Journal of Financial Planning: June 2011
H. Jude Boudreaux, CFP®, is the founder of Upperline Financial Planning in New Orleans, Louisiana.
Succession planning. On the face, it seems like it should be a fairly simple conversation. Our community is filled with entrepreneurs who set out on their own and build thriving practices. There’s a new group of young, technically proficient planners who are eager to become owners. These deals should be happening all the time, yet all I seem to hear from planners on both sides of these transactions is they’re not happening.
What gives?
Role Loss
When clients tell me they are retiring, I always ask if they’re retiring from, or retiring to. Sometimes they’re retiring from a job that is taking too much out of them, or a bureaucracy they’ve grown tired of fighting, or even from businesses they love but feel need fresh blood. Others are retiring to start a small business they’ve dreamed about for years, to take the trip they’ve always dreamed about, or to spend more time with the kids and grandkids.
Several planners I’ve spoken to who have bemoaned their perceived lack of succession planning options I’ve come to find are really avoiding the issue of what comes next. That’s a big issue. As planners, we’re not just a tangential part of our clients’ lives. I spoke to a doctor who recently retired, and he said a genius line of truth: “It was basically yesterday I was a healer, and today I’m not.” How profound. As we look at retirement from planning, one day we are helping clients craft their visions for their future, and the next day we will be left with only our own future to create.
When looking at the prospect of selling your practice, it doesn’t have to be here today, gone tomorrow. It’s quite possible to groom a staff member to become the owner of your firm. Transition of ownership as well as the responsibilities of managing the firm can come over the course of several years—if the planning for that transition begins with enough time before your eventual “retirement.”
Do Your Work
If you met a new prospect who had a thriving business but was not finding a way to fund retirement plans or otherwise get some capital outside of the business, I’m guessing you’d explore that topic and tell him or her all about the benefits of building those reserves. Yet how many planners have failed to do this themselves, and find themselves in a difficult situation when it comes time to retire?
Others (in particular Rick Kahler) have written extensively about the need for planners to have their own planner, and I agree wholeheartedly. Read any behavioral finance article and you’ll hear about how little control we actually have over ourselves. It’s easy to see the benefit of having an outside planner keep us accountable to our goals and bring our blind spots to our attention. Don’t let these blind spots be the reason you can’t complete an internal sale.
Commitment to the Deal
I’ve often heard that planners can’t get the best price for their business when they do an internal sale. The numbers are too large, the financing is hard to come by, or they’d have to finance the deal themselves when another party might be willing to come in and offer cash.
Internal successions can work, and work extremely well. They need more foresight and time to work than some external sales might, but that effort can pay dividends for your clients and your staff. It’s not likely that you can get an internal sale completed, from beginning to end, within a year. With a longer time horizon (say 5 to 10 years), an internal sale can be more feasible for a young buyer, can benefit the seller from a tax standpoint by spreading the gain on sale over several years, and can allow the seller to retain some influence on the enterprise they have nurtured for so long.
Young Planners Need Clarity
I’ve talked to planners in the past who nonchalantly tossed into conversation that they’re planning to one day own the firm they work for. After asking them a few questions it is clear that owning a business isn’t their passion, but working with clients is. There have never been more opportunities (or more need) for excellent employee advisers than there are today. I’d encourage young planners to consider whether entrepreneurship is truly their goal, or simply finding a place to do great work is. Do you want the additional hassles that go with ownership, including greater risk, time spent on the less enjoyable parts of running a business (including hiring/firing, negotiating with vendors, etc.)? Here is where an open and honest dialogue about the nature of being a business owner can be beneficial between founders and potential successors.
Discussions with your spouse are also essential when broaching this subject. While you may have the stomach for the risk, does he or she? How would your spouse feel about acquiring additional debt in order to finance a transaction? As a potential buyer, you owe it to yourself, your family, and to the business owner whose firm you are considering buying to do your own work and think deeply about these issues.
My only insight as somebody who recently opened his own firm is that if you’re going to be an entrepreneur, you really have to want it. You have to want to be your own boss enough to fight through all of the small yet essential tasks that seemingly get in the way of actually working with clients. Things like dealing with banking relationships, technology integration, marketing activities, etc. The list literally goes on and on. If you really want to be your own boss though, the Internet has made it more possible than ever for small firms to compete in our business.
Ultimately, there is no right or wrong answer. I’ve got friends who are carving out great careers with large financial institutions where they will never have any real ownership stake. I’ve got other friends who are working through internal succession plans and are purchasing businesses that they’ve been a part of for their entire careers. Success is possible in all situations, as long as it is the right situation for you, your family, your personality, and your life’s vision.
A Sell/Buy Statement of Guidelines
Discussing the sensitive issue of selling/buying a business is difficult and delicate. It requires great trust on both sides and great openness. I’d propose the following statements as a guideline.
- I promise to treat these discussions with the confidentiality and care that we would give to our clients.
- I promise to make appointments in advance to discuss our potential transaction, and I promise to honor these appointments as I would appointments with our clients.
- I promise to be as prepared for our discussions as I would be for our client meetings.
- I promise to make every effort to see things from your point of view, and ask for permission to ask (sometimes personal) questions that help me gain a better understanding. I promise to understand if you need some time to think through your answers.
- I promise to understand that you’re going to ask me some uncomfortable questions, and I promise to answer them honestly. I also promise to ask for some time to reflect and gather my thoughts when needed.
- I promise to be a true professional regarding the outcome of this process. I acknowledge the possibility that we may not be able to reach an agreement on this transaction, and to make every effort to not allow these discussions to color our working relationship in the future if a transaction is not consummated.