Someone recently asked me if succession planning should start 10 years prior to retirement, as opposed to one. My response was, why wait at all? The right time to think about succession planning is as soon as possible.
Advisors need to realize succession planning isn’t always triggered by a founder’s decision to leave on his or her own terms. Even with the most fastidious planning possible, we are all vulnerable to game-changing factors we have absolutely no control over, and it makes no sense to take these things for granted.
What if your health deteriorates? What if there’s a lengthy family emergency? What if you just get sick and tired of heavy-handed regulatory regimes? What if the joy you used to find in your work is no longer there?
It’s an illusion to think you’re in full control of every aspect that’s going to affect the terms and timing of your succession plan. And it’s not even limited to the stuff that happens to you personally.
A good friend of mine bought a practice a few years back, but she didn’t set out to buy a business. She had just moved to town and approached a local advisor about the possibility of doing some joint work. As it turns out, the local advisor was looking to immediately divest herself from the responsibilities of her practice because of her husband’s failing health.
The important point here is that it wasn’t a change in her own health that forced this advisor to look for an exit; rather, a change in her spouse’s health. It was purely good fortune, rather than premeditated planning, that the buyer and seller happened to cross paths at the right time. Succession planning shouldn’t be left to something as fickle as good fortune.
Even if everything is sailing along smoothly right now, it pays to have a Plan B. Another friend of mine is a key person at a cutting-edge financial-planning firm. These guys are at the top of the food chain, with a dominant market position, and they’re in complete control of their careers. And even they have a Plan B.
Why would a firm that already gets to call all of its own shots need a Plan B? It’s simple. Just because everything’s going great now is no assurance the situation won’t change in the future.
Another thing to consider is what your clients think about the situation. This isn’t something clients will always ask about, but that doesn’t mean they aren’t thinking about it. What happens to their financial plans if their advisor is no longer in the picture? Even if you’re decades from your planned retirement, clients will appreciate knowing in advance that if something happens to you, they’ll still have someone looking after them.
Finally, giving yourself plenty of lead time will allow you ability to adapt to changing circumstances. I had a young fellow keenly interested in buying my own practice. It was only after he worked with me for a year in a junior capacity that it became blatantly obvious he was not at all suited to take over. Best to find that out sooner rather than later.
Early succession planning is a very good idea, to be prepared for unexpected contingencies. But it makes good planning sense, too. There are certain matters to consider in advance – both financial and non-financial – for maximizing the monetization of your practice upon succession, as well as addressing any other objectives you may have.
Some of the variables that will impact the market value of your practice include: Do you have a clean balance sheet and income statement? Do you have structures and systems in place that make the practice less dependent on any one individual? How much of your practice is based on recurring revenue? Are there any messes that need cleaning up?
These issues typically will take some time to work through and get into place. So, again, the sooner you start working on them, the better. It might take several years to package your practice for sale. Ask yourself what you want your succession plan to look like. Because the best time to work on it is as soon as possible.
Brad Brain, BA, CFP, RFP, CLU, ChFC, CHS, is a registered financial planner and the president of Brad Brain Financial Planning, located in Fort St. John, BC.