Every client, whether active or prospective, has a plan in place to reach his or her financial goals. In many cases, unfortunately, the plan is to do nothing–to plan to not have a plan. This approach is an active decision, but not effective in the final analysis.
As independent financial advisors, we tend to use a similar methodology when planning for ourselves. Often, we spend so much effort focusing on our clients that we do little to secure our own futures until the last moment. I have experienced this situation with advisors during discussions about practice management and transition while negotiating and taking over their businesses. And from those experiences, I’ve witnessed firsthand how significant the impact of a succession plan can be when the time comes to put it into action.
The key to success
A program offered by my broker-dealer and its succession planning partner has been a valuable resource in my firm’s strategy for internal succession, as well as our success in acquiring other practices. That success hinges on the quality and pricing of the transition.
As advisors, we assist our clients in making sound financial decisions and creating strategies to help them reach their financial goals. Statistics suggest, however, that we do an inferior job in planning our own financial needs and business structure. In fact, most advisors, regardless of age, have no plan for transitioning their practice in case of death, disability or retirement.
I know several independent advisors who not only don’t have a transition plan, but also fall short of having sufficient coverage or resources to handle a disability or the means to retire. Just as with the clients we serve, we too will inevitably experience life issues that bring retirement to the forefront. For this reason, the time to start preparing for this eventuality is now.
As we well know, the value of an asset is strictly limited to what someone is willing to pay for it. Therefore, we need to be aware that a gap may exist, perhaps even a sizeable one, between how much we perceive our practice to be worth, and what we ultimately receive for it. We have built our practices from scratch, and feel strongly that we can command the ultimate price for our business. However, a prospective buyer may see the situation in a different light.
Many methods are used to calculate the value of an advisory business, and the manner in which the final figure is determined could potentially be endless. We have all likely been guilty of allowing our egos to interfere with determining a fair value of an asset, whether as a buyer or a seller. So when it comes to transitioning our business, it becomes extremely important to not let our judgment become clouded.
There are many factors to consider with how your business is modeled and operated. Among the questions to ask:
? Does your practice have a single advisor or a team structure?
? Are you primarily compensated via commissions or fees?
? Is the business healthy and growing or has it been allowed to stagnate and contract in recent years?