©2019 Emily M. Chiang, MBA, CFP
A Step-By-Step Succession Planning Process And Procedure
©2002 Debbie Lynn Butler
Why have a plan
When to do it
Which exit strategy
The searching process
The ideal buyer
The transition process
Your third act
1 in 6 advisors are planning to retire in the next 10 years (Source: Cerulli Associates 2015)
41% of advisors have some form of plan. Only 27% report having a formerly documented plan (FPA & Janus Henderson 2018)
60% of advisors in firms that manage $500 M AUM have a formal plan. 13% of advisors in firms manage less than $50 M have a formal plan (Source: FPA & Janus Henderson 2018)
51% of advisors consider the biggest challenge is finding the right person (Source: FPA & Janus Henderson 2018)
Death
Disability
Divorce
Disagreement with partners
Exhaustion
What kind of clients also need succession planning?
Examples:‣ Bakery and restaurant business owners‣ Dentists‣ Lawyers‣ Tax advisors and more
Why gain succession planning knowledge?
‣ Understand your own succession planning process/procedures
‣ Assist your business owner clients to monetize their businesses
‣ Establish a stronger adviser/client relationship with your business owner clients
I still have time
I love my work
I am so busy working
It is too hard to find someone trustworthy
I’m too attached to clients, colleagues and staff
No longer passionate or interested
Too many senior moments
When you are completely exhausted
When your career has peaked
When your clients ask you when you will retire
Do not want to experience another 2008/2009
Work with a life coach
Where to find a good coach- International Coach Federation (ICF)- International Association of Coaching (IAC)- The Coaches Training Institute (CTI)- A good referral is the best
What to discuss- What is my legacy?- Is this all there is?- Traditional or non-traditional retirement life?
Be the choreographer of your “Third Act”
Selling to someone in your firm (internal succession)Pro: The least disruptive for clientsCon: Takes a long time to identify and groom the buyer
Merging with another firmPro: Allows you time to decide if this is the right firm to take over your clientsCon: May take several years longer than you wish to exit
Selling to another firmPro: Quickest way to exitCon: Most disruptive for clients
Selling it yourself
Pro: Take your time to find someone compatible and comfortable to work with
Con: Time consuming with a steep learning curve
Selling it through a broker
Pro: Greater access to buyers
Con: May be under pressure to sell quickly
Get several valuations from reputable business-valuation consultants
Understand the basics of business valuation
Encourage your business owner clients to get valuations of their businesses regularly
Assets under management (AUM)
Revenue from recurring and non-recurring income
Cash flow from your business (EBITDA)
Client and revenue growth rate
Client demographics and lengths of client relationships
Business longevity and its physical assets
Contract attorneys
Tax accountants
Business valuation consultants
Business and/or life coach
High ethical standards with no compliance issues
Same geographical area
10 years of experience; late 30’s or early 40’s of age
Designations such as CFP and CFA
Someone you already know, like and respect
Same investment philosophy
Similar fee structure
Strong financial strength
Prior experience buying a practice
High IQ (intelligent quotient), EQ (emotional quotient) and AQ (adaptability quotient)
FPA and NAPFA local chapters are fertile ground
Your broker/dealers or custodians
Wholesalers
Describe the demographics in a succinct and confidential manner
Provide current total assets under management
Provide current and historical portfolio performance
Prepare a summary to tell the story of your life’s work
Do not exaggerate; honesty is the best policy
Be ready to show 3 to 5 years of historical, current and projected income and expenses
The selling price is a function of the projected revenues and cash flow
(we can not sell relationships)
Design a customized and strategic plan for each client
How long have you, the buyer, been in the business?
What is your business plan for the next three to five years?
How will you, as the buyer, incorporate newly acquired clients into your firm’s overall operation and growth trajectory?
Have you bought any practices before? What is your client-retention rate?
What is your investment philosophy?
How did your portfolio performed in 2008, 2009 and 2010? How did this performance compare to the benchmark?
What sample portfolio reports and historical rate of returns can you show me?
Who will be servicing the clients and what are their educational backgrounds and their designations?
What is the average number of years the buyer’s own clients have worked with the buyer?
Discuss and negotiate with the buyer about the appropriate length of transition period
Goal: Someone you trust and feel comfortable to work with. Some one who is better than you in financial planning, investment management and client servicing skills
What should you ask in different industries?
‣ A bakery or a restaurant owner who wants to sell the bakery or restaurant must understand the health code and should ask if the buyer possesses similar knowledge.
‣ A sole proprietor dentist, lawyer, or tax advisor must be licensed and must ask if the buyer is properly licensed as well.
‣ Be sure to work with an industry-specific expert to help with the process.
Major factors stated by Mark Hurley:
Timing
Pricing
Personality(Source: “Brave New World of Wealth Management.” Fiduciary Net Work. April, 2013)
My factors:
Values
Match
TRUST
Value of the business
Down payment
Earn out
Tax treatment
Consulting agreement
Non-compete agreement
Be transparent with all clients
Talk to the top 20% of highest paying clients or those who contribute 80% of the total revenues
Write formal letter to remaining clients
Introduce the buyer to clients and explain your due diligence process of selecting your buyer
Begin working at the buyer’s office
Buyer discusses their services in detail -similarities and differences
Be fully prepared that some clients may not follow you to the buyer’s office
The goal is to maximize a high transfer rate; buyer and seller should refer to their customized transition plan for each client
Buyer provides meeting agenda, reports, analyses and financial plan similar to seller’s method
Make changes slowly overtime
May take 4 or 5 meetings or 1 to 2 years for a seamless transition
Complicated and challenging clients may take longer
Cultural differences
- Entrepreneurial vs corporate
- Sole proprietor vs. team
- Gender-based management style
Investment philosophies differences
- Growth vs. value
- Passive vs. active
- Long-term investing vs. tactical investing or market timing
- Overly concentrated vs. highly diversified
- Model vs. customized
- Client is vs. isn’t educated about differences
- Alternative investments vs. traditionalinvestments
‣ Work flow differences
- Re-balancing
- Year-end tax loss harvesting
- Reporting methods
- Discretionary vs. non-discretionary
‣ Other potential pitfalls
One-size-fits-all transition plan may result inhigh number of defections; must remainflexible and adapt to challenges quickly
The buyer/firm has a similar culture, financial planning/investment philosophy and work flow process
The buyer shares a similar value system to yours
You would be comfortable with the buyer managing all of your money
Your clients will be happy working with your buyer beyond the earn out period at a minimum
Find someone you trust and feel comfortable with.
Find someone who is better than you in
financial planning, investment management and client servicing skills.
Find someone clients may like more than you!
Emily M. Chiang, MBA, CFP
www.emcsuccessionplanning.com
