Less than 4% of all independent advisers have ever had their businesses professionally valued, and less than 10% have any formal, written succession plans in place.
Years ago, I met an elderly farmer in ill health who had struck it rich late in life through an oil discovery on his land.
His greatest regret? Not realizing that his most valuable asset had been literally surrounding him all along.
It could have been worse.
He might never have discovered the true value of his land. His heirs might have parted with it for a fraction of its worth.
Like our accidental oil magnate, independent financial advisers frequently don't recognize early enough that the asset of greatest potential value can be found right in front of them: their practices.
Less than 4% of all independent advisers have ever had their businesses professionally valued, and less than 10% have any formal, written succession plans in place, according to a recent research report from FP Transitions, a financial practice sales consultant.
Given this context, independent advisers need to ask: How do I approach succession planning so that I can create a practice with enduring and transferable value? And how do I extract the greatest value out of my practice when I am ready to exit?
Addressing these questions requires an adviser to view succession planning as a form of “business life planning” across every stage of a practice's life cycle, versus a single event near the end of one's career.
For those fortunate enough to have a time horizon of more than five years, here are some strategies that will rev up the equity value of a practice, or position it for maximum future valuation.
Jump-start growth by becoming a succession partner. A demonstrated track record of growth in revenue and client accounts is a key valuation metric for a practice. Nothing provides a growth force multiplier effect better than the acquisition of an existing client base, versus relying on organic growth.
Some of the best opportunities are with solo practitioners much closer to retirement than you are. Position yourself as a succession partner to these advisers.
Clearly track your growth. Validate how well you are growing for potential acquirers or successors through regular third-party valuations of your business and benchmarking your metrics against other advisers — data that are frequently available through your broker-dealer or custodian.
Build a brand that is bigger than you are. Generally, an individual's name may not be as transferable or valuable as a brand that transcends who you are and around which lasting client loyalty can be built. Be sure to focus on consistency in the look and feel of all marketing materials.
Plan for the unexpected. Putting in place a plan that ensures uninterrupted service to clients, continued employment for staff and appropriate protection for your heirs is critical. Additionally, building a contingency plan can be a first step toward identifying successors for your business when you are ready to exit on a planned basis.
Establish an equity-sharing program. Potential acquirers and successors prefer practices with a stable, long-term work force and staff members who think like business owners. The best way to accomplish this is by giving key team members “skin in the game” through regular and gradual equity sharing. Parting with a little equity over time often maximizes the value of the equity you retain.
Develop an exit plan as you gain momentum. Advisers who have reached a critical mass in their businesses should start thinking through their planned exit alternatives. Are there younger partners or capable employees who could assume the business? Are there other practices that could be a good fit with one's business?
If you have less than five years before you feel you must exit, you can potentially maximize the equity in your practice by doing the following:
• Start working with your attorney and other business advisers to build a contingency continuity plan that best protects your clients and your heirs.
• If there are partners or professional staff members on your team, begin to explore how to structure and establish an accelerated equity-sharing program.
• Find a succession partner for your business by starting to network at industry association events and by approaching specialty succession-planning firms, or your broker-dealer or custodian.
As independent advisers build their practices, they should remember that succession planning is a process, not a single event. Taking this approach produces outcomes that appropriately validate — and value — a lifetime of hard work.
Andy Kalbaugh is executive vice president for business consulting at LPL Financial Independent Advisor Services.
