Coronavirus market alerts
Coronavirus market alerts
Find a listing of all articles and market perspectives on the coronavirus and its impact on the global economy.
March 18, 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.
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.
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.
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.
There are steps you can take today to help maximize the value of your practice for a smooth transition:
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.