3 Comments

Dos and Don’ts of Passing Down Your Practice

The average age of financial advisers in the U.S. has climbed north of 50 years old and approximately 43 percent of the total population of advisers are between ages 55 and 60. With so many advisers nearing retirement, the industry is facing a crisis when it comes to succession planning.

Typically, when the owner of a financial advisory practice wishes to retire, they’re faced with one of two choices: they can sell their firm to an institutional buyer, such as an RIA rollup shop, private equity firm or a regional acquirer; or they can bring in a junior partner and gradually introduce them to his or her clients and transition the book of business over bit by bit.

Ideally, firm owners prefer to transition their book of business to a junior partner over a five- to 10-year period. However, throughout my career helping small business owners transfer ownership of their firm and retire, I have found that financial planners ironically have some of the worst track records when it comes to successfully planning and executing an ownership transfer.

In this light, here are a few dos and don’ts when transitioning ownership of your business to a younger partner:

Don’t delay. It’s never too early to start the succession planning process, which can take more than a decade from start to finish. It takes years to introduce a new partner and provide them with the training and resources necessary to keep the business afloat. Too often do I see advisers continue to work into their senior years only to realize they have no exit strategy in place. Consider your clients; who is going to take care of them after you leave? And how are you going to monetize the business you’ve worked to build over the course of a lifetime?

Do get your younger partner involved in discussions and meetings with your larger, more significant clients throughout the transition process. Junior partners are typically brought on initially to handle an adviser’s smaller accounts. While this is all good and well in the beginning, it does not provide the new owner with the proper experience and training required to serve the bigger clients, which will be one of their primary responsibilities once ownership is transferred.

Don’t forget about the intangibles like the management style, likeability and cultural fit of the new owner. Some financial advisers still run a very formal shop with pressed white shirts and systemized client communication techniques. Others are more comfortable in khakis and a polo shirt, and prefer a more casual style of correspondence with clients. Also, does your new partner fit in well with other employees at the firm? Making sure you two see eye to eye in these categories can really smooth out the transition process, both for yourself and your clients.

Do go over the company’s financials. Not only must you teach the new partner how to handle your clients, you must also teach them how to run a business. What size client is most profitable? How does the business manage its costs? How do we manage the staff? Many new business owners overlook these extra responsibilities, which can be overwhelming at first. But as the outgoing partner, you need to make sure the business is left in a position to remain profitable. Typically, selling advisers are paid out in installments. If the business fails, these payments could stop, leaving the outgoing adviser in a sticky situation.

Don’t think you won’t need outside help. Hire a team of lawyers, accountants and even a management consultant to delegate the distribution of responsibilities throughout the process. Many times the incoming owner wishes to take over more responsibility at a faster pace than the retiring adviser is comfortable with. Management consultants go a long way in easing this tension.

Do be open to some degree of change. Relinquishing your power and watching the business you spent years creating change in front of your eyes can be a difficult pill to swallow. However, standing in the way of the new adviser’s vision will only muddy the process. You must accept that some aspects of your business are going to change under new ownership. The sooner you come to terms with this reality, the better.

No matter how much you plan, transitioning your business will almost inevitably come with a few bumps in the road. However, following this list of dos and don’ts will put your firm in a much better position to smoothly and successfully navigate the transition. Many of your clients have worked with you for decades, and you owe it to them as their financial adviser to ensure their financial futures are maintained. The first step in doing so is to make sure your business is taken care of after you’re gone. So take this transition process seriously and start early. Your clients’ well-being depends on it.

 

Stephen Brubaker

Stephen Brubaker CFP® is president and wealth management adviser at Exit & Retirement Strategies, Inc. He holds his bachelor of science from Miami University in Oxford, Ohio.

 


Leave a comment

Building Growth Through Succession Planning

Succession planning isn’t just an “end-game strategy”; it is the key to growth and sustainability.

