Bill Keen is the Founder and CEO of Keen Wealth Advisors and the Best-Selling Author of Keen on Retirement.
If you own or run a service-based business—whether it be a wealth management firm, law office, veterinary practice or something else—you’ve probably noticed there’s a trend that seems to be gaining momentum with each passing day: utilizing mergers and acquisitions (M&A) fueled by private equity (PE) and other outside capital to grow as big as possible as quickly as possible.
While the “grow fast, grow big” plan might be great for product-based industries, it carries a danger for service-based companies. Namely, focusing on growth to the exclusion of all else sets the stage for dropping the ball on client service—not to mention the execution of client strategy.
The solution to this danger isn’t to play small. Scaling is absolutely necessary, and bringing in outside partners to help achieve that scale may be the right solution in certain situations. However, if you do, it’s crucial to maintain a healthy balance between client focus and growth.
The Benefits Of Scaling
In the wealth management industry (as with so many other service-based industries), there’s no question that some level of scale is important. If you are a solo financial advisor or wealth manager operating out of your house or in a small office, for example, it’s very difficult to deliver a full-service package to clients. On top of that, burnout is a very real danger.
The same holds true for law offices with a single attorney and no paralegals and/or legal secretaries, psychologists with no receptionists and dentists with no oral hygienists. In fact, it holds true for every service-based business: Growing to the point where you can bring on additional team members will help distribute the load and give your clients access to a wealth of competencies.
Having some scale also enables you to tap into multiple thought processes, multiple brains and additional resources. And, it ensures there are redundancies in place to keep the ship afloat when people are on vacation, out sick or want to leave the business.
At my own firm, between our W-2 and long-term contract staff, we employ over 30 financial planners, client service associates, support specialists and so on. I absolutely think you can grow a business to scale while simultaneously maintaining or even enhancing the client experience.
Maintain A Healthy Balance
Scaling in and of itself isn’t inherently bad. Scaling too fast, though, can be problematic. After pouring your heart and soul into building your business, it can be tempting to see the money offered by private equity and think, “This is great. I’ll make a ton of money by wholly or partially selling my business, and my clients will get the benefits of working with a far larger business, too.”
As alluring as this thought might be, I want to caution you to slow down and really think about what you’re doing.
Let’s say, for the sake of example, that you run a wealth management firm. After a merger, you might be rolled into a company that has a tax division, an investment division, a legal division (for estate planning), an insurance division and so on—and the PE firm handling the M&A might tout the fact that all of these divisions create more opportunities for your clients.
In some cases, though, those benefits don’t materialize. Instead, each division is siloed, so clients end up having to repeat themselves to every single person that they work with. Not only that, but there’s a likelihood that things will be missed or overlooked, simply because the sheer number of clients now being served makes it almost impossible to stay on top of every little detail. Eventually, clients can get fed up with the lack of service and move their business to firms that can provide the kind of quality experience they’re looking for.
Finding The Solution
So, what’s the solution? The answer is twofold. First, take a good look at your business and your goals. There’s a lot of opportunity to grow and scale without bringing in outside capital or a board of directors. Can you achieve your fiscal and business goals without turning to PE?
If you decide to go the M&A route, you need to do your due diligence to verify there are processes and plans in place so that as your business is scaled up, the buyer will remain laser-focused on client service. After all, clients don’t care how big your business is; all they care about is how they’re treated.
So, do some digging. Will the new owners continue to do what’s in the best interests of your clients? Or, will every decision be made in service of generating profits? If your buyer is going to focus on growth and profit to the exclusion of all else, you may want to look for someone else—someone who will value your clients the way you do and knows how to help your business scale while making the client experience better.
I’ve been in this business for over 30 years, and I’ve never met a client who wants to be scaled. I’ve only met clients who want to get top-flight service: to feel seen and valued as more than just a dollar sign. So, think long and hard before you jump on board the M&A train (and do your diligence if you do decide to sell). Believe me, your clients—the people who have helped propel your business to the heights it currently enjoys—will thank you for it.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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