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Business of advice – You can grow with or without capital

Fifth part of our serialisation of the Taxbriefs book Business of Advice. In this extract author David Shelton explains that you don’t need huge funds to grow your business.

Over the next two years, the pace of consolidation in financial services will speed up. Consequently all advisory businesses will face the issue of buying or selling, which means that a pre-determined strategy is essential. It is as important as recruiting new advisers, managing risk and delivering excellent advice and service

The approach to growth will be dominated by two factors:

  • Attitude and policy toward organic growth or amalgamations: a mix of subjective views and deliberate policy.
  • Access to funds: internal or external.

Clearly the desire to grow may be constrained by availability of funds. However, lack of funds should not prevent growth, although it may well be at a slower pace.

Pro-active organic growth can be achieved by minimising some of the funding costs of growth. That means increasing adviser numbers using the self-employed model and buying books of business as opposed to whole businesses. Growth can also be supported by complete streamlining of your processes and financing purchase deals by using recurring income from the acquired business books. So, your rate of profit may be less (a likely consequence of adopting the self-employed model), but your dependence upon external capital will be lower. Finally, you have to adopt a very clear policy with regard to profit and the significance of building up capital through retained earnings to fund your growth. The only other internal route is to increase the capital contribution of the shareholders.

Pro-active acquisition demonstrates a serious and planned strategy to substantially grow the business. To adopt this approach you should develop a detailed plan and engage external consultants to help identify potential targets, run the acquisition process and undertake due diligence. You will need to establish funding policy and sources in advance, publicise your strategy and devote a percentage of senior management time to the exercise.

Re-active acquisition is often summarised as ‘we never say never’. This is where the enthusiasm for amalgamation is low, but you would be prepared to have an initial conversation rather than never entertain the idea of acquiring. In this case, screen out non-starters as early as possible. Advisers often get drawn into lengthy conversations or pre-negotiations that end up going nowhere. Sometimes the parties can only decide this after they have talked in detail, but many advisers often reflect that the potential of a deal was highly unlikely from outset.

Maintaining the status quo will be right for some businesses. If the funding does not exist, the adoption of a conservative approach to acquisition is appropriate. This is particularly the case if the business is sound and is looking to sell out within five years. In those circumstances entering into acquisitions and the associated funding may be quite wrong in the context of preparing for sale.

Finally, because changes of this nature are so fundamental, you must consider where you stand personally.

To test your own position on the question of organic growth or acquisition, answer the following questions.

  • Are you comfortable in growing the business rapidly?
  • Do you want to diversify the business?
  • Are you happy to share management and ownership with more and different people?
  • Can you devote less time to your clients?
  • Are you happy to take external funding?
  • Do you enjoy managing as opposed to advising?
  • Do you have a clear vision for a larger business?
  • Are you happy to take risks: sometimes with your own personal finances?
  • Have you experience of acquisitions?

If you answered yes to most of these questions, then you are pre-disposed toward acquisitions. The more important point is that the issues raised by the questions are those which you should think about if you are to acquire or be acquired. Incidentally, notice that we rarely use the term ‘merger’ because in practice this does not happen: one party will always be dominant.

Serialised from The Business of Advice, the definitive guide to running a financial advice business. Details and online purchase (£145) at:

DAVID SHELTON: Head of IFA Consultancy Service – Scottish Widows


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