As 2006 comes to a close and you reflect on the year’s successes, it’s important to look ahead by asking yourself a question that too many advisors ignore: How do you plan to exit the business? If you’re not sure, it’s time to consider your options–sell externally or internally–and create a business transition plan that spells out the future of your firm.
There’s no question that building a business transition plan is one of the most crucial steps you’ll take in your entire career. After all, your business is probably your most valuable asset. How you treat it will therefore largely determine how well you’re able to provide for yourself and your family during retirement. It also will affect the professional legacy you leave behind to your clients, employees and community. When you consider that the average advisor is 54 years old and 30% are over age 60, it’s clear that these concerns are of paramount importance for many of you.
But even if you’re decades away from retiring, a business transition plan is a key step in developing your firm. By thinking now about how you define the ‘maximum value’ for a transition, you’ll ensure that you optimize your options and position your firm to capitalize on the opportunity. In short, a business transition plan can serve as the guide for nearly every professional decision you make for the rest of your career–and make you more successful in the process.
Moreover, whether you’re 35 or 55, there are two big reasons to start planning for the transfer of your business now: time and money. Business succession may generate excellent returns for both the buyer and seller, but it requires careful long-term planning, and the plans themselves often take years to fully implement. Getting a late start could severely limit this option. By contrast, the valuation of an external sale can be optimized by focusing on the key success drivers and metrics today, so that the company is best positioned for sale when the decision is made to exit. “Business transition is a lengthy process that evolves over time, so it’s imperative that you start long before you want to step down,” says Tim Kochis, the veteran advisor and CEO of Kochis Fitz in San Francisco. “Having a well-developed plan early on gives you flexibility and gives your employees and clients confidence that they’ll be taken care of in the future.”
The first step in the planning process is to evaluate which makes more sense for your firm: an external or internal sale. The answer to this question will depend on your goals and situation. If you want to exit quickly and maximize the near-term economics of the transaction, then an external sale could be your best option. By contrast, if you value having more control over the business through this transition and flexibility on when and how you exit the business, then an internal succession is probably the leading option. In either case, the earlier you start developing and implementing your transition plan, the more value you will extract from the transaction.
Internal succession: Four steps to success
Advisor Mike Sargent, who sold his practice–Boulder, Colorado-based Sargent, Bickham, Lagudis–in 1999, opted to sell to a key employee who had been with the firm for 10 years. “He showed loyalty to me, and I wanted to show it to him by making him the buyer of choice,” says Sargent. “Also, the clients trusted him, which I knew would help the transition go smoothly. Outside deals can be long and drawn out, and the unfamiliar faces can increase your risk of losing employees and clients along the way.”
Regardless of your potential buyer, it’s vital to be careful and methodical in your succession planning to maximize the results that you desire. Rushing it will only result in a lower valuation, an inappropriate successor, or both. In the long run, poor succession planning could mean the death of the business you’ve worked so hard to create. Make no mistake: Planning and implementing the transfer of your business takes time. But the effort you invest now will pay off down the road.
To get started on solid ground, consider the following four-stage process for the creation and implementation of a succession plan.
Stage 1: Identify Your Strategic Goals
Start by deciding what you want to accomplish by transferring ownership. The initial thought most advisors have here is “I want to sell at a premium and get a big payday.” That’s certainly a key consideration–but it’s best to take a step back and think strategically about other issues that will have an impact on your plan. Chances are, you’ll find you have more varied and complex goals than you first realized. For example:
Business objectives. These might include issues such as whether you want the legacy of your firm to remain intact in terms of client service techniques and other processes. While some advisors want to ensure that their business practices stay in place after they’re gone, others are mainly concerned about maximizing their valuation and are happy to let a new owner set the tone of the organization.
Professional objectives. Your planning efforts are an opportunity to think about career goals you haven’t yet tackled, and start shifting your focus toward them. Ask yourself what you really enjoy doing. What’s less appealing to you? Are there other goals you want to accomplish with the rest of your career? Take a thorough inventory and then structure your plan accordingly. For example, owner-advisors who have been responsible for day-to-day duties may choose to shift to a business development role after they migrate ownership to a junior partner.
Personal objectives. Start with the basics: When and how do you want to exit? The issue of how you want to shape your non-work life in retirement will be especially familiar to you, as you’ve probably guided clients through this discussion for years. When plotting your own retirement, however, keep in mind that your situation may be unique. If you’re like many advisors, your roles as an advisor and business owner have largely defined you over the years. How will you feel about your identity when you’re no longer an owner and the main go-to person at your firm, and how will that influence your retirement lifestyle?
Your goal in this step is to create an overall strategic context that will guide the rest of your planning efforts. Once you understand exactly where you want to go, you can craft a succession plan with the terms and conditions that will take you there. “A big part of succession planning is understanding your various goals, and the goals of any other owners, so there are no surprises,” says Scott Roulston, CEO of Fairport Asset Management in Cleveland. His firm conducts regular meetings at which the partners discuss where they each want to be in five years. That information is then factored into the firm’s overall succession planning outlook.
Stage 2: Identify Your Successor
Your next job is to determine who from within your firm should take the reins. This decision may seem obvious–there could be one employee or partner who has expressed interest or who is especially competent. But here again, it’s best to take a step back and think strategically. Ask yourself: What are the skills, resources and capabilities that my successor must possess based on what I want to see happen to my business after I’m gone?
There are three main areas of expertise that successful advisors typically have:
Management capabilities. Any potential candidate should be able to take on the responsibilities of effectively running and growing your organization, managing people and making business decisions that enhance your firm’s value.
Client relationship expertise. The ways in which advisors build, manage, and maintain relationships with their clients is typically the most important factor in their success. Look for someone with client expertise and business development acumen.