Podcast Center
Video Center
Webcasts
Resource Center
Events
By 
October 11, 2023 at 02:58 PM
What You Need to Know
- Firms with with $1 million to $10 million in yearly revenue have outsize growth potential, but many hit a common roadblock.
- You might blame flawed marketing, training or client experience, but there's likely a more fundamental culprit.
- Intuition won't cut it at this level; you need a data-driven growth strategy.
Why do so many midsize advisory firms — those with $1 million to $10 million in yearly revenues and with greater potential than both smaller and larger firms — hit a growth roadblock?
Depending on who you ask, you might hear that failures of marketing, training or client experience are to blame. But as I’ll explain, there’s a different and more fundamental culprit.
Midsize firms not only have a great potential for growth but also have compelling reasons to grow. They possess a distinct advantage because they have more resources than small firms and more flexibility and potential to scale and adapt than large ones. And their owners are usually highly motivated to push their advantage.
First, when a firm hits the midsize tier, its valuation can really expand. A small firm (with less than $1 million in yearly revenue) has a market value that is usually flat. But once it becomes midsize, its valuation can increase relatively quickly and dramatically — expanding up to 3.5 times revenues within just a few years.
This reflects the fact that deep-pocketed acquirers are willing to pay a premium for midsize firms’ robust assets under management, stable client bases and potential for profitability. Simply put, one big motivator for owners to grow a midsize business is the enhanced opportunity for extra return — or alpha — that they can harvest from it.
The second reason that owners of a midsize firm typically want to capitalize on its growth potential has to do with the speed of change in the advice industry. At its core, a financial advisory business will always be about providing beneficial and needed advice to clients. At the same time, the quality and types of services that firms offer will continue to evolve.
Midsize firms have a big advantage to press here: They are small and nimble enough to change quickly, yet large enough to have the resources needed to keep them at the forefront of the industry’s evolution.
But robust growth isn’t a given once a firm reaches the midsize realm. Many run into roadblocks — demonstrated, for instance, by the strong turnout at a recent Herbers & Co. event focused on this topic. Why do so many firms find that their growth stalls out once they reach a certain size?
Some argue that it’s due to a niche-marketing focus, which can be effective at getting firms quickly off the ground but may later constrain their ability to grow. Other often-stated culprits include a lack of capital, an outdated client experience or difficulty in recruiting, training and retaining talent.
But 20-plus years of consulting has persuaded me that the biggest and most common pain point for midsize firms is intellectual capital.
Midsize financial advice businesses are often run by their founding owners. Many of those leaders are good at building and running a business, but a lopsided amount of the firm’s intellectual capital and decision-making authority resides with them.
These leaders may have lots of ideas on how midsize firms can renew their growth. But they often don’t have enough time to deploy, implement and manage impactful strategies.
