Financial Advisor Blog

The Planning Process

 
 

Let’s Make a Deal: Types of Successors, Deals, and Structures

Developing a succession planning process is one of the biggest and most important aspects of your career. One that requires the same kind of effective planning you utilize on a daily basis for your clients. Once you’ve made the decision to start planning for the future the first hurdle will be deciding on the best succession plan. Each of the plans have benefits and downsides. It is likely one plan will be better suited to the future of your firm than the other. In this post, we’ll take a deeper dive into succession planning. We’ll chart out the steps it takes to create your personal roadmap for the future.
 
 

Deciding on a Plan

Determining whether you want to do an internal or external succession plan can often come down to timing. When do you want to retire? How long do you have to plan? The internal succession planning process can take years. It often involves crafting your own career plan. And involves finding and developing the right advisor to bring into the firm. The external succession plan will be implemented in a much shorter period of time. Yet it requires more effort to make sure your clients and staff members comfortable with the transition.
 
 

Internal Succession Plans

When it comes to choosing a successor, advisors first need to identify the characteristics of an ideal candidate. Before you ask yourself if anyone on your staff could be a possible successor, you need to decide on the skills an ideal candidate would possess. You’re not trying to make just anyone inside your firm fit into the successor position. You’re trying to find the ideal candidate who fits into the mold you have created. It’s important you not look to specifically replicate yourself. By identifying the characteristics of the ideal successor you will find someone who “checks all the boxes” or identify someone internally. Then you can coach and train them in the specific areas you’ve chosen as being important for your successor.

A critical part of developing a successful internal plan involves positioning the right people in the right places. This part of the plan builds key area of the business. You will:

  • Outline career paths for your employees.
  • Offer competitive compensation plans.
  • Possibly change your business structure allowing for additional ownership tracks.

Once you’ve identified and developed a solid talent base, you can look at those employees as the foundation for an internal succession plan. An internal succession plan will likely take years to develop and execute but will pay dividends in the long run in terms of the ease of your transition.

Your plan will revolve around attracting, developing and retaining the best and the brightest. Then promoting them slowly to become the next owners of your firm. Developing benchmarks and timetables for the succession candidate while measuring progress and working toward the ultimate goal- “the changing of the guard”.
 
 

External Succession Plans

There are several reasons why an external plan might be the best option for your firm. The flexibility that comes with not having to spend years planning for an internal succession may be one of them. The key to executing an external succession plan is to identify a potential firm that will be a good fit for your business. This requires a great deal of due diligence. It means you’ll need to spend time talking to the new firm about:

  • Their investment philosophy.
  • How they service clients.
  • What their goals for the future are.

When spending time with the partners of the potential firm it’s very important to be sure they make you feel comfortable.

Do you feel like you share the same core values? Do you feel like they would relate well to your clients? These are key factors to consider when evaluating a potential firm. Ultimately your clients have become friends, in some cases can feel more like family. It’s important for you to be able to introduce them to your new firm with confidence. Your ability to transfer the trust your clients’ place in you is determined by how comfortable and confident you are with the group that you select.

Once advisors choose a firm or individual to be their successors, they can then work to solidify the transition by creating a tailored agreement. The tailored agreement hinges on several key steps. Most importantly determining exactly how much your business is worth.

Obtaining a valuation for your firm

The conventional rule of thumb of valuation, such as two to three times fee revenue, four to seven times earnings before interest, taxes, depreciation, and amortization or one to two times the commission revenue aren’t really used. Instead, buyers are looking for long-term value. Measured by the size of the firm, a sustainable growth rate, human capital, and client demographics. To get the best possible insight into the valuation process contact a valuation specialist who can help you in this phase of your succession planning process. Once the valuation of your firm is completed a realistic asking price will be determined. Then you will begin working on your timetables. Then you will move into the phase of preparing your clients and staff for the major transition ahead.
 
 

Develop the Process

Whether you pursue an internal or external succession strategy, your first step should be to give plenty of thought about your firm’s objectives. Then develop goals and a succession management process that your firm will follow. Every succession plan is different. It needs to be an individualized process serving as a game plan moving you forward. In order to get the best results, it’s important to tie the firm’s plan to the overall strategy of the business.

Your succession planning process will impact the firm’s objectives, serving as the guide for how the firm’s next leader will be chosen. Having a written plan in place means the process will remain the same. Even in the event of an unexpected scenario like the disability or death of a founder. A concrete succession leaves no room for infighting among staff members and leaves no questions on the table about how the succession process will take place.

 
 
 
 

Opinions expressed in this article are those of the author and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or a loss.

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