With the graying of the profession and the complexity of today's financial services world, many advisors find themselves overwhelmed and stuck when it comes to creating a viable succession or exit plan. Too many have postponed what should be a long-term process; sadly, these advisors may feel successful now but will be disappointed with the final outcome.
Over the past decade, many firms have applied business discipline to create practices that meet or exceed their personal financial objectives during their working years. That's a great development for those individuals and the profession. Yet the regrettable reality is that most advisors still fail to plan effectively for a sustainable business that doesn't require their ongoing personal involvement; a business that would be attractive to a future owner.
Having worked with hundreds of advisors and business executives over the years, I believe the most critical transition is not from advisor to business owner but from business owner to long-term strategic business thinker. By this I mean having the ability to look at the business objectively, ask and answer the right questions and formulate a strategic plan — whether it's for business development, operations, marketing or attracting next-generation advisors as a step in the owner's path to retirement.
By "strategic plan," I refer to a plan that is based upon a long-term outlook — 10 years or longer.
For a long time now, industry experts have been trying to help advisors change their understanding of their firms — to move them away from running a practice and toward running a business. The distinction may seem specious to some people, especially those whose firms have prospered without much tending. Moving toward a strategic business mindset becomes crucial, however, when you start to think about your internal succession or exit-sale strategy.
Are You an Accidental Entrepreneur?
One big problem my strategic consulting team and I have been observing for some time now is that many advisors are actually accidental entrepreneurs. These advisors never really intended to build a transferable business, but somewhere along the way they bought into the idea that they could cash in their chips when they got too old or tired to muster the same energy for the business that they'd had in the past.
Misinformation in the marketplace about practice valuations and the apparently growing number of active buyers led many to believe that even the smallest solo practitioner has built actual transferable equity, and that he or she will enjoy a liquidity event when it's time to retire. While a practice can provide the founding principal with an excellent income and lifestyle, an outside buyer is unlikely to see that income and lifestyle as something worth paying for — something that is literally valuable.
Those prospective buyers can probably build their own practice, exactly the way they want it, for less cash than buying an existing practice and inheriting all the legacy systems and people that come baked in with a package price.
Improvising as a Way of Life
As the founding generation of the financial planning industry moves toward retirement, its members are inventing a process for succession or exit planning, just as they invented their practice model. And once again, much of this process is improvised. There hasn't been much thoughtful methodology put in place for professional financial services firms to employ uniformly, whether for standard evaluation metrics, professional development or, importantly, just creating an attractive future for the next generation of advisors and firm owners.
M&A consultants abound but standards do not, and too much of their time is spent looking in the rearview mirror. Enterprise value — the financial value of a sustainable business — is a function of the future, not of history. While today's firm founders may have done an amazing job of cutting their service model out of whole cloth, many, if not the majority, have focused on growing their firms primarily to meet their lifestyle needs. As a result, they may have trouble attracting buyers or internal successors.
Entrepreneurial Risk and Reward
Even those who have been highly disciplined about building a business often didn't think about developing a new generation of leaders, or about creating career paths that would help the next generation step into leadership or governance roles. They may have taught the next generation how to create a financial plan, use financial planning software and work with clients, but failed to help them see how to embrace the risks of entrepreneurship. They thus fail to understand that business risk, just like investment risk, has the potential to pay off.
To find younger advisors is itself a challenge. The number of colleges teaching financial planning is mushrooming, but the graduates from their programs are still too few to meet the need, and they don't want to walk out of school and start cold-calling like their forebears did. Some forward-thinking firms are succeeding at recruiting these new grads by building teams that enable them to use the technical skills they went to school to obtain. The new grads want to develop and grow on a personal and professional level.
If you're looking to develop a successor internally, you'll likely need 10 years to groom that person. That's assuming you already have a candidate in mind — that time frame doesn't include the time it will take to find that person. Of course, you can find and hire someone who's able to run the business, but will they have all the business-owner skills needed, and can they take the risk of being an entrepreneur as a buyer?
If the answer to those questions is yes, then it is likely the capable candidate will not be willing to meet the selling advisor's price for the opportunity.
Culture Club
If you're looking to be paid well as you retire from the business, you have to share "your life's work" and passion with others and build a culture that prompts the next generation to say, "I want to be part of this."
If you haven't dealt with the challenges facing the industry today — what I have been referring to throughout this series as "the three C's" (consumer preferences; compliance and regulatory challenges; and competitive threats) — chances are that the beautiful mansion you think you built is really a fixer-upper.
You'll need to attract the right people now, people who will update the business the way they'd want to buy in to it — which also means you need to share some equity as the transformation unfolds.
