Money, emotions and succession

Coach says: Every once in awhile, we write about an issue in this column that strikes a chord with a large number of readers. The topic of succession planning is one of those. That is not too surprising, given the environment we described in the previous column: an aging advisor population with only a small number of these older advisors having written succession plans. I will follow up with several more that address various elements of succession planning.

I’d like to start by emphasizing this last point – a successful succession is a process and not an event. And, in my experience, that process can be broken down into seven steps:

1. Preparing yourself emotionally.

2. Preparing yourself financially.

3. Determining when you will exit.

4. Deciding how you will exit.

5. Choosing the right successor.

6. Writing a succession plan.

7. Implementing the transition.

Let’s address the first two steps in this column, with the hope of answering your specific question along the way.

– Emotional enthusiasm

It takes a certain state of mind to be willing to let go of a business you have spent years building, even if you intend to do so very slowly. That’s why I feel that Step 1 in your succession-planning process should focus on your emotional readiness to make the transition to retirement.

In my experience, even if you have given yourself sufficient time to plan your exit, there is a good chance that you are not yet mentally ready to walk away. That actually may be a good thing because it will give you time to think about what it will take for you to be emotionally prepared. You can do that by answering such questions as:

– To what extent am I defined by my role as an advisor? Does it give me most of my energy?

– How will I handle someone else doing what I have been doing for so many years? What if they don’t do it as well?

– Will I miss being in on the “action,” such as working through complex client situations, researching products, competing for business and dealing with markets?

– What about not being in regular contact with my favourite clients? Or my staff who have served me so loyally?

– When I walk down the street or show up at a charity event, will people no longer think of me as a successful businessperson and contributor to my community?

– What else will I do with my time that gives me the same level of satisfaction and engagement?

To help you assess whether you are mentally prepared to transfer your business to someone else, think of emotional enthusiasm as a continuum that runs from low to high.

At the low end of the scale, we find advisors who are completely wrapped up in their businesses and would have no idea what to do if they didn’t come into their office every day. They feel the business would fail without them and they couldn’t get by without all the perks and recognition they enjoy as successful advisors. These advisors are not mentally ready to quit.

At the other extreme, we find advisors who just can’t wait to leave the business – perhaps because they have some other passion they want to pursue. Or the fun has gone out of the business for them. On the other hand, these advisors may be proud of their business and want to pass it on to someone who will keep it growing.

In my experience, the majority of advisors fall in the middle. They are not yet fully prepared emotionally to step down; however, as they age, they are progressing toward a state of mind that views retirement as inevitable. However, this is the group of advisors who are most at risk of not starting their succession plans soon enough because they are generally quite satisfied with their circumstances.

My question to readers: where do you fall on the continuum of emotional enthusiasm?

– Financial fortitude

Having considered your emotional capacity to transfer your practice to someone else, the next step is to decide when you will be ready financially. In an ideal world, you would have sufficient financial resources outside your business to fund the retirement lifestyle you desire. However, in my experience, many advisors are counting on the proceeds from the sale of their practice to – partially, at least – finance their later years.

The best course of action, therefore, is to do your own retirement-income planning and find out how much cash or income you will require from the sale of your practice to have the lifestyle you want. Knowing your “number” will also be very useful when it comes to negotiating the sale price of your practice. If you have significant assets outside your business, for example, you may be willing to take a lower price from someone you really want to take over for you.

Assess your financial readiness by placing it on a continuum from low to high.

At the low end would be advisors who are totally dependent on their practice -not only for retirement but for their current lifestyle. These advisors typically have not reinvested much into their business because they consumed all the net revenue to maintain their personal lifestyle.

Nor have these advisors built up financial assets outside their business. It is possible that some creative accounting had the business paying some of their personal expenses. Running a practice in this manner is not necessarily a bad thing. But these advisors are not financially prepared to retire.

At the opposite extreme are advisors who really don’t have to sell their practice at all to fund their retirement lifestyle. These advisors have invested outside their businesses and have accumulated sufficient financial assets to retire in the manner they choose. Advisors at this end of the spectrum often are as interested in what happens to their business and their clients after exiting the business as they are in any financial reward.

Of course, just as with emotional enthusiasm, there are many advisors who fall between the two extremes and, with a little time and effort, can retire on their own terms.

– The emotional/financial matrix

If we were to overlay the two dimensions of emotional and financial preparedness onto a matrix, with one measure on the horizontal axis and the other on the vertical axis, we create four quadrants that provide a visual representation of whether or not you are ready to exit.

For example:

– Low emotional/low financial (bottom left): Advisors in the bottom left corner are not prepared to retire, either emotionally or financially. To retire successfully, these advisors must first deal with the challenges of doing something on both fronts.

– High emotional/high financial (top right): Quite the opposite, advisors in the upper right quadrant are pretty much free to do whatever they choose.

– Low emotional/high financial or high emotional/low financial: The other two quadrants call for caution. Advisors in these quadrants are prepared in one dimension but not in the other. Caution is warranted because it can be tempting to say you are ready to retire because you are either emotionally or financially ready. However, most successful successions happen only when the retiring advisor is ready on both fronts. IE

This is the second instalment in a five-part series on planning your exit. Next: using your position on the matrix to help you choose an exit option.

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

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