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Financial Professionals Need To Act On Their Own Succession Plans

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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).

A partial or installment sale may be more common when one has been working with, or grooming, a successor. To the extent that a family member is involved, the seller may have more than a purely financial motive to remain engaged with an ongoing consultative agreement.

If the seller has taken on an equity partner, or is grooming an associate in the firm for succession, other considerations are appropriate. The need for insurance should be given serious review. Disability coverage will permit remaining individuals in the practice to continue without increased financial burdens, either legal or emotional. A cross-purchase buy-sell with life insurance policies individually owned can be easily installed.

In selling a practice to an associate, who may lack sufficient funding for outright purchase, an installment agreement with a promissory note given to the seller could be adopted. Caution must be used, however, to assure repayment of the obligation through continued value of the practice.

Outside commercial lenders can be sought to obtain requisite loans for acquisition. Often the sellers own broker-dealer may have direct loan repayment programs secured ultimately by future commission payments.

Facilitating Ownership Change And Preserving Value. To enrich the acquisition value and opportunities, the seller naturally wants to promote the success of the practice, even post-departure. This can be enhanced by active participation in a client-control transfer process. This objective can be advanced through detailed conditions in the buy-sell agreement.

Provisions requiring that on retirement, or death of the seller, the buyer use his or her best good faith efforts to provide continuing securities, insurance and investment services to clients can be valuable. If a transfer is to take place on death or other event, having a clear provision as to when the purchase must be completed is needed. Both payment price and schedule can be structured using a formula that involves receipts of fees for a period certain of future collections.

Outside professional advice should be sought to maximize the benefits and ensure that any agreement complies with federal and state regulatory rules and law.

John F. Kennedy said, “Change is the law of life and those who look only to the past or present are certain to miss the future.” If financial planners do not employ the same passion in their own practices as they do in putting clients first, they, too, will miss the future.

Planners who fail to engage in self-evaluation and implement their own succession program will not achieve the full measure of the value of their lifetime work ethic.

Stanley R. Smiley, Esq. is senior vice president, advanced markets for

ING Advisors Network, Torrance, Calif. He may be reached at SmileyS

Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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