Journal of Financial Planning: April 2022
Michael Rose is an executive business coach at Carson Group. As an experienced financial adviser and practice management consultant, Rose leverages 20 years of industry experience when guiding advisers to the level of success they desire. His purpose is to help coaching members convert the firm they dream of into the firm they actually experience. Carson Coaching is Financial Planning Association’s exclusive coaching partner.
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We’re still in the midst of a global pandemic, and many people are considering what comes now. The last two years have given people ample time to contemplate their next move. Maybe that next move is to move on from their practice.
If this is the case for you, you want to set yourself up for a smooth transition of your business by becoming fully aware of your true aspirations and all the different considerations and elements in the exit planning process.
This process can be divided into three buckets:
- Planning and preparation
- Considerations for an anticipated internal sale
- Factors that chiefly impact an external sale
We’ll cover what you can expect in each bucket and how you can develop an exit plan to meet your personal and professional objectives.
Planning and Preparation
Valuation. The logical first step in exit planning is a formal firm valuation. This should be a formal assessment by a recognized expert, like a valuation consultant or M&A specialist who is experienced in our industry.
There are a couple of things you should know here: your baseline and what potential buyers are likely to pay for your business. This may be very different from what you believe your business is worth.
The valuation exercise also provides you a chance to highlight the value drivers at which your business excels and those where you’re challenged. The first group enhances value, while the second exerts a downward pressure on a potential purchase price. Armed with this knowledge, you can redirect energy and resources to the areas that will elevate firm value in advance of the sale.
You also want to know if there’s a gap between a best-in-class business valuation and the amount at which your firm is assessed so that if there is a gap, you can take corrective measures.
Sellers have different motivations and expectations. While valuation is important, it isn’t the only factor sellers consider. If you plan to sell to a colleague or family member, you may be less focused on selling price and more concerned with legacy and helping the G2 (second-generation) owners succeed.
Timing and what comes next. Some advisers reach a point where they want to flip the switch and move on to the next chapter. However, in my coaching experience, most advisers want to take their foot off the gas slowly, controlling the timing and pace of their withdrawal.
This “adviser emeritus” role is compelling for many. You continue to work with a handful of your favorite clients, but delegate operational and other firm responsibilities to your team. You get to focus on just the fun stuff!
I used to be an adviser in Sarasota—or as I refer to it, Retirement-ville. I worked with many clients who had retired and moved to the land of sun and fun. But after a couple of years of lounging, boating, visiting the grandkids, and playing rounds upon rounds of golf, some would start climbing the walls. They searched for something that would give meaning and purpose to the retirement years they had worked so hard to fund.
As you plan and prepare for retirement or semi-retirement, be deliberate about what comes after your full-time adviser role. How will you fill the hours? Here are a few ideas that will allow you to leverage your experience, give back to your community, and address those parts of yourself that may have lain dormant:
- Teach a course on financial planning at the local community college
- Help other business owners find success through programs like the Service Corp of Retired Executives
- Master that long-thwarted passion like piano or photography
- Become involved in philanthropy
- Start another casual business
Mastering your plan for life’s third act is critical to transition success. If you’re unsure about what your retirement will look like, you might struggle to crystallize your exit strategy, or you might even sabotage established plans.
Considerations for Internal Buyers
If you anticipate staying involved with clients but reducing your overall role in the business, your options regarding internal or external buyers may be affected. Selling to a colleague or family member offers much more flexibility in terms of your continued presence in the firm. While you may find external buyers who will accommodate the timeline of your post-transition participation, you can more easily sculpt a flexible, self-directed plan for easing off the throttle with internal buyers.
We understand the draw of passing the torch to an internal buyer, particularly if it’s a family member. However, you don’t want to watch as the business you spent decades building slowly withers away. Nor do you want your clients and their families to be left in the lurch as the new owner struggles to service clients appropriately. As you cast about for the next “you,” be realistic about whether your replacement’s ability and skills align with the demands of the job.
