“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.

Advisor says: This year will mark my 25th anniversary in the financial advisory business and it’s time to start thinking about my eventual retirement. I know from reading your columns that you feel a five-year horizon is a good minimum length of time to get ready for succession but, frankly, I don’t think I need that long. With all the advisors around who want to buy a practice, I should easily be able to find someone qualified to take over my business. Do most advisors actually plan that far ahead?

Coach says: First off, congratulations on a quarter-century in the business! You have obviously done many things right in your business to have survived the ups and downs of the industry over 25 years.

As a regular reader of this column, you’ll know that I have written extensively about what I feel needs to be done to ensure that both the legacy you leave behind and the value that you receive for your practice are fitting of your life’s work. Rather than repeat that advice, let me share a few real-life stories of advisors with whom I have worked who thought they had their succession plans all figured out – until something unexpected threw those plans well off course.

The long close

Bob had built a great practice over a 20-year period. Then, at age 55, he became excited by a new business opportunity in another part of the country. While not actively looking for a change, Bob wasn’t motivated by the thought of doing the same thing for the next 20 years. The chance to “build something all over” stimulated him. So, Bob decided to sell his business while he was still young enough to pursue his new opportunity with the same energy he’d employed in building his practice.

Our formal valuation of Bob’s business indicated that a $1.8-million price tag was reasonable. Bob wanted a down payment of $1 million, with the balance paid over two years to provide the capital to launch the new business and maintain his lifestyle through two to three years of startup.

We quietly let it be known within the industry that Bob was open to offers. Not surprising, the reaction was swift, with half a dozen suitors immediately expressing interest. However, what followed is not atypical:

– The first group turned out to be “tire kickers” more interested in comparing their own business with Bob’s than actually buying.

– Most suitors did not have the financial capacity to meet Bob’s price or terms.

– None of the suitors matched the profile Bob wanted in his successor: experience, philosophy and approach to managing a practice.

– The due-diligence process was extremely frustrating, with multiple non-disclosure agreements, information exchanges, “lock-up” periods and discussions.

After nine months of distracting effort, Bob was no closer to finding a successor until he was approached by one of the industry’s leading “consolidator” firms. This firm’s executives offered Bob an all-cash payment of $1.4 million if he agreed to sell within 90 days. The firm planned to merge Bob’s office with another the offering firm had in the community.

While the quick sale and upfront cash were enticing, Bob worried about:

– getting fair value for his life’s work

– having a secure income for the next two years

– how clients and staff would be served under a new dealer firm

– how his ‘legacy’ – the business he’d built – would be run.

Bob rejected the offer, confident he could find a more suitable successor. Six weeks later, Bob came across another advisor in Bob’s dealer firm who was looking to expand outside his community, about an hour’s drive from Bob’s office. They agreed to start the due-diligence process.

To complete the mutual due diligence and sign a letter of intent took more than two months. The financial terms met Bob’s expectations, but he had to commit to stay on through a 12-month transition period. During that time, Bob, in addition to continuing to serve his clients, was to assess the systems at the purchaser’s other office to determine if the efficiencies that Bob’s office enjoyed could be replicated.

The transaction was formalized in an agreement of purchase and sale, which took each party’s independent legal counsel more than a month to put together. Because the purchaser was partially using borrowed funds to make the down payment, his bank required several weeks to complete its underwriting of the loan.

By the time the agreement was effective, almost a year and a half had passed since Bob first contemplated selling his business. Add to that the 12-month transition period, and what started out looking like a simple and easy succession took two and a half years to implement, with a further two years to complete the buyout – almost five years in total before Bob was completely clear of his advisory practice.

Last-minute letdown

Lisa started her succession plan a full 10 years before her target retirement date. She hired Sally, a bright young woman, very early on, with the intention that Sally would take over the business some day. Sally turned out to be a talented associate who demonstrated every characteristic Lisa wanted in her successor.

Everything was progressing toward a planned transition to take place in about a year’s time, then Sally’s husband received an out-of-the-blue and out-of-this-world offer to head up his company’s operations in Europe. The offer came with a lucrative employment contract and all the perks of a very senior executive.

For Sally, making the choice between Lisa’s practice and her husband’s prospective position in Europe was gut-wrenching. Sally and her husband concluded that their children might never again have such an opportunity to experience different cultures and see the world. So, with great regret, Sally walked away from her potential ownership of the business she and Lisa had been working on together for almost a decade.

That left Lisa right back where she started 10 years prior. Fortunately, she was able to fast-track the finding and integrating another successor. However, the change set Lisa’s retirement plans back by several years. More important, Lisa never really got over losing Sally as the ideal person to carry on the business.

Market meltdown

Fred was an investment industry veteran with a very successful practice. Unfortunately, he was afflicted at a fairly young age with arthritis, which became progressively worse as he got older. Fred looked forward to retiring and not having to meet the demands of a busy practice.

Fred contacted me about 18 months before his intended retirement to help prepare his business for succession – not a long time to work together, but enough to make a difference in the value of his business. Every dollar was important because Fred was relying upon the sale of his practice to fund a large part of his retirement.

Fortunately, Fred had an associate in his office willing to buy the practice whenever Fred was ready to sell, even agreeing on a valuation formula. So, we went to work to maximize the value of Fred’s business – increasing recurring revenue, reducing expenses, streamlining processes and so on. Our target was to increase the selling price by at least 25% over the 18-month period.

We were pleased with the progress – until markets crashed worldwide about two months before we were to announce that Fred’s practice was for sale. Fred’s assets under administration dropped by almost 40%, as did the revenue and, consequently, the value of his practice.

Fred postponed his retirement and spent the next three years rebuilding his business, which brought him back to the point at which he was just before the market meltdown. His energy was drained by the physical effort and his disability was aggravated by the emotional stress. He finally sold his business to his associate for about the same price they had discussed three years prior. And while Fred still looked forward to his retirement, much of his enthusiasm for it was gone.

Hopefully, you are never faced with anything as catastrophic as these situations. They show that no matter how well prepared you are, unexpected events can wreak havoc on your succession plan.

As John Lennon wrote in a song to his son Sean: “Life is what happens to you while you’re busy making other plans.”

Be prepared!

George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to george@marketlogics.ca. George’s practice-management videos can be viewed on www.investmentexecutive.com.

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