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Enterprise Valuation Planning

Wealth Management – Business Consulting For You and Your Business Clients

WikiPedia Planning (also called forethought) is the process of thinking about and organizing the activities required to achieve a desired goal.

Planning involves the creation and maintenance of a plan. As such, planning is a fundamental property of intelligent behavior. This thought process is essential to the creation and refinement of a plan, or integration of it with other plans; that is, it combines forecasting of developments with the preparation of scenarios of how to react to them.

An important, albeit often ignored aspect of planning, is the relationship it holds with forecasting. Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like.  The counterpart to planning is spontaneous order.

As you read in the above definition, planning is done by all of us, in some cases subconsciously, regardless of the desired goal.  The greater the complexity or importance of the goal the more planning (and documentation) and expertise is required to develop and execute the plan.  Whether you are planning to go to the grocery store in the afternoon, start or re-organization of your business you engaged the process of planning.

The purpose of this discussion is to associate two planning functions affiliated with the services offered by some Wealth Managers. The two topics are personal financial planning, which is almost a standard in this industry.  Secondly, new entry, Enterprise Valuation Planning for the business owner, who in some cases may be the Wealth Manager themselves.

The topic of personal financial planning requires a deep analysis and understanding or the individual and/or family. Most people who have a formal Financial Plan have engaged a Financial Advisor (sometimes referred to as a Wealth Manager) to manage the process and ultimately the execution of the plan with products and services. The Wealth Manager (WM) will conduct a complete financial review and analysis to include, an understanding of the clients desires (retirement, savings, protection, etc.), current assets and liabilities, income and expenses, current insurance coverage (personal and P&C) and an overall understanding of the clients experiences, family values, financial knowledge and commitment to the process and desire to achieve the stated goal(s).

To distinguish between two styles of financial planning; differentiated by style, resources, clientele and business models predominately – static and consultative.

Static is used to capture a client’s desires and financial resources in order to assess one’s ability to meet their financial goal(s).  The WM will design a strategy using the resources at hand by repositioning investment assets into a portfolio that is better aligned with the stated goal(s), review income and expenses and increase savings if possible, review retirement vehicles used and make suggestions to help the client better understand their retirement options and possibly draft a hypothetical projection if appropriate. The delivery of the financial plan may be documented with stated recommendations or a bit more informal in a summary format.  The WM will meet with the client annually to review the performance of their investments and may make adjustments where needed – rebalancing or reallocation.

The consultative approach is more hands on and interactive.  The WM works with the client on each subject in the plan employing specific tools and analytics to design milestones in order to keep the plan alive and provide the client and WM points of reference in assessing the results in meeting the goal. This plan is usually documented and delivered in a format where edits can be made, updates can be easily included and each section is segregated for ease of use and reference. This style of planning requires a higher interaction and has a higher probability of success because of the “high touch” client/WM interaction.

These two styles because differentiate the skills, personality and knowledge a WM will need to possess. Focusing on the “consultative” WM as this person is highly engaged in the client’s personal and financial life. In this scenario the client/WM relationship is united and the WM may take the lead with respect to other professional relationships such as CPA, banker, insurance and attorney. Additionally, this WM potentially has a higher net worth client base with complex financial planning issues such as estate planning, divorce, children/step children/special needs children, alimony, family governance, other real estate, and insurance needs to name a few. AND this client may also be a business owner.

There is no one financial planning style better than another nor does the style imply one WM is better than the other.  The style is almost exclusively determined by the WM’s business, client’s needs, complexity and the value the client and WM put on the financial planning process. The consultative approach is more costly and intense than the static.

When working with a complex client you need to clearly understand the client’s goals, importance and dependency on each asset/portfolio the client owns or controls. You also need to understand how the estate is designed to transfer or distribute the assets.  When the client is an owner or partner in a business it is imperative that the WM understands not only what the client has in mind for the business but understands the business itself. In many cases when a client owns a business the business represents a very large percentage of the clients estate and income. I am sure you have heard a client state “I am sitting on my estate and retirement”. My question to WMs is this – Do you know your client’s business intimately?

Most WM’s have little knowledge of a client’s business except in where they may manage the DC/DB plan, pension or profit sharing plan and some insurance. As a WM do you believe your fiduciary responsibility ends with a personal financial plan?  If your client states “I am sitting on my net worth” are you acting as a fiduciary with respect to your client’s financial planning?  How do you define your role as the client’s WM? As a WM do you believe you are responsible to work with the client on all of his/her assets irrespective of the asset or the guidance you have over it?  Just because this asset is not liquid (maybe today) and you cannot control the asset, do you believe you should discount your fiduciary responsibility with the client?

Assuming your answers to these questions are in agreement with the overall intention of this discussion – as a WM we are responsible to work with clients on all facets of their financial assets. Below are a couple of statistics on small businesses in the US:

  • There are over 27 million small businesses in the US – <100 employees according to the SBA
  • 60 – 80% of all new jobs are attributed to small businesses
  • Small businesses represent 30% of the payroll in the US
  • Small businesses represent 35.4% of the US employment
  • Failure or closure rate for small businesses
    • 49% have a chance of failing within 5 years
    • 44% survive four years
    • 31% survive 7 years

The impact on the US and specifically local economies if a small business fails or just doesn’t grow can be devastating.  As you know, communities rely on small businesses daily.  The local hardware store, deli, manufacturer, restaurant, landscaper, auto repair, CPA, attorney, the list can go on.  Failure of any of these businesses will create unemployment in the community for not only the business owner but for members of the community who are employed by the business and this may spiral into greater losses, not to mention an increase in unemployment and even an increase in state benefit use, which can increase taxes and deplete state resources. This might be an extreme explanation but nonetheless it is reality at its worst that could potentially be dealt with and minimized – one business at a time.

