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Practice Management > Building Your Business

A values-based approach to succession planning

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A number of years ago I had the privilege of spending an evening with the CEO of a 200-year-old family business. Over dinner, he described how they dealt with succession planning.

The most important value in their family business is stewardship. His central purpose as the CEO is to secure the transition of the business from one generation to another. He is working to ensure that his successor inherits a stronger and more vital business.

For many financial advisors, the issue of succession is central to their business thinking. Yet, in my experience, very few are looking at succession planning through the lens of building a stronger and more vital business for the next generation. Let me give you an example. A few years ago, two partners enrolled in our Practice Development program.

The first step in our program is to clarify the intention of the participants. I asked each of them, separately, what they wanted in their business and their life. The senior partner, who was 61, wanted to retire in four years and sell his part of the business to his partner for a million dollars. The other partner, who was 39, wanted to build a successful business and was not sure if it made sense to buy his partner’s practice. A succession problem was obvious.

As I explored their shared history and present circumstances, the root of the problem became clear. They initially formed their partnership to share office and overhead expenses. The senior advisor was mentor and played an important part in the younger advisor’s development. When the more senior advisor was 59, he raised the issue of succession. He was then generating about $500,000 in gross revenue. He suggested his partner buy the practice for two times revenue in six years. At the time, the younger partner thought this was a fair arrangement. However, over the next two years, a troubling trend began to emerge.

The senior advisor spent less time and energy building the practice; his gross revenue began to decline. He became more reluctant to invest money back into the business. From his perspective, retirement was secure. He wanted to spend more time on the golf course. In the younger partner’s mind, the value of his partner’s practice was going down.

In succession planning, you need to pay attention to three types of common interest: Results, process and emotional. Let’s examine how each of these apply.

1. Results (substantive interests)

Make sure you focus on the interests and outcome of all parties involved in succession. Passing on a practice worth a million dollars to the senior advisor and generating sufficient value for the successor going forward was the desired result.

2. Process (procedural interests)

This is the process by which you arrive at a succession plan that meets everyone’s needs. How will we determine value? How long will the transition take? How will the succession plan actually work? Who else needs to be involved? Are all the processes and procedures of interest to both parties?

3. Emotional (psychological interests)

This interest is concerned with what is going on emotionally or psychologically as you try to reach agreement.

To help these two partners develop a succession plan and manage the transition, we had to address each of their interests and find the common ground regarding their vision for the future and their shared values in wanting a successful transition for all stakeholders.

The good news is we were able to resolve the differences and get them to a point where they had a shared vision for the business going forward. They both realized their common interest in building a sustainable business.

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