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Succession Planning: Avoiding the 6 Most Common Mistakes

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Avoiding these 6 most common mistakes will help protect an advisor’s business, clients and legacy

Succession planning has become a hot topic, driven by an aging advisor population and the anticipated wave of retirements coming in the next decade. Planning for one’s next chapter is the best way to ensure the legacy an advisor has worked so hard to build can continue well into the future.

For independent advisors, this often presents a greater challenge. While there are many suitors for a quality business, finding the right match is often complicated and time-consuming—a result reflected in industry surveys which indicate that only 40% have a succession or emergency plan in place. Although most advisors consider it important, succession planning often ends up on the back burner, eclipsed by other, more immediate priorities.

Yet life itself comes with many variables and uncertainties, and as such, dealing with succession is a task owners should address sooner rather than later.

A true story…

Take the case of “John”, an independent business owner who ran a $220 million RIA for the last 25 years. As CEO, CIO, chief rainmaker, solo advisor and client relationship manager, he and his support staff did it all.

John reached out to me when he came to the realization that his firm needed a next gen advisor—someone he could train and grow to become the firm’s successor. Like most advisors, the aspect of “home-growing” the next gen was by far John’s preference, as it often provides the best path to continuity on all fronts.

After many unsuccessful attempts over several years, it was clear that John was over-taxed with splitting his time between the search for his “mini-me” and trying to keep up with the management and growth of the business—and even clearer that finding a next gen would be more difficult than he expected. As a result, he realized that merging with another firm might be a better option. Several local firms were identified, and John zeroed in on one that aligned well on all points. It seemed to be the perfect solution that John was looking for.

So they moved forward to draft an agreement to merge. Then time got away from him and the agreement sat on John’s desk, taking a back seat to his many day-to-day responsibilities.

Sadly, the agreement, which would have provided continuity for clients and protection of the value of the business, remained unsigned at the time of John’s untimely death at the age of 57.

Related: Two Alternative Paths to Successful Succession Planning

6 Mistakes to Avoid

This devastating cautionary story is a reminder of the importance of ensuring continuity in an all too uncertain world and that succession planning is not something to place on the back burner.

While John’s case is certainly an extreme scenario, avoiding these common pitfalls will help steer an advisor through the succession planning process—and ensure that enterprise value is maximized while the continuity of the business and care of clients is maintained.

  1. Believing that succession planning is a process you begin only when you are almost ready to retire.

Succession planning often takes years because many times, matches that look good on paper fall short of expectations. It is a complex process that can’t be rushed. At minimum, businesses must line up on their investment approach, client service model and pricing. In addition, personalities and work ethics must align, and valuation and deal structure must be agreed on.

  1. Allowing the business to age along with you and failing to connect with the next gen of clients.

One of the key drivers of enterprise value is growth. So, to maximize the value of the business an advisor must continue to bring in new clients and develop relationships with the next generation of existing clients. Advisors that allow the business to steadily shrink over time will attract far fewer suitors and depress enterprise value.

  1. Being inflexible and narrow-minded.

A lot of independent advisors want to “home-grow” a successor since this allows them to retain total control. The problem is that the competition for advisors is fierce and bigger firms wield large checkbooks to land top talent, making it difficult for small independents to compete. Often advisors spend years searching, while completely shutting out other options. Instead, an advisor should consider multiple paths to solve for succession including merging with another like-sized firm or being acquired. Although a merger or sale requires flexibility and a loss of some control, it delivers scale and resources which benefit clients, plus the capital and next gen talent to solve for succession.

  1. Having unrealistic expectations.

One of the biggest deal killers is a seller with an unrealistic expectation of the value of his business.  Valuations are driven by a range of factors including total fee-based AUM, average AUM per client, number of clients, historical growth rates, key-man dependence, and allocated infrastructure and support staff.  Bottom line, two businesses generating similar total revenue may sell for very different multiples.

  1. Limiting your search to only your current broker dealer.

In an ideal world, advisors hope to find their successor within their broker dealer, since this is the least disruptive option and is assumed to result in higher client retention. Yet, if staying within the confines of the broker dealer results in a successor that is not a good cultural fit or is located far from clients, then expanding the net to consider other broker dealers and RIAs makes good sense.  Although this would involve change, the benefits of searching outside the current broker dealer would be the ability to identify a successor that is a better fit for the business and the potential to, through competition, see an even better sale price.

  1. Not having a clear plan established to protect your heirs and clients in the event of untimely death.

Having an emergency plan in place is essential to protect the enterprise value of the business and to ensure good stewardship of clients in the event of a disability or, as in John’s story, an unexpected death. Typically, “emergency” plans can function as stopgap measures and be replaced by a more formal succession plan in the future. Without an emergency plan in place, an untimely death leaves the business unattended, often resulting in client attrition and the deep discounting of the value of the business.

Unfortunately, it is all too common that independent advisors have no plan in place to protect their business—often their largest asset. To establish a succession plan that is right for the business and clients, while also delivering maximum value, an advisor needs to start planning early, while the firm is still vibrant and growing.

Our best advice is to start by getting educated on the options, moving forward with an open-mind, flexible attitude, and a realistic view on valuation. Placing a priority on the process and exercising a certain level of patience will pave the way to ensuring that a firm’s legacy is an enduring one.

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