Planning your exit: When and how

Coach says: A successful succession, as I have emphasized in previous columns, is a seven-step process, not an event. That process is:

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 plan.

7. Implementing the transition.

So, once you have prepared yourself emotionally and financially, you can look at the important steps of determining when and how you will make your exit.

– setting the date

Your target date for making the transition for your practice doesn’t have to be chiselled in stone. That said, you should have some sort of timing in mind, because it would be difficult to keep a good successor candidate engaged in the process if he or she does not know when they might get the opportunity to follow in your footsteps.

In practice, when I talk to financial advisors about their succession plans, only a small percentage have an actual calendar date picked out. A few more will tell me something like “I plan to retire within the next 10 years.” Unfortunately, I have also seen too many advisors in that category fall into the “rolling 10-year trap” – saying the same thing year after year, so that the end never gets any closer. So, while it is quite possible (and, apparently, popular) to develop your plan without having a specific date in mind, you should at least have a general time frame that gives everyone some idea of your thinking.

Larger practices typically need longer transition times. So, consider how complex your practice is and how long it will take for you to find the right successor and have that person become qualified and comfortable in his or her new role, and for your clients to accept the change. If your plan extends for a number of years (which, ideally, it does), you can break down the transition into smaller, more manageable milestones so everyone involved feels some sense of accomplishment toward the objective.

Be careful, however, not to set the approximate dates so far out that the people you are counting on to make it a successful transition are discouraged by the amount of time it will take to get there.

So, if you don’t already have the big day circled in red on your calendar, how do you go about setting a target date? My suggestion is to pick two dates: the “earliest possible” and the “latest acceptable.”

The earliest possible date on which you will be ready to retire is likely to be driven more by your financial ability to have the lifestyle you want after the transition than anything else. Hopefully, you will have had the chance by this first date to complete your written succession plan and have your successor engaged in the process (if not already in place).

Your latest acceptable date is more likely to be driven by your emotional readiness than your financial position. Here’s where you will want to consider your health, any hobbies you want to pursue and, of course, your family’s desires.

The final point to take into consideration in setting your target date is the marketability of your practice. Clearly, a practice with steadily growing revenue will attract a higher price than one in which the advisor has begun to slow down and revenue is declining.

– Exit options

While there can be many approaches and structures to a succession plan, you have four basic exit options:

1. Do nothing. The option to ignore the whole question always exists in any decision-making process. It won’t make the succession issue go away, but it does mean you don’t need to develop a plan. Instead, you will simply react to whatever happens along the way. It also could mean, however, that you will have little or no control over your exit and that you (or your family) will be unlikely to realize the full value for your practice when your time is finally over. I refer to this as the “die in the saddle” approach.

2. Carry on. If “do nothing” is the “die in the saddle” approach, then carrying on is akin to “riding into the sunset.” The difference is that this second approach at least has some element of decision-making associated with it. It is an intentional plan to simply continue doing what you are doing until the business – or you – runs out of steam. When you feel it is no longer worthwhile to go on, you can merely power down your laptop, sell off anything left that has value and go on to whatever is next in your life.

Ironically, for many advisors, this might be the best approach, particularly if they have built a “lifestyle” practice, in which the advisor consumes all the revenue to meet his or her personal income needs. (That type of practice typically isn’t worth much to anyone else, unless he or she has a way to reduce costs significantly.) In this case, you may end up with more money in your jeans overall by taking whatever income the business generates over, say, the next five to 10 years (even though that amount may be decreasing year by year) than by transferring the business to someone else with a two- to three-year payout.

The uncertainty that accompanies this approach, however, may cause your clients concern about their needs being met in the future. This may make them more open to competitive overtures, which hastens the decline in revenue. There is also the emotional impact of watching your life’s work dwindle away.

3. Internal transition. If you are like the majority of advisors and want maximum control over your exit and what happens to your clients after you are gone, an internal transition or sale is likely to be your first choice. This method is usually the easiest to arrange and the least disruptive to clients. In some firms, financing is available to facilitate a sale between colleagues.

On the other side of the ledger, there may not be a suitable candidate within your firm. In addition, if you are planning to transfer your book to a son or daughter or another relative, family dynamics can come into play and complicate the situation.

4. External sale. While a sale to a competitor may yield a higher price, it also will be the most disruptive to your clients, who will have to change dealer firms. Your firm also might prohibit you from selling your book externally.

At the strategic level, your options for exiting your business also can be influenced by your position on the Financial/Emotional Matrix. By delineating these two dimensions onto the horizontal and vertical axes of a matrix, you create four quadrants in which you can locate your degree of financial and emotional readiness to exit. You can use those quadrants to assess whether the exit option you have in mind is appropriate. For example:

– High emotional/high financial: You are emotionally ready and financially able to exit. Succession options: any option you choose.

– Low emotional/low financial: You are neither emotionally nor financially prepared to exit. Succession options: do nothing; carry on; work to maximize value for a future sale (internal or external) when you are emotionally and financially prepared.

– Low emotional/high financial: You are financially able to make the transition, but not ready emotionally. Succession options: do nothing; carry on; plan to exit over time (with an internal or external succession) when you are emotionally prepared.

– High emotional/low financial: You are emotionally ready to exit, but are not financial able to do so. Succession options: sell quickly to the highest bidder (external or internal); work to increase value quickly and then sell to the highest external or internal bidder.

This is the third instalment in a five-part series on planning your exit. Next: Choosing the right successor.

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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