Passing the Baton

Most small-business owners don’t have an exit strategy — and that’s just as true for financial advisory firms as it is for their business-owner clients. Yet it is essential to have a practice continuation plan in place in case of sudden death or severe disability, particularly for sole practitioners and small firms where one professional is the sole service provider.

Don Patrick, CFP, managing director of Integrated Financial Group in Atlanta, remembers when one of the advisors in his branch told him she had only six weeks to live. While she had done some succession planning, it was not nearly enough. Patrick had emphasized the importance of developing a continuity plan, but his colleague hadn’t really committed to the process until her cancer diagnosis. As soon as she shared it with Patrick, they drafted letters and met with clients to inform them that the practice would be changing hands. Using the firm FP Transitions, they listed the practice for sale and within days received great offers from four businesses that were good cultural fits. A few weeks later, the business was sold.

“We got it done, but it was not ideal,” says Patrick. “We might have gotten a higher price had the sale not occurred under duress.” Patrick is counseling all of the advisors within his consortium to start planning for the eventual transition or sale of their practice — and to get the plan in place without delay.

“Continuity plans aren’t focused on the joys of retirement and reaping the rewards of a work-life well spent, but rather on death or disability, events that every advisor hopes won’t happen,” says Chris Kirby, a practice management consultant with Securities America, one of the nation’s largest independent broker/dealers. Without a proper plan in place, an untimely death or disability can leave clients and customers in the lurch.

Devery “Rusty” Cagle, CRPC, CAP, CFP, president of Greenville, S.C.-based ASE Wealth Advisors, regularly discusses business exit planning strategies with his clients. “I am always astounded that we are the ones who have to ask clients about business exit planning rather than the other way around,” says Cagle. “And when we do bring it up, the response is often the same: nothing has been done to plan for an eventual exit. They may have a vague idea of what they think will work, but haven’t done their homework to put a plan in motion.”

Scott Thomas, president of The Financial Farmer, a Maitland, Fla.-based wealth advisory firm and author of Financial Secrets for the Man of Means, recommends that advisors find out what is most important to their business owner clients and use it as a scare tactic to get them thinking seriously about continuity planning. “Continuity planning is akin to estate planning; most people don’t want to talk about it because your own death isn’t a popular topic of conversation,” says Thomas.

Patrick adds this zinger, “If you have a business worth $1 million and don’t plan for succession, it’s like dropping $1 million out of an airplane and watching it float away.”

Know the ValueBusiness exit planning is about preserving your legacy. Many advisors have sad stories about a client who passed away without a concrete and executable plan. There are several important steps in the process, including business valuation. “Knowing the value of your business is vitally important in protecting, growing and ultimately realizing its worth,” says Kirby. “In continuity planning, the valuation becomes a reference point for owners, key employees and family members in understanding the underlying equity. Knowing what it is and how it’s calculated is helpful in taking appropriate steps to protect and transfer that equity, especially for a professional services business.”