A succession plan advantages advisory companies and their purchasers


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In a time of record-breaking mergers and acquisitions for financial advisory companies, the design and implementation of a succession plan has become a crucial success factor.

This volume and breadth of M&A activity has increased the pressure and options for business owners.

According to the RIA Deal Room 2021, the average rating of registered investment advisors rose more than 20% from 2019 to 2020. This caught the attention of numerous well-funded partners as well as growth-oriented RIA platforms and investors looking to buy or partner with consulting firms.

This offers companies an unprecedented variety of economic models, degrees of control and exit timing scenarios.

This is good news for business owners. Not only have the options for leaving the company increased, but so has the support for independent companies that want to develop and implement a succession solution.

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While succession planning is important to the company and its long-term profitability, it is equally important to the company’s customers and all investors. Up until this point, clients should be careful to see if their advisor has a plan, as that will affect who will handle their money if the business owner leaves, retires, or dies.

While advisors are more likely to consider their succession planning options as they approach retirement, a 2018 study by the Financial Planning Association and Janus Henderson Investors found an overall 73% lacking a formal succession plan.

Meanwhile, the industry has developed a new cohort of talent that gives founders more opportunities to transfer the business they have lovingly built to the next generation as an alternative to an outside partnership.

Consultants should create or review their business or succession plans to allow for more options and flexibility. The lack of a solid succession plan can lead to confusion, misunderstanding, and conflict that disrupt – or even disrupt – business continuity.

Succession planning defined

Succession planning is the deliberate process of transferring the management, property, and goodwill of a consulting firm from one generation or company to another. This should not be a stand-alone event. It should bundle several elements together:

  • strategic planning: Outlining the process, purpose, vision, mission and values ​​of a company, along with a tactical plan to bring that vision to life;
  • Continuity planning: the planning process for an unforeseen event; and
  • Sales planning: the process of preparing a company for sale to a third party.

The RIA market is becoming more complex as the ecosystem grows and competition increases. RIAs have a responsive and flexible model, but the industry does not have a defined model or unified approach to when a consultant retires or leaves the company.

As a result, succession planning offers strategic advantages and addresses several areas of risk:

  • Customer Churn Risk: Clients, especially those with high net worth, value continuity and stability and may choose to move to another company.
  • Growth risk: Discipline in business and succession planning reduces the risk of a company’s growth stalling or slowing down if current owners cease making professional contributions.
  • Risk of employee churn: The involvement of the next generation in succession and business planning creates commitment and promotes long-term loyalty to the company.
  • Enterprise value risk: RIA ratings are based on either discounted cash flows or multiples of free cash flows, with discounts and rewards based on elements such as sales growth, customer demographics, employee affiliation, and stability and management quality. A lack of a plan can have a negative impact on rating and attractiveness.
  • Risk of optionality: The lack of a defined plan or waiting too long to create one reduces the options available to owners. This is usually not a quick process: an in-house succession can take five to ten years to complete, and a sale can take more than two years, according to Advisor Growth Strategies.

In order to create a succession plan, owners should first set personal goals. Do you want to build a legacy, maximize financial income, or both? Then identify workable succession plan options that are tailored to personal and business needs.

Firms should use legal counsel to define voting rights for potential internal and external buyers, the event that triggers the execution of succession planning – typically death, disability and / or old age – the assessment methodology for internal succession and buyer party and source of funding .

Owners also need to determine the timeline for their exit from the company so that they have ample time to find the right buyer or find an in-house successor.

In the meantime, do due diligence to identify a potential buyer or successor. They should identify what is important to them and create an assessment scorecard to list the strengths, weaknesses, opportunities, and threats of each decision.

Then choose a model and structure the deal. Business leaders can hire a consultancy or investment bank to negotiate on their behalf.

Once the plan is in place, it should be reviewed at least annually. Succession plans generally have a long time horizon and need to be updated as conditions change.

The implementation of a succession plan is crucial. Clients will continue to monitor the safety of their assets and expect a detailed plan from their advisory firm.

A well-crafted plan can be a competitive advantage for attracting new business, retaining customers, and increasing employee engagement and retention.

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