Financial Professionals Need To Act On Their Own Succession Plans

Financial Professionals Need To Act On Their Own Succession Plans

By Stanley R. Smiley

Financial planning professionals routinely aid their clients in the development of business succession strategies. Yet, notwithstanding the efforts made for others, planners have often been reticent to implement a suitable process for their own practices. This is an unfortunate irony that can have significant financial consequences for financial professionals who have devoted their careers to helping others achieve financial security.

The primary emphasis in any business succession scenario involves developing an action plan that takes into consideration a number of different elements, each of which are described below.

Valuing The Practice. Four different models are typically employed in ascertaining the value of an existing practice. The first is an income approach based upon the measurement of the stream of benefits flowing from the practice. This can be viewed under either a capital return method or a discount on future returns–one looks backward and the other forward. The former examines the history of earnings over a term of years with the application of a capitalization rate. In the latter, projected future earnings are discounted to determine the present value.

A third methodology involves the market approach. This entails valuation similar to real estate seeking “comparables” adjusted for variants. This is problematic in a financial practice, and similar practice metrics often cannot be located.

The last model is an asset value approach calculating the worth of tangible assets. Since there are minimal tangible assets in a financial practice, this method may not be very useful.

Each of these models can be significantly affected by the nature of the buyer. For example, a buyer who has been integrally involved in the practice over time and has developed client relationships aids in practice value. For this reason, it is a good idea to conduct a preliminary analysis that identifies where the most likely buyer will be found. This could lead to a search for the right person already within the practice to mentor over time.

Regrettably, this is not an action that can quickly develop and may require careful long-term planning. It is not uncommon, and perhaps most effective, to seek children or other family members for assimilation into the practice. This can foster significant client loyalty over time, and add great value to the practice and prospects for success going forward.

There are several complicating factors in a financial practice valuation. The overall analysis is affected by whether the activities of the business are grounded by fees or commissions, the scope of its insurance activities, loyalty of its clients, and even the depth of prior business financial reports. It is important to consider using an outside resource to help you ascertain the value of a financial practice because every practice is unique.

Structuring The Arrangement And Financing. An in-depth tax analysis of the sellers specific business circumstances may influence the choice of best arrangement structure (see sidebar).