The specific goals of the succession planning process depend on the founder and his or her circumstance—including age, health and family demands—and they vary case by case. The point, though, is to take a methodical and practical approach to building a business that will endure beyond the builder. Four key areas to concentrate on are:

  1. Building strong, sustainable growth;
  2. Creating a focus on the bottom-line;
  3. Implementing a practical and reliable continuity plan; and
  4. Designing an income perpetuation strategy for the founding owner

The first is perhaps the most important. Building strong, sustainable growth for the business is supported by a clear succession plan in two ways. First, by incorporating next generation advisers who will be investing financially and physically as they buy in. One of the most effective ways to grow a business is to help the next generation build on the foundation the founder has already created and gradually transition ownership—and leadership. The next generation will learn not only how to “think like an owner,” but to be an owner. They will connect the daily goal of revenue production with the long-term goal of producing sustainable revenue in an efficient and scalable manner. They will make decisions that benefit the whole, not just themselves.

Second, growth through succession is about even more than just improving numbers. Strong, sustainable growth demands that the business owner increase their own capabilities as a leader—not just as a producer. As an executive of a multi-generational business, building the strength and depth of the entire team fuels continuous growth.

Cultivating ongoing growth in this way allows a founder to realize exponential value in the business they’ve built, while allowing them to plan for life after advising without worrying about the future of the business or the clients.

Unless the world of professional financial advisers discovers immortality or the fountain of youth, 100 percent of today’s advisers will see their careers come to an end, one way or the other. The only question is how you’ll help your clients transition from your advice and care to someone else’s. Will it be through a professional and carefully crafted succession plan; a last-minute sale to a friend or colleague; or will the clients be left to fend for themselves?

Building a business is about building for the future—your future and your clients’ futures. With a solid succession plan you not only promote growth—you build a legacy, and most importantly, you provide for your clients’ needs beyond the length of your individual career.

david_grau_sr

 

David Grau Sr., J.D.
President and Founder
FP Transitions
Lake Oswego, Ore.


Leave a comment

The Financial Implications of Selling Your Practice

Prior to selling a financial advisory practice, along with selecting the right buyer, it’s important to be knowledgeable about the financial aspects, including: price versus value and the aspects of the deal.

Price Versus Value
To begin, it’s important to know the difference between valuation and price. For example, you may think your practice is worth a certain dollar amount because of the hard work you have put into it and the wonderful clients you have, however the valuation may show otherwise.

Valuation looks at the entire enterprise value of the firm based on the methodology that is most appropriate for a given situation. Most valuation approaches are classified as: income approach (net value plus future potential); market approach (comparison to similar practices); and asset-based approach (tangible net assets determine fair market value).

While the debate continues as to which is best, and rules of thumb are suggested, the best advice is to seek multiple valuations.

When preparing for your valuation, the following factors are often key determinants for buyers and lenders:

Age of your clients. If a large number of them are nearing retirement, they may be considered less valuable than younger clients who are in the accumulation phase.

Number of clients. A smaller number of clients with higher net worth are easier to manage than a large number with fewer assets.

A buyer will also look at the current profitability of your firm and the amount of growth you have experienced over the past years. Equally important will be how you manage your business. For example, fee-based income is more predictable and looked at more favorably by lending agencies.

Aspects of the Deal
How you are willing to structure payments is an important element of the sale and can affect the buyer’s and loan company’s willingness to participate. Unfortunately, there is no boilerplate formula. On average payment terms were split between three payment types:

  • Down payment: 36 percent
  • Promissory note: 55 percent
  • Earn-out: 9 percent

Advisers need to keep in mind that a sizable down payment may be impractical because the assets are intangible. The bank can’t repossess a book of investments.

However, there are institutes that are set up to make loans of this type. The buyer or seller might also contact his or her B/D or custodian to see if it has a program available.

The promissory note allows the seller to receive fair value over a reasonable amount of time. Most sellers are paid in full within three to five years.

The earn-out compensates the seller a percentage of future revenues based on future performance. Performance can be based on gross revenue, AUMs, net acquired assets or any other measure both parties agree too. It’s a good way for buyers to be protected against an under-performing firm or sellers to receive the full amount of its worth.

The important thing is to set up a deal that you feel okay with and the buyer will be able to find funding for.

phil-flakes

 

Phil Flakes
Co-founder
Succession Link
San Diego, Calif.