Exit planning: Building your own retirement plans (Part 1)

When it comes to retirement, advisors are the first to tell their clients how important it is to plan for the future. After all, clients cannot expect to fulfill their retirement dreams by developing and implementing a plan only a year or two before retirement. But when it comes to their own practice, advisors often put their own succession planning off until the last minute.

As the industry becomes more competitive though, it is obviously important for advisors to have a plan to build a transferable business. Ideally, transition planning — the structured process for evaluating your practice, setting business objectives and developing a strategic game plan to meet those targets — should be part of an advisor’s quarterly business review to ensure the success and longevity of their practice. An “exit” strategy evaluating what happens to the practice, clients, staff, and the firm’s reputation when the time comes for an advisor to retire, should be part of that review.

Properly negotiated transitions can be a win for all involved. From the buyer’s perspective, if the deal is structured correctly, overpaying is a non-issue since the vast majority of all transitions today are done on an earn-out basis. In other words, if a buyer gets less revenue than anticipated, a lower final purchase price is paid to the seller. From a seller’s perspective, if a buyer receives more revenue than anticipated, a higher final purchase price is paid.

To protect your clients and the value of your business it is essential to think ahead and consider different alternatives for your own eventual exit. Fortunately there are a number of options (internal succession, merger, acquisition or outright sale), but all have important financial, legal and organizational implications for you and your business.

In my experience, mergers or acquisitions involving external candidates are the most challenging. The fact that independent financial advisors are entrepreneurial in nature further complicates potential partnerships. Of all transition options available, mergers and acquisitions have the lowest success rate for several reasons:

1. No clear strategy

Without a clear strategy, there are a number of risks and obstacles that can affect advisor transition plans.

Incompatible client base

Buyers and sellers talk about “synergy” as a concept, without taking the time to examine their client base and the processes in place to support those clients.

Lack of commitment

If you are planning to merge with another practice, it is important to ascertain the other party’s level of commitment, and their reasons for wanting the transition.

Failure to add capacity

Buying a practice is a great way to increase your revenue but you must ensure you have the resources to address the needs of your existing and newly acquired clients.

No transition plan

A transition plan that defines roles and responsibilities for the buyer and the seller must be incorporated into the agreement, along with a timeline discussing when each party will execute certain tasks.

2. Incompatible culture & philosophy

To help identify common goals or conflicts with a potential partner, advisors must ask the following questions:

• Do we share the same values? Is our approach to business similar? What fundamental differences exist in the way we conduct our business and personal affairs?
• Will this new advisor provide the same level of service to my clients? Will my clients like this person?
• Does this partner have a good history of business and personal relationships?
• What is their financial condition? Does it make our deal risky?

Ultimately the goal is to determine how your clients will be affected. The client has a right to agree or disagree to the change in advisor and the succeeding advisor has a legal and regulatory obligation to serve the client. It is important to feel secure in the knowledge that you are leaving your clients in goods hands. To ensure this, some due diligence is required. For example, is the seller properly licensed? Does he or she have a clean compliance record? Most deals break down because of unanswered questions. The sooner you resolve these questions, the less time you will spend chasing a deal that will not work.

3. Unreasonable expectations

Financial planning practitioners generally have an inflated perception of value. For example, having a practice for 15 or 20 years does not necessarily translate into value. A good reputation in the community does, however, but it is hard to transfer.

To survive the negotiation process, both sides should be prepared to clearly understand what the other needs and expects.

• What is reasonable value?
• What is motivating this purchase or sale?
• What is the required rate of return?
• How many buyers are interested in the practice?
• How many employees are involved? What are their attitudes about the partnership?
• What is the acquisition timeline?

The quality of the buyer should supersede the value placed on their pocketbook since an exclusive focus on the bottom line usually results in a poor personal and business match, which ultimately impacts clients and the value of the deal — when clients leave, so does the value of the practice, and most, if not all deals, include a contingent payment plan.

In the end, clients are all that matter and they generally don’t care about the details of your deal. As a buyer you need to be able to win trust and transfer those relationships. As the seller, you must be able to let go of those relationships and help facilitate the transition. Unfortunately, if the pitfalls outlined here come into play, both parties look at each other as adversaries, provided the deal is still on the table at all, which can hinder the transition process and overall practice performance.

Next week: Transitioning best practices (Part 2).

Cindy Jenner Cowan is vice president of training and development at Worldsource Financial Management. With more than 17 years of experience in the financial services industry, the expert in relationship management and value-added coaching recently developed FRAMEWORKS, a training program for Worldsource advisors, focusing on advisory practice life cycles.