By Joni Youngwirth
At some point, most advisors will arrive at a crossroads in their practices: Should they continue to pursue business growth? Or should they maintain the status quo and start to disengage? How do you know what decision is right for your practice?
The 5 Stages of Small Business Growth
In their classic article "The Five Stages of Small Business Growth," Neil C. Churchill and Virginia L. Lewis describe five stages in the evolution of small businesses: Existence, Survival, Success, Takeoff, and Maturity.
The Success stage is particularly unique in that it offers two potential routes: continued growth or disengagement. A firm that continues to grow moves into Takeoff mode, a period of rapid growth, and then into Maturity, during which time the firm will be challenged to maintain its entrepreneurial spirit. Alternatively, if the owner of the firm chooses to disengage—perhaps to focus on personal or family interests—the firm could remain in the Success stage indefinitely, though it may not experience the same growth trajectory of firms in the Takeoff stage.
Churchill and Lewis also identify eight key factors that determine the ultimate success or failure of a business. The first four relate to the business itself, and the second four relate to the business owner:
1. Financial resources
2. Personnel resources
3. Systems resources
4. Business resources (e.g., client retention and market share penetration)
6. Operational abilities
7. Managerial abilities
8. Strategic abilities
The importance of each factor varies depending on where a firm is in the development process. In other words, are you a boomer advisor or someone just starting out? Your personal goals and financial resources are essential in the first stage, whereas business systems and your strategic abilities assume greater importance at business maturity.
What Does This Mean if You’re a Boomer Advisor?
Boomer advisors are likely firmly in the Success stage. You’ve endured the hard times of Existence and Survival, arriving at a point of economic health where the practice yields at least average profits.
Some of you may view your firms as a platform for ongoing business growth. Others have (consciously or unconsciously) disengaged, shifting energy to personal interests outside the business. Again, as long as there is sufficient cash and internal delegation, either option can work. But there are other considerations that may come into play.
Intent to work indefinitely. Many boomers want to “work forever” or as long as you’re able. But external factors can affect your plans. Since sustaining the disengagement model depends on steady cash flow, it’s important to forecast future revenue accurately. What happens if you lose a few clients to another firm, clients increasingly draw down their assets, or clients pass away? All directly affect revenue (i.e., the key factor in remaining in the Success stage versus reverting to Survival mode).
Attracting new clients. It’s easy to think you’ll simply replace disappearing business with new clients. Well, think again. The oldest baby boomers are just starting to turn 70. Gen X investors are now entering their 50s. Are these investors more likely to seek an advisor nearing 70 or another Gen Xer in the industry? The hard truth is that attracting new clients may become increasingly challenging.
“I hate that management stuff.” You’ve achieved success in the industry thanks to your excellent professional skills. But long-term growth and viability require myriad business capabilities. Specifically, you must question whether you’ve developed the management skills that are just as critical to the growing enterprise as your professional expertise, if not more so.
Leaving a legacy. Many advisors talk about building an enduring firm. If you’re a solo, however, the more likely scenario is selling your practice. Ensembles tend to sell to other ensembles, and solos sell to either solos or ensembles. So, if you truly want to build a legacy firm, you cannot choose to disengage. Instead, your focus should be on continued growth and advancement to the Takeoff and Maturity stages.
What About Next-Gen Advisors?
Next-gen advisors will likely buy a practice already in the Success stage. In many cases, you will combine the new practice with a firm you have taken through the Existence and Survival stages. When you reach the success crossroads, which you’re likely to do at an earlier age than the previous generation, you will face the same hard decision: Will you reinvest your resources in the firm, or will you redirect your time, energy, and resources elsewhere?
If you choose continued growth, you will need to arm yourself with a variety of well-honed skills. These include:
• Embracing managerial responsibilities, especially those related to managing people
• Having access not just to financial resources but also to borrowing power
• Taking advantage of highly sophisticated technology, which will likely encompass business management functions as well as financial planning and investment management
• Understanding the impact of retention and niche-specific growth on expanding market share
• Thinking strategically to match the needs of the firm with personal goals
Be aware, there will be challenges awaiting you in the Maturity stage, when you must take care to preserve both your firm’s financial gains and its entrepreneurial spirit. As Churchill and Lewis note, if either is lost, your practice will ossify.
The Road Ahead
It seems likely that the industry will be shaped by those who choose to bring already successful firms to the Takeoff stage, potentially evolving into a big business. Regardless of your personal vision of the future, it’s essential for you to make strategic decisions about the importance of growth to your firm. Whether you’re a baby boomer or a next-gen advisor, the choice to grow or disengage should be one that is consciously made.
This post originally appeared on Commonwealth Independent Advisor, a blog authored by subject-matter experts at Commonwealth Financial Network®, the nation’s largest privately held independent broker/dealer–RIA. To subscribe, please visit http://blog.commonwealth.com/.
Joni Youngwirth is managing principal, practice management, at Commonwealth Financial Network®, member FINRA/SIPC, an independent broker/dealer–RIA.