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Maximize the Value of Your Business (Part 2)

6 Steps Financial Advisors Can Take to Maximize the Value of their Business Through Succession Planning

Maximize the Value of Your Business Through Succession PlanningIn the first installment of this two-part series, we explored six steps you could take to maximize the value of your business.  In this installment, we will highlight six steps allowing you to monetize that value through succession/exit planning.


Why is a succession plan important?

Succession plans are more than just about selling a business and extracting value; it is about building a plan to ensure the continuation of your business, ensuring your clients are taken care of and being able to work less when you want/need to while maintaining an income stream.  You have a fiduciary responsibility to put your clients’ interests and well-being before your own, and it’s important to think of that responsibility not only through the duration of your clients’ lives, but yours as well.  In addition, having a solid succession plan in place could help grow your practice by assuring clients that the firm will be around for their lifetime.


When should you create your succession plan?

Right away!  Even if you are years from retirement, you need to have a succession plan that will allow you to extract the value you are creating in your business. The primary difference between continuity and succession planning is the nature of the triggering event.

Continuity plans address unplanned events like death or disability, while succession plans address a planned event like retirement. These plans can be mutually exclusive, or a succession plan can have continuity provisions built in. These plans can change and should be updated regularly, but having some type of plan in place will help you develop the resources and structure needed to eventually achieve your strategic objectives.

If you wait until you are ready to leave your business before defining your succession plan, you will likely not get the amount it is actually worth—or at least not the amount it was worth at its peak. This chart highlights potential impacts to an advisor’s value over time if a succession plan is not put in place early on in the firm’s lifecycle.

Measuring a Successful Retirement Plan over Time

You can see that the value of a practice grows over time, but if there is not a succession plan that can be executed before retirement, it may quickly lose value. Some advisors make the mistake of growing their business bigger and bigger early in their careers, but then letting the business slide later. As a result, the value drops before they have a chance to sell or transfer the practice.

You should have an idea of what type of succession plan you would like early on in your business, and begin planning and working on your strategy about three to seven years prior to retirement. In doing so, it allows you the greatest control over the process and helps maximize the value you receive from your business.


6 Steps to a Successful Succession

1. Define your Ideal outcome

The best way to approach succession planning is to begin with the end in mind. This includes defining what the next chapter of your life looks like after you transition from your business. Having a vision for the future of your business and life will make it much easier to determine how to get there. Are you starting a new career, pursuing philanthropic passions, focusing on a hobby or investing in family?  Do you want to stay involved or step away from your business entirely in retirement? Further, when do you want to begin this new adventure?

Your business is likely one of the largest assets in your professional and personal financial portfolio and should be managed along with the rest to achieve a successful succession plan. Knowing what resources you need and when you need them can be compared to where you are today in order to establish the framework for your succession plan.


2. Evaluate your options

While there are a number of succession options financial advisors can take, the most common are below:

  1. Internal/Family—Consider someone currently within your firm (another partner, junior advisor, or family member) or a person you hire with the potential to groom as a successor. This strategy is popular because it can help ensure job stability for other firm employees, and you can retire and maintain a limited role in the business if desired.
  2. External—An outside advisor, not currently part of your firm, who will purchase your business when you are ready to exit. This is the least complex strategy and provides immediate liquidity by requiring upfront cash payment combined with an interest-bearing note paid over time.
  3. Merger with Another Firm—This strategy provides immediate liquidity; however, it is only for a portion of the firm. Clients experience a relatively high level of continuity while the owners enjoy the economies of scale that comes from being part of a larger organization.
  4. Attrition—Although not a strategy per se, this scenario is best characterized by an advisor who does not have a successor of any type. They will work until the day they cannot work any longer, and client attrition slowly erodes the size of the business—especially if the advisor is not actively engaged in client acquisition. Attrition usually results in little or no transferable value at retirement.

Look at your practice and determine which option will be the most feasible for you. For example, if you have no potential family member successors and no current staff who would be both capable and willing to eventually buy you out, you will need to consider hiring one or more junior advisors or looking to an external source for a successor. Once you decide what type of successor makes the most sense for you and your business, you can begin to make a list of requirements.


3. Identify key criteria for your potential successor

To help you find the ideal successor, make a list of key criteria to assist in your evaluation. In the case of internal succession, they should be able to gain the trust and confidence of both employees and clients.  If you are looking to bring on junior advisors, you might want them to have a finance-related college degree and perhaps, a couple years of experience in the industry. Or maybe you want a recent graduate so you can train them from the ground up. A “trial period” for potential successors is recommended as it will allow for performance feedback and evaluation before you step away from the business.

If you choose to merge with another firm or sell to an external successor, you’ll want to consider key areas such as clients, competition, and firm management.  Some sample questions include:

  • What is the firm’s main value proposition to clients? What is the target client service model (e.g., investment management, tax, insurance)?
  • How does the firm’s strategy differentiate them from their competitors? How do the firm’s fees compare to the industry standard?

