Finding the Right Successor
3 Considerations for Finding the Right Successor for Your Business
When most financial advisors enter the profession, they do not necessarily think about building a business, rather they are focused on providing the best possible financial planning and advice to their clients and helping them pursue their most important goals. As a result of doing this, advisors find that they can earn a good living and along the way build a successful business. Somewhere along this path they start thinking about the business continuing beyond them and finding a successor.
However, finding the right successor can seem like an overwhelming process. How do you find another advisor/firm who will continue to provide service to clients you have worked with and developed relationships with over decades? How will you find someone who will continue the business and legacy that you have built? How will you find a firm that can properly transition and retain your clients, while ensuring they are paying you fair value for your business?
As soon as you start considering all of these factors, it’s no surprise that many financial advisors, while they know they need to find a successor, will ultimately decide to move this goal to “next year” and prioritize other business goals.Rather than continuing to put this off until it’s too late, take the necessary steps to find a successor for your business. When evaluating your succession options, the 3 key areas are: client fit, business model fit, and transition and capital resources.
1) Client Fit:
Even with the best planned transition, if the new advisor or firm taking over your business can’t work with your existing clients, the clients will leave and the value that you built will quickly erode. When evaluating a successor, it’s important to look at both experience and personality.
First, does the new advisor have the knowledge to continue to serve your clients? While most advisors have the same licenses and/or designations, their experience and knowledge of specific areas of financial planning can be very different. For example an advisor that focused on estate and legacy planning has a very different experience than an advisor who works with younger couples on college planning or the advisor who works with companies to set up their retirement plans and employees benefits. The topic of experience becomes even more relevant for advisors that have niche focused practices. These advisors are focused on a very specific type of client and are knowledgeable in all areas for those specific clients. If this describes your practice, it is important to find a successor that has a similar experience. Often, with niche focused practices, knowledge is more important than location when finding the right successor.
The second consideration when deciding if someone is the right fit for your clients is personality. Let’s face it, this business is a relationship business, and if the new advisor can’t build relationships with your clients, they will ultimately find a new advisor. This is not saying that the new advisor needs to be exactly like you and share all the same beliefs as your clients. However, finding someone with similar interests and values with you and your clients can go a long way in client retention and maintaining the value of the business.
2) Business Model Fit:
When you think business model fit, it could be vision for the business itself or the ability to take over your business and integrate your clients into their business model. If you are planning on entering into a longer term succession plan (link to case study on Realize page), as important as it is for your successor to be able to continue to work with your clients, it’s equally as important that you share a general vision for the business. Many times, like minded advisors will enter into a succession plan only to begin working with each other and realize their vision for the business is completely different. For example, if one advisor wants to build a lifestyle practice while the other wants to scale an enterprise business the partnership will never work. A good exercise to go through with a potential successor is to write these down, what is the long-term mission and vision, do they align? If they don’t, are you willing to compromise? This can often lead into discussions about the goal of the business. If these align, then you can dig a level deeper and discuss investment philosophy and planning process. These conversations will lead to what are ultimately the most important parts of the business that must be maintained by the successor to help ensure long term business growth.
The level of importance on shared business vision will also depend on the type of succession plan that you are entering. If you are looking to simply sell and exit it will be less important. In the sell and exit strategy, business model becomes the most important as you want to find a successor that has the capacity to take on your business and clients. Capacity can often be overlooked, particularly in the event the succession plan must be implemented quickly. You want to evaluate if the new advisor/firm have the capacity to take on your clients in addition to their own. Do they have the infrastructure, processes, and team in place to transition your clients and continue to serve them? The business model fit consideration is one of the most important areas if you are considering selling to someone outside of your current firm, so take the time to understand their planning process, investment management approach, capacity restraints, and have they ever completed a transition like this before?
3) Transition and Capital Resources:
You have found a successor that can work with your clients and shares a similar business vision, however do they have the resources to transition along with the capital to purchase your business? As valuations on financial advisory businesses have continued to increase, it’s important to make sure the successor that you choose can not only service your clients and maintain your business, but also have the capital to pay you what your business is worth.
While evaluating potential successors for your business, it’s good to have a discussion around your ideal timeline and expectations for how the succession plan would be structured. If you are planning on selling and walking away, that could include a valuation and specifics around purchase price and how the payments would be structured. If you are entering into a longer term succession plan, while the specific dollar amounts don’t need to be finalized, the methodology, valuing and payment structure should be outlined to help eliminate any issues when it’s time to implement.
Finding the right successor for your business can seem like an overwhelming process and it is why many advisors put this off, wait until it’s to late, and then are forced to sell due to a health or family issue. Waiting will not benefit your clients and certainly not allow you to maximize the value of the business that you built.
One recommendation is if you are not ready to pull the trigger on a full succession plan, find a continuity successor, an advisor/firm that would take over the serving of your clients in the event of unforeseen death or permanent disability. This immediately protects your clients, business, and helps to ensure your family will receive value for your business if something were to happen to you. This is also a great way to start to evaluate a potential successor and determine if this is the advisor or firm you would like to ultimately take over your business.
The great thing about a continuity plan is while it protects your clients and business today, it also can be updated at any time, so if you do find the right successor for your business you can easily update and shift to the new advisor. By focusing on client fit, business model fit, and capital, you can properly evaluate advisors and find the right successor for your business.