Grow next-generation leadership or buy it? Do you have a potential next-generation owner who has the skills and passion to take your team into the future? They might not be ready now, but you can train them and start to hand over responsibilities to them.
Your potential next-generation owner must have the following abilities:
- Acquiring new top-tier clients
- Technical expertise and experience to deliver financial planning and investment management services to those top-tier clients (note that separating the adviser role and the planner role is becoming increasingly popular)
- Confidence and relationship-management skills to retain clients, deepen relationships, and attract new clients
- Business management proficiency
- Ability to lead a team or delegate to an operations professional
- Work ethic and business acumen
Future leaders might not be proficient in all these skills immediately. Once you identify a potential internal candidate, develop a training plan and deadline to determine if this candidate can ultimately take over. If there are no candidates on your team, you’ll want to bring on someone who’s qualified, or at least someone you’re very confident has the raw talent to develop.
The training plan should aim to close the gap between where the adviser is now and where they need to be. The plan should be detailed and include specific modules or areas of instruction, like who will transfer knowledge for each area, a timeline, and success measurements that determine whether the topic has been mastered.
Establish a hard deadline for when you will make a final determination on the next-gen adviser’s ability to take over, but give yourself ample time. If you ultimately decide that your candidate is unable to assume the leadership role and purchase the business, you need that time to find a replacement and get them up and running.
Remember, you can’t step away until you find a replacement you trust. If you are within five years of your target transition date, finding the next owner or senior adviser should be a top priority.
Financing and terms. It’s common for deal structure in our profession to include a combination of seller financing, earn out, and cash from the buyer.
Some important questions to consider as you envision your ideal exit include:
- How important is it to you to get fair market value for your business?
- Will you finance the entire transaction yourself, or rely on a mix of the techniques listed above?
- If you aren’t financing the entire deal, can the internal buyer arrange partial funding?
If none of the above items are true, consider partnering with an organization that can take a minority position in your firm and ease the financial and management burden on whoever the new owner will be.
Much like with valuation, deal structures can be complicated. It’s advisable to consider talking to a specialist or consultant. As you move to solidify your transition plans, engage with an M&A specialist who might be able to provide context on industry best practices and how you can best meet your needs and desires.
Considerations for External Buyers
You wouldn’t want to see your clients and colleagues suffer through a transition to an ineffective internal leader. You also wouldn’t want to bring on an outside buyer who doesn’t align with your approach in caring for clients and team members.
There are many points of view regarding the right way to sell to an external buyer, including finding the right fit. Here are some key factors to consider when evaluating potential suitors:
- Will they prioritize the client experience? Will they meet with clients according to a reasonable schedule, or ignore all but top revenue generators?
- Will they provide comprehensive financial planning? Will they plan for every possible contingency? Do they wrap their arms around the entirety of the clients’ financial complexity?
- What is their style when it comes to managing assets? Are they advisory-focused or transactional? Will they make investment recommendations that hold the clients’ best interest uppermost?
- Do they value the team? Will they treat the staff with respect and provide a career path and advancement opportunities for those who are interested?
- Where are they located? Are the bulk of your clients within an hour’s drive of the buyer? In this new Zoom-friendly world, does this still matter to you?
- Is the buyer from an organization type similar to yours (i.e., large/small, RIA, broker-dealer, bank, etc.)? Is this important to you? If so, will they allow you to maintain client relationships while decreasing your role at the time and pace of your choosing?
- What is their preferred deal structure? Do they agree to your terms or offer an agreeable alternative?
There are many different elements to consider when developing your ideal exit plan. Exit planning requires thoughtful planning and execution, and a realistic exploration of your genuine motivations and desires for the next phase of life. It’s a period of great transition where you’re planning for the next phase of the business you’ve spent your career building. It can be difficult to make that transition for you and for your clients. Engaging in thorough planning, however, can help make the transition easier for both you and your clients and ensure the future success of your firm.
