The many ways to bow out

I have been in this industry for more than 40 years; my clients are as old as I am (or even older). We still have great relationships; in fact, our meetings are definitely more social than business, but that seems to be what they like.

Yes, my practice isn’t as large as it used to be. Unfortunately, some clients have passed away and a few have placed their financial affairs in the hands of their children, who had their own advisors, so I lost those accounts. I don’t think I have taken on a new client in years.

Most of my clients’ portfolios are, as you might guess, pretty conservative. And while market downturns have had a negative impact, these portfolios haven’t been as damaged as many.

So, when you add all these up, I guess you could say that my practice is slowly dying. But, on the other hand, my time remaining in the business is getting shorter as well.

So, my question is: should I go through all the trouble of trying to find the right successor and striking a good deal when both of us would know they would be buying a dwindling asset?

Coach says: First off, hearty congratulations on 40-plus years in the industry. You obviously have done many things right, not only to last that long but also to build a clientele that is so loyal to you to this day.

And thanks for attending the conference. It would be easy for someone with your time in the business to feel they had “heard it all before” and skip educational opportunities such as that.

I will get to my answer to your specific question shortly. However, please allow me to outline first the choices available to any financial advisor approaching the culmination of their career. In my view, there are five exit options:

1. Do nothing. This is always the first option when faced with any strategic decision. And in the case of succession planning for advisors, this appears to be the most popular option. That surprises me; and I am being somewhat facetious, but I don’t know how else to explain why even though the average age of financial advisors is approaching the mid-50s fewer than 10% have a written succession plan.

I often refer to this situation as the “die in the saddle” option because you just keep riding along until something like death, disability or a major market meltdown causes you to fall off your horse and you can’t get back up again.

2. Controlled extinction. If the “do nothing” option is dying in the saddle, this one is “riding slowly into the sunset.” Under the “controlled extinction” scenario, you simply run out your practice until it is no longer viable or does not provide sufficient reward for the effort required to manage it. In certain situations, this can be the best option (and, apparently, the one you are advocating). When a practice is largely transactional, has a naturally diminishing client or asset base, or is entirely dependent on the established network of its founder, maximum value often is obtained by simply continuing to reap the declining annual revenue for an extended period.

3. Acquisition. This may seem at odds with the notion of exiting the business. However, some advisors have had success in buying smaller books of business and amalgamating them into something larger, which they can then sell as a package a year or two later to fund their retirement.

Larger practices tend to attract higher valuation multiples. For example, one $50-million book probably will attract a higher price than two $25-million books.

4. Partner. The increasing costs of compliance and technology are prompting more and more advisors to consider forming partnerships to achieve economies of scale and to support the specialization of staff. This could include, for example, the hiring of full-time marketing or office-management personnel. The logical extension of these arrangements is internal succession for advisors wanting to retire fully or partially from the business.

Many of these partnership agreements start off as contingency plans. For instance, “If I die or become disabled, you will take over my book” or vice versa. These situations evolve over time into formal succession plans.

5. Sell. This is the other end of the spectrum from the “do nothing” approach. It is the option, as you summarized, that probably involves the most work and can take the longest time.

To do this option effectively, you have to find the right successor, negotiate a mutually beneficial deal, train your successor in the ways of your business, introduce him or her to your clients and stay on for some transition period to help retain clients because it is very likely that some of your sales proceeds will be tied to a retention formula.

In addition, if you will want to maximize the value of your practice (and, therefore, your retirement fund) in preparation for the sale of your book, you may have to do some work to improve certain aspects of your business to make it more scalable and salable. In my experience, three to five years to get all this done is not unreasonable.

– CONSIDER YOUR OPTIONS

So, what should you do? My recommendation would be to consider all the above options from two perspectives financial and emotional.

On the financial side, regardless of which option you initially favour, start by getting a professional valuation of your practice as it is today. This will give you a baseline from which to measure the alternatives.

Next, estimate the dollar amount you need to receive from your practice to reach your “number” either the income or capital required to fund your desired retirement lifestyle.

If you have significant personal assets outside your business, you may be willing to settle for less from the sale of your practice. If all of your wealth is represented by your business, you might want to consider what has to be done to maximize its value before you retire.

Finally, determine which option, or options, will most likely allow you to meet your financial objectives. For example, if you are in good health and plan to maintain your practice at its current level for the next 20 years (the “do nothing” option), simply multiply average expected earnings by 20.

In the “controlled extinction” method, estimate the declining net income for as long as you think your practice will be viable. An example would be: $300,000 in Year 1 + $250,000 in Year 2 + $200,000 in Year 3, and so on.

For the other options, calculate required expected revenue (or sale price) minus any capital investments that are required to acquire additional assets under management, improve valuation, etc.

On the emotional front, ask yourself questions such as: “When will I be emotionally ready to retire? What will I do with my time if I am no longer working in my practice? Will I be able to let go of my life’s work?” Think as deeply about these issues as you do the financial ones.

With those questions answered, there is one more you must ask yourself before you choose your path: “What do I want for my clients?” Each exit option has implications for your clients, and you must try to imagine what their world will be like in the wake of your decision.

At the end of this exercise, don’t be surprised if there is no obvious strategy that jumps off the page. More likely, you will have to make compromises among what you seek financially, what you are prepared for emotionally and what you desire for the people who have trusted you with their financial well-being.

George Hartman is co-founder and managing partner with Accretive Advisor Inc. and president of Market Logics Inc. in Toronto. Send questions, comments and opinions on any aspect of practice management to ghartman@accretiveadvisor.com.

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