Succession planning: Laying the groundwork for selling your financial practice

By: Erin Fossett

March 17, 2020

Establish a game plan

Even if you’re years from retirement, it’s worth considering your priorities. How important is it that your firm lives on after you retire?

Are you willing to train a successor? Are you looking for a clean break, or would you be interested in working for a few years in a scaled-back advisory role?

By deciding on some guidelines now, you can start thinking more strategically about your business and what retirement might look like for you. You can also start weighing your options between internal and external succession. This article discusses the benefits and challenges of both options and then lays out some steps you should take now that would help maximize the value of your practice when you do decide to sell – regardless of whether you ultimately decide on an internal or an external succession plan.

Option 2: Selling or merging your advisory firm

Some financial professionals, especially sole proprietors, may prefer external succession strategies, such as selling their firm or merging it with a larger enterprise. This may be less complicated and could be completed in a matter of months instead of years.

In most cases, your firm would no longer exist as a separate entity, and you would have very little say in what would happen to employees and clients once the deal was closed. And while external succession may involve fewer financial complications, it won’t necessarily earn you a higher valuation. An acquiring firm is primarily interested in your book of business and may not pay a premium for your brand, operations, technology, or staff expertise.

If you hope to sell or merge your practice, begin your preparations early. While it may only take a few months to find a potential buyer, the process of building and marketing the value of your practice should begin years in advance. Start as soon as possible to track key performance metrics such as operating cash flow, profitability, fee-based recurring revenues, and client growth and retention. That way, you can establish a record of success while highlighting areas for potential improvement.

Best practices that may ensure a smooth, profitable succession

There are steps you can take today to help maximize the value of your practice for a smooth transition:

• Maintain a growth mindset. Even as you approach retirement, it’s important to reach out to a broad range of new clients, including younger clients. A buyer is primarily interested in future earnings potential and will assign less value to a practice made up primarily of retirees drawing down their assets.

• Talk to your clients. Don’t be afraid to talk to your clients about your succession plans. Younger clients in particular will appreciate knowing that their needs will be met for years to come – even after you’ve retired.  It’s also helpful to emphasize how a sale will benefit clients — for example by providing access to added resources or investment alternatives.

• Involve your broker-dealer. Your broker-dealer may be a valuable partner for identifying potential buyers or younger advisors looking for ownership opportunities. By identifying potential buyers in the same broker-dealer network, you could make the transition much smoother for your clients.

• Get a professional opinion. Periodic professional valuations provide a snapshot of what your firm is worth. An external opinion can be especially helpful if you’re working with an associate or family member, when you may be tempted to accept less than your practice is worth.

• Start handing off more responsibility. Even if you are years from retirement, the more responsibility for day-to-day operations that you can hand off to associates, outside vendors and technology programs, the smoother your transition is likely to go. This approach has the added advantage of giving you more time to spend building your client base and helping you maximize the long-term value of your financial practice.