In this, the fourth article Phil Billingham’s exit strategy series, he challenges one of the industry’s most revered ‘sacred cows’, that is, that advisers are ‘building businesses’.
In many cases of ‘building a business’, usually larger firms are doing just that.
But let’s take a small firm. In fact, a one man band.
We can start by acknowledging that the advice and service provided from these small firms can be very good. However, supporting the delivery of this can be an issue.
So what is the ‘firm’? And, importantly, what does it own in the way of assets?
“In reality, there is no – or at best limited – value in a firm once you take the adviser out of the business.”
If we ignore the desks and chairs and computers – which may be worth a couple of thousand pounds at best – the only real asset is the relationship with the client. Which is all about the adviser. In essence, the underlying income is derived from this relationship
If we take the adviser out of the picture – death or retirement being the usual methods here – then what is left? In short, is there any actual business left behind?
I’m going to be harsh, and say no. In reality, there is no – or at best limited – value once you take the adviser out of the business.
In short, there is no real ‘business’ there in many cases, but just a job.
If that is true, how do you exit?
Well, in the same way as any other self-employed person exits. By running an efficient and profitable business and investing in assets outside of the company. So the boring route of pensions, Isas and debt-free property.
If retirement is supported by substantial non-company assets, if there was to be some value in the firm, it becomes a bonus rather than being the figure we depend on.
In this we are no different to other ‘reputation’-based professionals, such as chartered surveyors, barristers and engineers. While they are sometimes part of a larger grouping, and so can have some value, the default position is that there is no capital value in their employment apart from in themselves and the relationships they have.
So how can we tell if we are ‘self employed’ or really do have a business?
The classic one is to go away and take a full three weeks off – with no iPads and smartphones.
If that is possible – perhaps with some planning – then it would seem likely you have a business.
If that is simply beyond comprehension, if that is something that would kill the firm, then you probably have a job. A professional, ethical, high-paying job, but a job nonetheless.
If this describes you, what are your options?
- You can accept the position and run the firm as a cash cow in the years before retirement in order to build up enough assets to retire on.
- You can decide that this does not properly reward you for all your work and effort, and so seek to join forces with another firm in order to create a real capital value.
In either case, can I suggest you need at least a five year ‘run up’ to your eventual retirement? Ten years would be better, if possible
The important thing is to deal with the situation as it really is, not carry on assuming it is as we would like it to be.