“50 Ways to Leave Your Lover”
and Other Reflections on Succession Planning for Financial Advisors
At Jones Graham we are often asked for some rules of thumb when either selling or acquiring a practice. While every situation is different, we have found there are seven cardinal rules that exist for both buyers and sellers of Wealth Management practices. Much of what is discussed below might seem like common sense, but in reality, we’ve seen common sense go out the window when strong emotions come into play during negotiations. For more detailed information on your particular circumstances, we encourage you to contact us.
- Know What You Want First
Let’s face it, you probably wouldn’t be reading this article unless you were contemplating some major change in your lifestyle. Perhaps you are considering exiting the business or conversely feel you have both the financial and personal capacity to acquire a practice. Just like you have carefully planned financial strategies to meet your client’s retirement objectives, your succession or growth strategy should first start with what you intend to do. If retiring, questions such as do you wish to travel, remain partially engaged in the business, require upfront capital to start a new business or perform volunteer work all need to be considered prior to making a decision.
For those seeking growth by acquisition, consider the impact a sudden increase in your clientele will do to your family or personal obligations. What will payment terms do to your cash flow? Moreover, how far are you prepared to go to accomplish your goal? To get what you want are you prepared to switch dealers or registration categories and go through even greater change than initially anticipated?
While we have been accustomed to thinking about our clients needs first, take a moment to turn the focus back to yourself prior to embarking on any change. Your practice and personal life are very much intertwined and both need to be considered in tandem. Ironically, by not biting off more than you can chew your clients will also benefit by continuing to receive the same service and support they have come to expect.
- Think Like a Client (TLC)
Whether you are the purchaser or seller, a careful review of what your clients have come to expect in terms of service, investment philosophy and personality traits is crucial. After knowing what you want, consider your clients and what they have come to expect from you or from the departing advisor. One of the greatest reasons for your success in business has been your ability to think like a client, plain and simple. So why should this stop now? How will your clients perceive any transition? By now you’ve realized that any change must be carefully managed in the eyes of your clients. Some simple suggestions include making the transition a “non event” without the use of announcements by simply having your vacations become longer and longer. Bringing in a new advisor as a “new team member” rather than a successor is a good positioning strategy. Finally, if there is not a solid meshing between advisors styles, the price of the practice may be affected due to retention clauses. Remember, fit always trumps price.
- Measure Twice and Cut Once – Consider all Options
Remember the song “50 ways to leave your lover” by Paul Simon? When I started working with retiring advisors 20 years ago succession planning options were very limited; you simply found someone more junior in age and worked out a deal. In fact, quite often the new advisor was a family member who could be trusted to meet the needs of your clients. Today there are a myriad of options that can be tailored to your personal goals (see point #1 above Know what you want) first and foremost. These include payment options that resemble a lifelong annuity to team-based platforms that can easily absorb clients. I recently met one advisor who sold a large and well-established practice and regretted not exploring a number of options as he simply didn’t know they existed. Knowing what you want and mindfully incorporating all possible scenarios into a careful planning process is key to meeting your needs.
- Upfront Price is only a Secondary Consideration
You’ve worked hard for your business and built it brick by brick, client by client and rightfully you take a great deal of pride over what you’ve accomplished. So what is it worth? If your first thoughts turn towards recurring revenue as well as client and asset demographics you are in the right ballpark. You need to also go deeper and consider aspects such as whether you use a detailed contact management system and whether key staff will remain in place post-transition. Even if you are not contemplating selling your practice these same factors should be incorporated into your business planning. A well run practice (business) benefits you today and adds equity value down the road. In other words, incorporate value for yourself first.
Having made note of the qualities of your practice, did you know that there are factors outside of these characteristics that have a strong influence on price? Remember in point 1 above that your practice and your life are intertwined. Deal specific characteristics that stem from your personal requirements have a dramatic impact on price. Consider how long you will stay on to assist the seller, your payment terms, retention provisions, the deemed tax disposition of sale proceeds, your desire to remain partially involved, etc. In fact, I’ve seen the upfront price be re-negotiated once the terms of the purchase & sale agreement became more apparent to both parties. Without knowing the intentions of both buyer and seller it is always very difficult to determine a price.
Finally, perhaps the best determiner is to test the waters by marketing it to only qualified firms and individuals. A careful and well-timed marketing strategy is as a crucial as the notional value placed on any practice. At the end of the day, we all know that the real price of anything is what someone wants to pay for it. Getting in front of the right person is therefore key.
- Bring in Experts When Needed
Most advisors I’ve met have a very eclectic skill set which is a fancy way of saying they are a jack of all trades. When you started in the business you probably signed your own lease, bought your own furniture, hired your first assistant, implemented software systems, etc. etc. It is, therefore, a natural inclination to “go it alone” when it comes time to leave the business you’ve worked so hard to build. A few things to consider here are that there is significantly more at stake in these later years and transitioning a practice is (usually) only done once in a person’s life. Using outside experts who have comparative experience in valuation and marketing a practice as well as legal and tax experts is essential. You’ve got so much at stake, at this critical point in time why leave anything to chance?
- Be Fair, Upfront and Transparent
Remember those things our parents did their best to teach us? They are also true when negotiations take place between both buyers and sellers. I recently met an advisor in his early seventies who had two deals fall through because the junior advisor simply left. My first inclination was to feel terrible for this man but on closer examination, the terms of both deals were very one-sided and frankly flawed. In one case the buyer left because the senior advisor remained longer than verbally agreed upon and in the second instance the price was so exorbitant the new advisor simply could not pay. Whether you are the buyer or seller, the commercial terms must make sense for you and everyone else. Having a detailed purchase & sale agreement that takes all parties interests into account is crucial. The seller, purchaser and clients must all benefit with a win-win-win strategy.
- Plan Smart and Plan Ahead
No matter what your age, you should always have a succession plan in place that designates what should take place with your practice upon death, disability or retirement. Reminiscent of the story of the shoemaker’s shoes, I have been involved with situations where an advisor has passed away suddenly without a plan or waited until the very last minute and was forced to make a rash decision. In many cases succession plans take years to execute and complete. Just like we tell our clients, starting early is also essential to success in our business lives.
Your practice is one of your greatest assets and deserves respect and careful planning. Jones Graham Consultants provides Growth and Transition Services to financial advisors seeking to navigate the complexities of retiring or growing through acquisition or migration.
For an initial consultation feel free to contact Nicole Graham to discuss your needs.
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