Succession planning has been one of the most talked-about subjects in our industry for several years, but remains a challenge and source of anxiety for many advisors and firms.
While our focus at the Financial Services Institute (FSI) will always be advocacy, we also look for opportunities to bring members together to collaborate and drive progress on issues of concern to the overall industry wherever we can. In this capacity, several key best practices have recently come to the fore that may help advisors face the challenge of succession planning.
In discussions with the members of our Marketing, Growth & Development Council – which includes executives drawn from a broad cross-section of our member firms – and our partner Truelytics, which provides business intelligence and valuation services to advisors and the firms that serve them, one key theme stands out: While advisors excel in building businesses that are attuned to serving clients' needs, they often struggle when it comes to thinking of their practices as assets in a larger, competitive market.
To draw a comparison to the housing market, when a homeowner is preparing to sell, he or she will typically contact an appraiser to gauge which renovation would be more valuable – adding a deck or updating the kitchen – and develop a sense of that project's impact on the sale price.
The problem for advisors thinking about succession is that, for as long as they are operating their practice, they are still building the house, and the valuation impact of specific improvements is largely a black box.
The challenge – according to Kevin Connor, managing director of Truelytics Distribution – is twofold: (1) to help advisors identify the specific areas of their businesses to work on to maximize the proceeds they receive in a succession-driven sale; and (2) to demystify the valuation process, to give them a clearer sense of what to expect when they decide to retire – and to motivate them to translate those prospective improvements into reality.
Where to Focus
Connor points out that many advisors assume growth is the key factor for realizing a successful sale. In fact, he says, stability is the core issue. Since the buyer in a succession-driven transaction knows he or she is purchasing the business to facilitate the founder's retirement, expectations for growth are usually fairly reasonable.
Connor counsels advisors to take a serious look at their practices in three core dimensions:
- Business stability – including factors such as the strength and depth of the management team, continuity plans and cash flow;
- Client stability – including client base composition, average frequency of client interactions and, of course, AUM; and
- Market stability – including the practice's mix of business (recurring revenue, fee v. commission, etc.), the amount of business driven by financial planning and consulting, and the percentage of managed accounts.
Within each of these broad categories are more granular criteria that can help advisors develop concrete action plans by, for example, addressing potential client concentration risks or establishing non-compete agreements with key employees.