The quandary is, as a WM you have access to financial planning tools but in many respects have no access to the tools or expertise of working with clients on their business as you do with their personal financial plan.  Sure, you can speak with the business owner client about how their business is going but to have a road map or guide as financial planning software provides you are somewhat at a loss. There is a software tool today that has been 30 years in the making.  The process is proven and the application has been tested without fail. The most significant feature is that it provides a road map for the WM and client to assess and determine the “enterprise value” of the business, resulting in a stronger firm that can be sustained and transferred to a successor. Most business owners assess the value of their business based on revenue and expenses – EBITDA.  The issue is that all the other functional areas of the business, which are components of this, are overlooked – until it comes time to sell!

Each business is made up of 18 drivers such as finance, senior management, operations, market share, customer diversification, barriers to entry, margin advantage and so on. In order to get the most out of your business and have the ability to maximize the value of your business, today and in the future, all 18 drivers MUST be identified, operating proficiently and improved as your business grows.  If ignored because the business is operating well and producing great profit the business owner may uncover operating inefficiencies during the sale or transition process – and encounter a diluted monetary value at the time of the sale thus not receiving the ultimate dollar value or sale price for the business. This is where we revisit planning.

There is an association between personal financial planning and Enterprise Valuation Planning. Both are processes where you are analyzing, assessing, monitoring and improving the assets ability to meet its goal.  Each business owner and WM includes the business in the personal financial plan but unfortunately, until today, has never been included the business as an active responsibility of the WM. The WM can be active or passive (active would be the wiser role to assume though) when introducing this concept to the business owner.  In the early stages of establishing the business relationship the WM will work closely with the business owner on completing the software set up, analyzing the 18 drivers and developing a plan to work on each driver.  Depending on resources and desired time to complete the implementation of the plan, the WM may meet with the business owner quarterly in the early stages and then ultimately annually after completed.  This could take anywhere from 6 months to a couple of years, much like a comprehensive financial plan.

The benefits the business owner derives from the process of Enterprise Valuation Planning:

  •  Transparency of the 18 business drivers
  • Identification regarding areas of strength and areas for improvement
  •  Results driven plan
  • Higher probability of success – sustained and transferrable business
  • Higher probability to capture the greatest economic value

The benefits to the WM’s business by incorporating Enterprise Valuation Planning:

  • A significant market differentiator in the WM’s business;
  • Deeper and broader relationship with each business owner client;
  • Additional source of revenue;
  • Cross-sale opportunities – retirement plan, buy/sell insurance, key man life, deferred comp plan etc.;
  • Documented future assets – FAUM*.

*FAUM – Future Assets Under Management. Impact example – assume the WM currently has $100M RAUM (regulatory assets under management) and has 10 business owner clients with an average business value of $20MM which accounts for $200MM in FAUM. This amount of course cannot be included on the WM’s firm ADV but the amount is now documented and has increased the value of the firm through increased revenue and a higher probability of managing those assets when the client company sells, and a more committed/loyal client. As a practitioner or RIA business owner the value of your RIA firm will enjoy an increase importance because of the inclusion of FAUM.

Getting started; evaluating your skills, business model, resources, client base and market demographics will help the WM to create a plan to include Enterprise Valuation Planning for business owners (as noted in the Wikipedia definition).

As a WM you already possess the skills to work with a business owner client because of your understanding of the personal financial planning process.  The Enterprise Valuation Planning software will be your guide through every business driver and the improvements required to achieve the desired result.

Your business model will be amended just as if you are adding a new product.  You will design promotional materials, train staff as applicable and introduce the service to the appropriate clients. Once you have perfected the service and determined the resources you will require to execute the new service offering you can then begin to introduce Enterprise Valuation Planning to prospects.  This could even turn into a service unto its own for business owners and your WM services come as an add-on to these clients – a new “door opener”.

When examining your client base you should categorize your clients by gross sales, employees, business and maturity of business. This will assist you in determining your approach and service. Additionally, you will have a more perfected service model when you take this new service to prospective clients.

As a WM in a regulated environment you need to outline the compliance required Compliance policies and procedures and supervision for this expanded service.  Building out or expanding your compliance and operations procedures to accommodate new clients and in this service will be required.  You should review the areas which will be effected and make your amendments.



Is it time? Are you and your firm ready to embark on a new service offering? The potential to naturally expand your service offering with retainer income is here.  This complete package is available in a turn-key format including:

  • Enterprise Valuation Planning software
  • Enterprise Valuation Planning consulting – service development inside your firm
  • Product training
  • Product positioning
  • New product business consulting – roll out assistance, pricing, service model(s)
  • Compliance Procedures and Risk consulting

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