“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: I just celebrated my 25th year in the business at the same time as my 55th birthday.
The joint occasion caused me to reflect on my experiences, both good and bad, throughout my career. This milestone also made me think about what the rest of my working life might look like.
Of course, there will always be challenges; but, mostly, I like what I see: continuing to work with clients whom I enjoy; earning a very good income; and creating a solid business that will have real monetary value to me when I decide to retire.
On this last point, I have always been one of those guys who said they would never retire. However, as I crossed the quarter-century mark in the business, a voice in my head started asking, “Are you going to do this for the next 25 years?”
And I have to admit that I don’t think so.
I am probably good for another 10 to 15 years, so I don’t really feel the need yet to begin my succession planning formally. However, as a regular reader of your column, I know you are going to say I should start “sooner rather than later.”
Realistically, though, what is reasonable for someone in my circumstances?
Coach says: Let me start with belated birthday and anniversary congratulations. Reaching both milestones with such an optimistic view for the future is a testament to your capability, perseverance and self-confidence.
On the question of when to start planning your eventual transition from the business, one school of thought is that all entrepreneurs should be thinking about their exit plan from the day they start their business. By doing so, they will make decisions along the way that will result in the highest value when the time comes to sell.
I phrase that advice slightly differently: “Manage your business as if you will run it forever, but always be prepared to sell it at any time to the most qualified buyer for the highest price.”
I think this message incorporates the advantage of early planning with the reality of life because we never know when one of the “Big Ds” – death, disability, divorce, disaffection, disagreement, disinterest, etc. – might strike.
The outcome will be much better in the event of one of these contingencies if you have a plan to deal with it.
More specifically, with respect to your question about what is right for someone in your circumstances, there is no perfect answer.
The ideal strategy really depends on you and your comfort in dealing with things in both the short and the long term.
If you are a long-range planner type, you should begin early.
On the other hand, if you like to be more reactive, you may choose to wait longer, given your confidence in your ability to do whatever needs to be done quickly when the time feels right to you.
As you pointed out, I favour a longer runway to retirement. I just think this strategy gives you more options and improves the chances that the outcome will be what you want.
That said, here is how I would broadly break down the timing, based on the strategies you might pursue:
– 10 years or more to your retirement
You can develop a strategy of inspiration if you have a full decade to plan and implement.
You will have sufficient time to fashion your business to maximize its value and assure your legacy is safeguarded.
You might recall from an earlier column that I differentiate between your “succession plan” and your “exit strategy.” Although we often use those two terms interchangeably, in my mind, they represent two different perspectives.
I define a succession plan as “what happens to the business after the founder is gone.” There often has to be a compromise between what is good for the business and what is good for the departing advisor.
I define an exit strategy as “what happens to the founder after the business is gone.”
Given these different viewpoints, 10 years is a sufficient length of time to work out the answers to such questions as:
– What do I want my legacy to look like? How do I want people to think of me when I am no longer in the business?
– When will I be both emotionally and financially prepared to exit the business I have spent my life building?
– What will my exit look like? Will it be on a specific date or a gradual withdrawal over time?
– How am I going to spend my time once I have made the transition to retirement?
– How do I position my business in the marketplace to give my successor the best chance of continued growth?
– What monetary value would I like to receive from the sale of my business to assist with the funding of my own retirement lifestyle?
– Who can I groom, coach and mentor to carry on my business?
– Three to five years
I call a three- to five-year plan to succession a “strategy of perspiration” because, if you want the best result, you will have to do a lot of work in a relatively short period.
Although three to five years may seem like a long time, there is much to be done to prepare your practice for transition.
Some things will take at least that long to complete. For example:
– How will you make your business more salable?
This might seem like an odd comment, given the current bull market for books of business. The reality, however, is that you have tailor-made your practice to work for you.
You have systems and processes that you designed, technology that you put in place and customized approaches that fit your philosophy and way of doing business.
Will your way work for everyone?
Perhaps for many, it will. But to the extent that you can make your business adaptable to the needs of a potential buyer, the more attractive your practice will be. To make your business more salable and, thus, more valuable can easily take several years.
– How will you make your practice scalable?
Just because you have reached the size of business you aspired to does not mean potential buyers will be satisfied with where you are.
You will want to be able to demonstrate that, under their new management, your business can grow even bigger than what you have created. That means having marketing, sales, and service systems in place that can be leveraged for growth.
– You also have to find, negotiate with and integrate the right successor:
– What does he or she look like?
– What skills and experience does he or she need?
– Where do you find him or her?
– How do you approach him or her?
– What kind of a deal do you want?
– Once identified, how do you integrate him or her?
– How do you introduce your successor to your clients so they are reassured and stick with the new advisor?
– What if, after a period of time, your first choice in successor it turns out not to be a “good fit” and you have to start over?
– One to two years
Now we are down to a strategy of desperation, which, unfortunately, is all too common. With the time until your transition measured in months, you will find yourself scrambling to get some of the things done that are required for any sort of reasonable transition.
Having a successor in the wings certainly will help you. If not, you will begin a frantic search for one.
Advisors who are planning their exit tell me that the toughest challenge they face is finding a suitable successor. As I have said before: although there are lots of buyers out there today, most of them are people you would not want to sell your practice to because they just don’t fit.
The view of a potential successor regarding how your clients, your staff and your business will be treated often can be quite different from yours.
Desperate sellers attract opportunistic buyers looking for a bargain price, so realizing the full value of your business will be difficult within a short time frame.
Client retention often is reflected in some sort of “claw-back” clause in an agreement of purchase and sale. The less time clients have to get used to the idea of a successor-advisor, the less likely they are to remain with the practice once the advisor on whom they relied for years (i.e., you) leaves. This could have a significant impact on the ultimate payout you receive.
The truth is that you will leave your business one day – voluntarily or otherwise.
The big question: Will you be in control of your exit or will fate and circumstance dictate what happens?
George Hartman is CEO of Market Logics Inc. in Toronto. Send questions and comments regarding this column to firstname.lastname@example.org. George’s practice-management videos can be viewed on www.investmentexecutive.com.
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