Building your own business succession plan

A client base is bound to change, but the basic message advisors preach to clients remains essentially the same, whether the source is a tax specialist, financial planner, insurance agent, estate planner, registered rep or broker: Plan now for the future or risk seeing your retirement goals and legacy unfulfilled.

Tiburon Strategic Advisors has 10 predictions about the future of succession planning in the financial advisor segment:

1. More than 500 fee-only financial advisor succession transactions will occur between now and 2009.

2. At least half those transactions will involve current employees as successors.

3. Current partners will be an option for firms with multiple partners.

4. Local competitors will be the second-most-active group of buyers.

5. Financial buyers – those buying practices for purely financial reasons – will never be successful.

6. Banks will emerge as aggressive buyers.

7. Regional and local CPA firms may acquire their way into the financial advisory market.

8. Acquisitions by buyers with financial and strategic motivations will cause a consolidation that yields more national advisory firms.

9. Free cash flow multiples will reach six times to eight times for the best firms and more buyers will pay with cash and/or public stock.

10. Valuation ranges for similar size firms will widen dramatically.

But when it comes to their own retirement and the future of their practices, many advisors, it seems, are not practicing what they preach. The reality, according to Chip Roame, managing principal of Tiburon Strategic Advisors, is that many advisors are so focused on helping plan the future for their clients that they’ve neglected planning the future of their own businesses.

“Most advisors have planned poorly for the succession of their practices. It’s often a case of the cobbler having no shoes.”

“They’re financial professionals, but just like anybody else, they sometimes need to be nudged into planning for the future,” observes Richard S. Dennen, president and CEO of Oak Street Funding, a firm that provides capital and consulting services to insurance agents for succession transactions and other funding needs.

Findings from a report issued in 2005 by Roame’s northern California consulting firm document just how unprepared many advisors are for the succession of their practices, whether it comes as a result of retirement, a strategically motivated transaction or unforeseen circumstances. The Tiburon report, which analyzes the state of succession planning, firm valuation and the acquisition market within the financial advisor segment, found that only 45 percent of the largest fee-only financial advisors and 29 percent of the largest independent reps have written succession plans.

Why are self-planners in the minority? According to Roame, many advisors have a succession plan in mind but haven’t committed it to paper. Others lack one because they don’t envision ever retiring. Some simply haven’t realized the substantial value of their practices – and how a succession plan eventually can help them tap or preserve that value.

For advisors who find themselves in one of those categories, the risks of moving forward without a formal succession plan are substantial, Roame says. What happens to a practice in the event its principal advisor dies unexpectedly or is incapacitated by illness? What about the advisor who, with retirement looming, realizes he has started the succession planning process too late? Those are moot questions for advisors who have a plan in place. Advisors who don’t are the ones who should be worrying about seeing their practices change hands under transaction terms that are less than favorable.

“It can mean the difference between the seller being stuck taking a promissory note [from the buyer] and getting cash upfront [for a practice],” says Chris Hirschfeld, managing director of Goelzer Investment Banking, an Indianapolis firm specializing in business valuation and succession planning.

The planning imperative
Changing demographics within the advisor set make succession planning a more pressing issue. Tiburon estimates there are 19,500 independent fee-only and fee-based financial advisory practices, roughly six times as many as 20 years ago, along with about 85,000 independent reps, up from about 75,500 as recently as 2002. Meanwhile, 50 percent of independent advisors are over age 50. All this points to more advisory businesses changing hands.

Any advisor who envisions his practice continuing without him needs a succession plan, whether the goal is to pass the practice on to a child, business partner, or employee, to sell it to a competitor, or to find a buyer in the open market. Even advisors who aren’t contemplating retirement need a fallback succession plan in case they die or are disabled. And the right time to begin succession planning? “Immediately,” Hirschfeld says.

At minimum, an advisor should start the succession planning process five to seven years before he anticipates retiring, Hirschfeld and Roame agree. It’s not an easy process, Hirschfeld says, mainly because advisory practices tend not to be asset-rich but rather derive their value from service and relationships. Oftentimes, a transition in leadership gives clients the green light to change advisors, he notes, so many advisors are reluctant to go down that path. But with a plan in place to ensure the transition goes smoothly, clients may be less apt to defect.

Best practices
Based on an in-depth analysis of real-life succession scenarios involving financial advisory firms, Tiburon specifies seven key steps to successful succession planning:

1. Identify an appropriate advisor to serve as a guide through the process.

2. Develop objectives, expectations and a strategy for completing a sale, plus an understanding of what motivates prospective buyers.