Succession planning should be at the top of any financial advisors to do list for many reasons – to prepare the practice for a career change, plan around health issues that may arise, or plan for their own retirement. As a financial advisor at a firm with none of its original advisors, I’ve witnessed good succession planning come to fruition several times. However, succession planning is still something that is ignored for too long or handled incorrectly by many people within our industry.
Succession planning may be intimidating due to its customizable nature. There is no one size fits all option as each plan must fit the needs of the employees and clients at the practice. There are many factors that determine whether a certain avenue is right for your practice. The following are the most common paths to plan your success and how to ensure the smoothest transition possible.
Why succession plans are valuable
The idea of losing the meaningful social interactions that come with owning a practice can be disheartening, pushing many advisors to avoid retirement. Without a succession plan, these advisors slowly work less until their practice ceases to exist over time. It’s important to consider what would happen to your practice beyond your retirement, especially if you suddenly had to leave due to unforeseen hardships. Planning in advance prevents you from leaving your business in the lurch if this were to happen.
Sale to a family member
The most common plan of succession is to pass the business to a family member. Many advisors pick this option so that they can maintain the value of their business and feel confident that their practice is in good hands. Selling to family gives a better sense of comfort and control, but can also bring certain challenges to the table. For example, family members may not possess the skills or interest to run a business, or the family dynamic may lead to hurt feelings or conflict. The only way to circumvent these potential hiccups is to remember to treat a family sale like a normal business transaction. Establish an agreement ahead of time so that family members understand the terms and details of the sale. When done correctly, selling a practice to family can result in peace of mind and can help secure income for the next generation.
Internal sale of practice
Selling internally is one of the best ways to ensure a smooth transition and maximize the value of your practice. Your business is more likely to withstand change with a buyer who already knows your clients and processes, and your clients are more likely to remain with the business if they are working with a familiar face. A buyer who already works within the firm understands its value from an employee standpoint, thus making the purchase more valuable. One drawback of internal sales is that your options are limited to the size of your firm. This creates a major limitation for those advisors who work independently and do not have the option of finding a buyer from within.
External sale of practice
External selling can be a difficult process, but there are tactics that can make it a smoother transition. The difficulty lies in the unknowns on both sides such as terms of the sale, perception of value and unfamiliarity with clients.
For this option to be most effective and to avoid loss of clientele, it is better to be replaceable within your practice. The more the business depends on you, the less it is worth to the buyer. You can help the transition by staying with the practice long enough to familiarize clients with the new management. The buyer is likely to pay more when the seller agrees to stay for a period of time to aid with the transition.
Now that you’ve found a buyer…
As with any business transaction, present a clear plan of action that avoids miscommunications. The start of your process should include an agreement so that both parties understand the terms of the sale. The timing of the transition, potential changes and expectations should all be agreed upon before any proposals take place.
Many factors count toward the price of your practice, and successful succession planning should help you to obtain the maximum value for your business. Other factors that increase its value include:
- Maintaining detailed notes and organized files
- Higher recurring revenues
- Younger and accumulating clients
- Quality of clientele
Overall, succession is most successful when the buyer and seller both feel that it’s a good fit. Ensuring that your employees and clients are left in good hands is your primary responsibility. If the buyer does have a different style of management than you, it’s important to discuss how they plan to adapt in order to transition smoothly for clients and employees.
Succession planning can be a daunting task for advisors who own their own practices. If you examine and understand the long-term effects on your employees and clients you will have clarity on the right decision to make for the future of your business. Your services are of value to your clients and you have spent time and money in creating those relationships. Without a succession plan, the fruits of your labor would go to waste. If you create a good succession plan, your legacy can live on and continue to positively affect those involved in your practice.
Clay Gillespie is a Financial Advisor with Rogers Group Financial. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.
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