Does the firm have sufficient resources to execute growth objectives? Is the firm’s incentive program aligned with both employee and client interests? Where is the firm located?


4. Identify your buyer or successor

This may take several years, especially if you are training junior advisors and won’t be sure if they will be the right fit until after you have worked with them for some time. If you have employees, you know that everyone you hire does not always work out.  The trick is to stay persistent in looking for and recruiting top talent to your firm.  Individuals who possess an entrepreneurial mindset along with intelligence and strong work ethic can be offered an ownership path that progresses over time.  Time allows for the proper training and experience necessary for your successor to be successful and also allows you to be flexible in making adjustments as you progress in your plan.

If you are closer to retirement and do not have internal succession candidate options available, you may need to identify a buyer quickly. These external succession candidates may be identified through:

  • Leveraging your broker-dealer relationship
  • Networking with other financial advisors
  • Communicating with your product wholesalers and partners
  • Hiring an executive search/recruiting firm

The important thing to remember is that there is typically a large supply of potential buyers.  Invest the necessary time in your due diligence efforts to ensure they are truly qualified and capable.  Further, are they someone that you trust, and does their business culture, service model, resources, and personality complement yours?


5. Structure and finalize the deal

The deal structure depends heavily on whom you choose as your successor and there are a number of different options from which to choose. Below are a few common structures:

  • Traditional Sale—Selling your entire book of business immediately and transitioning to the buyer over a specified period of time.
  • Partial Book Sale—Appropriate if you would like to remain in the industry, but at a lesser capacity. Similar to the traditional sale, but you only sell a portion of your business and the post-closing relationship is quite a bit longer.
  • Sell and Stay—Also referred to as merger acquisition, this is a great option if you would like to sell your entire business, but remain in an ongoing part-time employment contract for client servicing.
  • Internal Succession—A major drawback to this option is that there is generally a lack of capital on the buyer’s part. However, if structured correctly, it could provide you a fixed income for an extended period of time.

A series of employment agreements, partnership agreements, and/or purchase agreements may be necessary to detail the plan that will allow you to achieve your objectives. There are a number of firms that assist advisors in these areas.  It is important that you have tax and legal counsel as part of your succession team to ensure that your interests are being protected and that you are optimizing the deal structure to maximize your control and tax efficiency of the transaction over time.


6. Transition and integration

Ownership transfer may be incremental over several years or through a more condensed timeframe. It involves executing on the written agreements defined by you and your succession partner. Additionally, it will include moving client accounts to your succession partner and ensuring that your clients stay with your firm as part of the transition. Consider playing an active role in this stage, as it can help maximize client retention and ensure that full value is retained by your succession partner—a positive outcome for both of you. Once completed, you can focus on your retirement goals and enjoy the fruits of your labor.

A successful succession plan may take several years to execute.  If you are selling your firm or merging with another firm, be sure to budget at least 18-24 months from identifying the buyer/partner to closing the deal.  For an internal succession, budget no less than five years.  It takes time to find the right talent and groom them to take over.  Additionally, it will take time for them to raise the capital required to buy you out.



As we discussed in part one of this two-part series, your broker-dealer may have resources available to you. In addition, there are a number of organizations specializing in the financial services industry that can help you through this entire process.  Advisors affiliated with Cetera® firms have access to resources beginning with an assessment of their business, setting goals, implementing an action plan and ultimately deciding upon and executing a succession plan. The foundation of those resources is the award-winning Pentameter® platform (WealthManagement.com industry award winner for Practice Management in 2015 and finalist in 2017). This resource helps you assess your business across Business Development, Operational Efficiency, Human Capital, Business Management and Succession Planning measures. These efforts are supported by in-house teams of relationship management, business consulting, practice management, marketing, wealth management, and retirement planning professionals dedicated to assisting advisors in these areas.


Start Today

Only you can define what you want your future to be and take the steps necessary to define a plan to get you there.  So you must ask yourself: what do you want your future to look like? When do you want to be there? Then take action to make it happen.



About Cetera® Advisors

Cetera Advisors LLC is an independent broker-dealer and registered investment adviser (RIA) firm offering efficient and convenient access to an extensive network of people, products and services to financial professionals. As part of Cetera Financial Group®, a leading network of independent retail broker-dealers, the firm is able to offer all the benefits of a large, well-capitalized broker-dealer, including innovative technology, leading wealth management and advisory platforms, and comprehensive broker-dealer and RIA services, with the personal relationships often found only at a boutique firm.

Cetera Advisors is a member of the Securities Investor Protection Corporation (SIPC) and a member of the Financial Industry Regulatory Authority, Inc. (FINRA). For more information, visit ceteraadvisors.com.

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