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How to Think Outside the ‘Black Box’ on Succession Planning

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Succession planning has been one of the most talked-about subjects in our industry for several years, but remains a challenge and source of anxiety for many advisors and firms.

While our focus at the Financial Services Institute (FSI) will always be advocacy, we also look for opportunities to bring members together to collaborate and drive progress on issues of concern to the overall industry wherever we can. In this capacity, several key best practices have recently come to the fore that may help advisors face the challenge of succession planning.

In discussions with the members of our Marketing, Growth & Development Council – which includes executives drawn from a broad cross-section of our member firms – and our partner Truelytics, which provides business intelligence and valuation services to advisors and the firms that serve them, one key theme stands out: While advisors excel in building businesses that are attuned to serving clients’ needs, they often struggle when it comes to thinking of their practices as assets in a larger, competitive market.

To draw a comparison to the housing market, when a homeowner is preparing to sell, he or she will typically contact an appraiser to gauge which renovation would be more valuable – adding a deck or updating the kitchen – and develop a sense of that project’s impact on the sale price.

The problem for advisors thinking about succession is that, for as long as they are operating their practice, they are still building the house, and the valuation impact of specific improvements is largely a black box.

The challenge – according to Kevin Connor, managing director of Truelytics Distribution – is twofold: (1) to help advisors identify the specific areas of their businesses to work on to maximize the proceeds they receive in a succession-driven sale; and (2) to demystify the valuation process, to give them a clearer sense of what to expect when they decide to retire – and to motivate them to translate those prospective improvements into reality.

Where to Focus

Connor points out that many advisors assume growth is the key factor for realizing a successful sale. In fact, he says, stability is the core issue. Since the buyer in a succession-driven transaction knows he or she is purchasing the business to facilitate the founder’s retirement, expectations for growth are usually fairly reasonable.

Connor counsels advisors to take a serious look at their practices in three core dimensions:

  1. Business stability – including factors such as the strength and depth of the management team, continuity plans and cash flow;
  2. Client stability – including client base composition, average frequency of client interactions and, of course, AUM; and
  3. Market stability – including the practice’s mix of business (recurring revenue, fee v. commission, etc.), the amount of business driven by financial planning and consulting, and the percentage of managed accounts.

Within each of these broad categories are more granular criteria that can help advisors develop concrete action plans by, for example, addressing potential client concentration risks or establishing non-compete agreements with key employees.

Depending on a practice’s existing strengths, improvements in any of these three overarching areas can help a founding advisor drive a substantial increase in the proceeds from a succession-driven sale.

Helping advisors quantify such potential gains brings us to Connor’s second key priority:

Practice Valuation

Few things motivate a financial advisor more than hard numbers. While awareness is gradually growing within the industry that simply applying a 2x multiple to a practice’s trailing 12-month revenue is not a sound basis for valuation, advisors are still uncertain when it comes to developing an early sense of the proceeds they might realize in a sale.

Connor believes the solution is not only to explain various valuation methods (including discounted cash flow and comparable analyses, among others) to the advisory community, but to give them the tools to see – in real time – how various improvements in their operations can have a direct impact on the potential sale price of the business.

Think Like a CEO

By providing advisors with these two new sources of perspective on their practices – key attributes to improve to build stability in critical areas, and the tools to understand the specific impact of these improvements on valuation – Connor believes that business consulting groups and succession planning experts alike can empower advisors to make the crucial leap from thinking like a practice owner to thinking like a CEO.

That transition, says Connor, is the single most important driver of a successful succession planning process. “In order to maximize the outcome of a succession planning-driven sale, you have to build a business that creates lasting value,” he explained. “That means thinking like a CEO – as early as possible in the business’ life cycle.”

FSI and our Marketing, Growth & Development Council are pleased to play a central role in helping our members address the persistent challenge of preparing today’s advisors to retire with peace of mind – while also creating growth opportunities for the rising generation of independent advisors – by facilitating collaborative solutions on the crucial topic of succession planning.


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