In recent statements, Securities and Exchange Chairwoman Mary Jo White has indicated that some requirement for succession planning will be incorporated into the much-heralded and anticipated uniform fiduciary duty rule being crafted by commission staff. Because of its investor protection focus, the SEC mandate will likely include business continuity. Regardless of the impetus for action, the anticipated SEC mandate may prove to be a useful motivator to the large majority of industry professionals who have not taken the time to thoughtfully develop a business succession plan.
As a result of White's comments, I asked my partner, Dan Sheridan, who has been drafting succession plans for many years, to give me his thoughts.
Sheridan advised that there are many benefits from succession planning, but the greatest benefit by far—which should resonate with investment advisory professionals—is value preservation. Every investment advisory business, regardless of size or complexity, has an ascertainable value. Unless a plan is in place, at the point of business transition, that value will migrate to others.
There is no "one size fits all" solution for business succession plans. That said, there are several core considerations that will be addressed in a well-designed plan. The more thoughtful and thorough the planning process, the better the result is likely to be. At the very least, a good succession plan should:
Address planned and unplanned events. Many business owners have an identified retirement horizon. While a succession plan should address the owner's ideal situation, if that is the only scenario addressed many other situations are left to chance. The most critical of these are death and disability. In many cases (depending largely upon the age and health of the business owner), insurance can be used to protect value and provide liquidity.
