After years of crafting financial plans for others, advisors often find that their own succession plan for retirement is lacking or even nonexistent.
If you’re about five years from selling your advisory practice, maximize the value of your life’s work by following these proactive steps. They can mean the difference between a less-than-positive exit and a highly profitable one.
Determine the Value of Your Current Business
The source of revenue for a practice can drastically impact the sale price. Businesses with recurrent revenue from assets under management, or AUM, typically have the highest value. Commission-based practices bring a lower sale price. But regardless of the current structure of your firm, an independent professional appraisal is critical, says Kari Gillenwater of Gillenwater Consulting Group. It is far better to learn the value of your practice while you still have plenty of time to make adjustments.
Decide Whether the Practice Will Transition Internally or Externally
The successor can be an unrelated third party, another experienced advisor, an internal advisor or a family member. Each of these options has pros and cons, so identify your primary goal for the succession. It could be getting the highest sale price, making a seamless transition for clients or creating the opportunity for a second-generation firm.
Many advisors prefer an internal transition, but not all employees are ready to make the leap. Time is a necessity when executing an internal succession. Gwen Garrison of LifePlan Financial Advisors in Newnan, Georgia, began introducing her planned successor to her client base with a five-year horizon in mind. She has completed a continuity plan and will soon implement a buy-sell agreement, funded with life insurance. She says that an internal transition requires a longer lead time to prepare for unexpected events, such as a broker-dealer merger, so that there’s plenty of time to build relationships with clients.
Create an Enterprise Instead of a Practice
Make sure the value of your practice will survive your departure. Many independent advisors overemphasize their own unique value to the practice. Unfortunately, all that potential buyers will see is the momentum that will be lost when you leave.
Create a management team and outsource technology to build a resilient structure that will encourage buyers to trust the growth projections you’ve set. Also, focus the practice’s efforts on its most profitable activities.
Review Client Demographics and Relationships
Buyers place a higher value on younger clients who are still in the accumulation phase versus older clients who are converting their assets for distribution. They can be wary about a greater proportion of older clients, especially if they feel those clients may leave solely because “their person” is no longer there. Implementing a team approach with clients can help build “stickiness,” especially if the founder proactively cultivates multigenerational clients.
Create an Organized, Accountable Culture of Growth
Buyers can sense it when a firm has a growth mindset. Jennifer Goldman of Jennifer Goldman Consulting in Boston, suggests documenting your client experience, from lead to client review meetings, as well as your tech stack and data flows. Also, create an online brand that is attractive and inviting, she says. In addition, modifying your firm’s compensation practices can generate renewed enthusiasm among staff to create deeper client relationships, add new clients and ask for referrals.
A top-shelf firm is also able to produce full and complete records on profitability, compliance, client files, marketing plans, operating capability and more. Buyers are looking for potential liability issues, and a haphazard client file rife with sticky notes is a red flag. For many, consistent processes, excellent due diligence and an automated customer relationship management, or CRM, system are deciding factors.
While it is never too soon to devise an exit strategy, it can certainly become too late. Steven Saladino of Principal Financial Group in Tampa, Florida, says that taking the time to mentor younger potential successors is important. Explore opportunities to add diversity to your firm as more women and members of minority groups seek careers in financial services, he says.
Whatever your strategy, a sound transition depends on a proactive, not reactive, approach. Ron Schutz of Exponent Prosperity Accelerator Advisors in Houston, completed the transfer of his firm in 2019 by following his own method for business transition planning, which he has offered to clients for nearly 53 years. He still maintains a presence in his firm as executive chairman, as his succession plan stipulates.
With perseverance and dedicated effort, financial advisors can make a profitable transition to retirement while leaving a solid framework for their firm’s future success.
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6 Steps to Take If You Plan to Sell Your Advisory Business in 5 Years originally appeared on usnews.com