There is much more to succession planning than waking up one morning and deciding that you want to sell your business. Your practice is probably one of your most valuable financial assets, which you might have spent a lifetime building. So, you would naturally want to get as much for it as you can.
You should, therefore, prepare your practice for succession through a gradual process. It can take as long as five to 10 years for your succession plan to unfold, George Hartman writes in his new book, Exit Is Not A Four Letter Word: How To Transition Your Advisory Practice Profitably and Proudly.
During the preparation stage, you should seek to maximize the value you can get by making your practice “saleable, scalable and transferrable,” according to Hartman.
This step could mean transferring certain clients to other advisors, with a view to optimizing or right-sizing your practice for succession, says Kevin Birch, principal, branch and regional development with Edward Jones in Mississauga, Ont. After using proprietary planning tools to formulate a transition plan, Birch says, you can then work with a chosen successor to determine an appropriate valuation with a view to ensuring that you, as the retiring advisor, are appropriately compensated.
Some firms, such as Edward Jones, have incorporated succession planning in their training program for advisors. But if you are an independent advisor, you are responsible for taking the initiative to prepare for succession.
That means ensuring your practice is functioning like a well-oiled machine and can pass due diligence by a potential successor.
Typically, a successor would look at the quantitative and qualitative factors of your practice in determining its value, Hartman says. Quantitative factors, such as revenue and cash flow, are easy to measure. But the qualitative factors — the unique characteristics of your practice — should also be identified and could make it worth more.
Yet, Hartman says, the No. 1 underlying fundamental principle of practice valuation is based on expected future profitability — and not past results. In other words, the successor wants to know the expected return on his or her investment.
Therefore, in preparing your practice for succession, you must address its weaknesses and bolster its strengths to maximize its value. Here are some steps you can take:
> Address quantitative factors
Take steps to increase cash flow and the percentage of recurring revenues, Hartman says. Find ways to reduce operating expenses and costs of client acquisition and services. Explore ways to improve average revenue per account, per client and per team member.
> Address qualitative factors
Have an up-to-date strategic plan that articulates your vision and how you are going to realize it. Your plan must describe how you will build and maintain the strength of your brand and attract new clients. Hartman recommends implementing a client segmentation process that matches client value to service levels.
> Update your administrative processesYour operating systems and processes must be up to date, Birch says. In addition, your financial information must be accurate and client records well maintained.
> Choose the right time
Hartman suggests setting an “earliest possible” and a “latest acceptable” date for selling your practice. The earliest possible date is the time when you could retire if you choose to do so; the latest possible date is the time at which you will not want to wait any longer to head off into the sunset. You must also take into consideration market conditions and how ready your practice is to be put up for sale.
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