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Erin Fossett

Succession planning: Laying the groundwork for selling your financial practice

By Erin Fossett, Author | 03/17/2020

One of the most important issues you’ll face as a financial professional is deciding what to do with your practice when you’re ready to retire. Establishing a sound exit plan is essential for taking care of the needs of you and your family, and it’s integral to your responsibility to your clients to make sure they are cared for even if you’re no longer in the picture.

Yet a recent study found that only 73% of financial professionals had a written succession plan in place.i  The study, conducted by Financial Planning Association, in partnership with Janus Henderson, also revealed that only 60% of financial professionals within five years of retirement had a plan in place. This leaves the fate of many advisory practices in limbo – along with their clients and employees.

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 1: Grooming a successor

With internal succession, a chosen successor takes over ownership and management of your firm, which may continue on in much the same form. This option may offer greater control over the timing and terms of your succession, as well as the fate of your clients and staff.

Of course, this approach has its challenges, including identifying or recruiting a potential successor — someone with the skill set necessary to oversee a financial practice. You will also need to consider whether this person has the financial resources to compensate you fairly for the value of your practice while also meeting the day-to-day cash needs of the business.

  • Making internal succession work. A financial professional may need to start several years in advance to recruit and train a potential successor. Some firms have started internships or ownership tracks to attract, retain and motivate top talent. You may also need to consider creative strategies to facilitate the financial side of succession. For example, a gradual transfer of ownership through profit sharing or performance bonuses may carry some tax advantages.
  • Have a contingency plan in place in case the sales agreement sours. When negotiating the sale of your practice, it’s important to make sure your interests are protected. Even the most carefully designed succession plan can run into rough waters, especially if you and your chosen successor disagree about the direction of the firm. For this reason, it is recommended you work closely with your attorney and accountant to structure any gradual transfer of ownership. Provisions should include a strong noncomplete clause in case either of you decide to dissolve the agreement. The plan should also give you the option of buying back any transferred ownership stake at a discounted rate.
  • Develop a timeline. It’s essential that you are emotionally prepared to relinquish control. It could help to establish a disciplined timeline to progressively hand over more responsibility as your successor meets certain success metrics, such as new revenue growth or client acquisition. You can show your confidence in your successor by letting them set the agenda in client and staff meetings. While you might continue to work part time during an interim period, you’ll need to be ready to defer to your successor if former clients or staff members reach out for help after you’ve exited the firm.

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.

By planning ahead, taking the necessary steps to maximize the long-term value of your business, and negotiating a fair and comprehensive sales agreement for your practice, you can help ensure a more lucrative settlement for yourself and a smoother transition for your clients.

i Napach, Bernice. (2018, April 25.) 73% of Advisors Don’t Have a Written Succession Plan: FPA. ThinkAdvisor.

The concepts in this article are intended for educational purposes only. Check with your organization for any specific policies or procedures they have related to these activities.

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