Only 30% of advisors currently have a succession plan in place. Furthermore, many existing strategies are not well-planned and would be difficult or impossible to execute. Although a weak plan is better than none at all, a high-quality plan is crucial to protect your practice and legacy.
A succession plan helps provide continuity for clients and employees who rely on our practices, although diverse factors motivate advisors to develop a strong plan. My plan serves to protect the clients, who have built up my successful business, and ultimately enabled a lifestyle that I did not previously envision. Others may desire to reward a long-time employee suited for ownership, protect growing assets on a personal balance sheet or use the profits to support your family’s lifestyle.
Steps for a Successful Succession Plan
Transition planning experts recommend business owners start the process no less than five years before they’d like to retire. This lead time is important to ensure proper preparation for a seamless transition.
Establish Your Team
A quality succession plan should be developed with help from a team of experts. An attorney and a CPA will make up the foundation of your transition planning team. They will bring to light important tax and legal implications associated with the transition or sale of your practice and will help you prepare for all contingencies.
Work with a CPA to clean up your books and records, understand the tax liabilities of a sale and prepare a list of documents required to effectuate an orderly transition. Your attorney will organize and update documents relevant to an outside sale that will likely be requested as part of a buyers’ due diligence process and a part of the ultimate business transfer.
Understand the Value of Your Business
The valuation of your business is an indicator of success to potential buyers. According to David Grau Sr., author of Succession Planning for Financial Advisors: Building an Enduring Business, 75 percent of advisors have not conducted a formal third-party valuation of their practice. As a result, 90 percent of succession plans do not reflect the business’ actual value.
If you have not already done so, conduct a formal valuation of your business. Make sure the valuation breaks revenue streams into multiple categories, as well as a total number. Separate out recurring revenue from first-year revenue or one-time income sources and commissions. If possible, also segment revenue by other meaningful sub-categories that impact overall value, such as client age, product type, and client tenure.
Create a Transfer Action Plan
Regardless of if you design your succession plan for internal or external sale, make the payment plan easy and affordable. In the event you have an internal successor, consider payroll deduction for a promissory note repayment. You will be in control of the payment and can make it part of both your employment agreement and promissory note provisions. In the event you utilized trusts in your personal estate planning, make sure to speak with your legal counsel about assigning the promissory note to the appropriate trust.
Latest posts by Edward Skelly, CLU, ChFC, RICP, RFC, MDRT (see all)
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