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• If you ’ re happy with your current income but want to build long-term equity value for a possible sale of your firm , then you should make a conscious decision to trade a lower profit margin for higher growth . Shoot for at least double-digit organic growth , and if you want to get aggressive , complement the organic growth rate with a merger and acquisition strategy . But don ’ t let your operating margin drop below 15 % if
Bookstore the rule of 40 % is a solid way to think about the mix between the growth and profitability of your business . fa-mag . com / bookstore
and excluding interest and taxes ) averaged about 30 % in 2020 .
• The average advisory firm with more than $ 250 million in assets under management has averaged 37.5 % on the “ Rule of 40 %” scale ( that is , a 30 % profit margin plus 7.5 % annual growth ).
Here are a couple of observations about those numbers .
1 . It ’ s not quite apples to apples , because the data I ’ m using combines fiveyear average growth rates with 2020 ’ s profit margins , but it should be directionally correct .
2 . The average advisory firm is quite profitable but growing slowly .
the Mix Of Growth and Profit Margin
The key question now is : What is the right mix of the growth rate and profit margin for your business ?
To answer that , there are several things to consider .
• If you ’ re optimizing for current income and not too concerned about having a big liquidity event ( such as a sale ) in the future , then the 30 % ( or more ) profit margin and an annual organic growth rate of 5 % to 7.5 % should work fine .
• If you have a high profit margin ( 40 % or more ) with little to negative revenue growth , you ’ ve got a wasting asset . You won ’ t attract top talent and you should consider selling or regrouping to get back on a growth track . possible as that leaves little cushion during an extended bear market .
• If you think you ’ ll sell the business someday , start making it salable today . Even if your business isn ’ t for sale , it must be salable . That means you have clean and updated monthly financials , you ’ re tracking metrics , you have a solid team , you have a consistent record of organic growth , you have a nice mix of clients from an age standpoint , etc .
The Rule of 40 % is a solid way to think about the mix between the growth and profitability of your business . The key is to get clear on your business strategy , specifically by asking , “ What are you trying to accomplish ?” That will inform the strategy you develop to drive your arrival at a number that ’ s 40 % ( or more ). What is your Rule of 40 % number ?
Steve SanduSki , cfp , is a financial advisor business coach and the co-founder of rol advisor , a discovery process technology system . He ’ s also a New York Times best-selling author and host of the between now and success podcast .
28 | financial advisor magazine | september 2022 www . fa-mag . com