Exit Planner. With this gained skill set, you will have the resources necessary to market your planning more efficiently, recruit other like-minded professionals to your planning team, and create and execute successful business exits for your owner clients. 

In my last blog entry, I talked about transferable value: the value buyers look for and pay for when making acquisitions. That entry focused on how Value Drivers increase transferable value if they contribute to cash flow both during and after the original owner’s tenure.

Determining how to increase transferable value is the business owner’s job. However, once owners and their advisors determine which of the Value Drivers (listed below) must be strengthened, everyone in the company should be involved. By definition, business owners cannot do it alone. If they could, they wouldn’t be creating transferable value, because once they departed, the Value Drivers would disappear.

As you read through the following list, remember that it contains only “generic” Value Drivers. Depending on what your company does, it may have other factors that create and increase transferable value. Additionally, there’s no particular order to this list, except for the importance of the management team: It is management that creates, manages, and grows these essential business characteristics, which is why establishing a best-in-class management team is always the most important factor of creating transferable value.

Common Value Drivers

1. A stable, motivated management team that stays after the owner leaves.
2. Operating systems that improve the sustainability of cash flows.
3. A solid, diversified customer base.
4. Recurring revenue.
5. Sustainable revenue, resistant to “commoditization.”
6. A competitive advantage.
7. A documented and proven growth strategy.
8. A demonstrated and successful acquisition strategy.
9. Financial foresight and controls.
10. Good and improving cash flow.
11. Scalability.

Let’s look at each of these Value Drivers in a bit more detail.

1. A stable, motivated management team that stays after the business owner leaves. If you plan to take any Exit Path other than liquidation, capable management is indispensable. Having best-in-class management is the surest way to become a best-in-class company. Capable management is what buyers buy when owners sell their businesses, so establishing the best possible management team will make it more likely for you to receive the best possible price for your business.
2. Operating systems that improve the sustainability of cash flows. The establishment and documentation of standard procedures and systems demonstrate to a buyer that the business can maintain profitability after the sale.
3. A solid, diversified customer base. Buyers typically look for a customer base in which no single client accounts for more than 10% of total sales. A diversified customer base helps insulate a company against the loss of any single customer.
4. Recurring revenue. As a buyer, wouldn’t you want to acquire a business that prints money with the push of a button? Recurring revenue is that button that buyers look for in purchasing a business. Without recurring revenue, you may struggle to find a buyer who is willing to pay top dollar for your business.
5. Sustainable revenue. Buyers look for revenue streams that continue despite fluctuations in the economy. They also prefer those that are resistant to “commoditization,” which is when a company, product, or good loses its distinctive attribute, forcing that company, product, or good to compete based on price alone, which leads to slimmer margins.
6. A competitive advantage. To paraphrase Michael Porter of Harvard Business School, competitive advantage is a product or service that a company offers that, over time, performs either better or more cheaply than its competitors. Your company’s competitive advantage is the reason your customers buy from you instead of your competitors. Thus, having a strong competitive advantage can differentiate you from the rest of the pack, and if that differentiation is positive, buyers will be more likely to pay top dollar for it.
7. A documented and proven growth strategy. Even if you expect to retire tomorrow, it makes sense to have a written plan describing future growth and how that growth will be achieved based on industry dynamics; increased demand for the company’s products; new product lines; market plans; growth through acquisition; expansion through augmenting territory, product lines, and manufacturing capacity; and so on. This detailed growth plan, properly communicated, will help attract buyers. Buyers will give credence to your current growth plan if previous plans have achieved their goals.
8. A demonstrated and successful acquisition strategy. When applicable, having a demonstrated and successful acquisition strategy can go a long way in proving your company’s commitment to detail and wise investment.
9. Financial foresight and controls. Effective financial controls protect company assets and support the claim that a company is consistently profitable.
10. Good and improving cash flow. Ultimately, all Value Drivers contribute to stable and predictable cash flow. You can begin increasing cash flow today by simply focusing on ways to operate your business more efficiently by increasing productivity and decreasing costs.
11. Scalability. Could your company improve its profit margin if it increased its revenue? Considering value-added services or even creating a mobile app can contribute to the company’s scalability.

Creating a plan to increase transferable value in your company is your job. No one else cares nearly as much as you do, and no one else will reap as great a reward for making sure that your company has the most transferable value it can. However, executing the strategy to increase value is everyone’s job. If you don’t already have top managers and skilled advisors ready and willing to provide ideas and implement Value Drivers, I suggest that you recruit them. Today.