7 Signs of a Failed Succession Plan
DEAR ADVISORS,
What is a “failed” succession plan? It could be anything, from a lower-than-average client retention rate, to the not getting a goal sales price. Ultimately, it depends on how the partners define success or failure. The partners include both buyers and sellers; not just the seller. Most of us haven’t defined what a failed succession plan looks like, so here are a few examples and red flags to watch for, and take action to resolve sooner rather than later.
Sellers are not retiring - Timing is a huge issue in succession planning. The most common problem is that the seller doesn’t want to leave, and they feel they have the right to stay because the business is their baby. Sometimes an arrangement can be worked out. More often than not, the buyer is trained and ready to assume the responsibilities of ownership long before the seller is ready to let go. The solution in this scenario is to have regular, open conversations about how buyers and sellers are feeling about the timing. This allows for you to brainstorm and implement some unique solutions instead of bailing out.
The business valuation hasn’t been updated in years - The first step in a successful exit plan is to know how much the business is worth. The valuation is a lot more complex than simply a multiple of revenue. Some important factors include average age of clients, frequency of client interactions, and percentage of revenue that comes from AUM, for starters. It’s worth it to hire someone to update your valuation on an annual basis. This exercise is a great way to measure if you’re on track to achieve your succession planning goals, and monitor all the components that change the value of your business during the transition.
Defining financial planning and investment management differently - The best way to secure a succession plan is to find a buyer who shares your definition of financial planning and investment management. I’m not saying that it won’t work if you differ on this, but it definitely makes it easier when you’re on the same page about the kind of business your building and the service models your clients want and need. The easiest way to know is to look at how the buyer and seller charge for services. For example, if one firm is charging more for financial planning, their services probably include additional features, personalization, or deeper expertise. That means their clients are used to that, and it’ll be difficult to combine your processes and procedures, and ultimately, the trial and error period to do so may cause some clients to leave.
Focusing on the money instead of longevity of the business - It’s natural for the seller to want a higher price and the buyer to want a lower price. However, focusing on the sale price, or spending too much time defining the terms of the deal seriously slows down your momentum. As long as the price and deal structure is reasonable, it’s usually better to act quickly, so you can get back to directing your time and attention on growing the business and servicing clients well. Once you’ve found the right buyer, don’t waste years on the deal or the buyer will move on to find a seller who is truly ready.
Buyers have no control or leadership in the company - For every one seller, there are 30-50 sincere, qualified buyers. So why are succession plans such an issue for the advisory industry? I’ve talked with several young advisors who have been burned by sellers who intentionally bring them on to serve as a succession plan, but then won’t relinquish control. If a buyer, or potential buyer, has been with a company for over 3 years, but is not bring brought in on leadership conversations and decisions, that’s a red flag. Buyers and sellers in this situation can work together to identify projects for the buyer to demonstrate an ownership mindset and leadership potential.
Partners aren't doing their financial plan - Most sellers don’t know the sales price they need to retire, and don’t know how to live without the business. Most buyers jump at the chance to buy a firm, without considering the other costs they’re about to incur, like giving up years with their family, and committing to a loan that absorbs all available cash flow for many years. Hiring an objective financial planner ensures that the buyer and seller are thinking about their own life and family outside of the business. It’s also useful to identify ways the succession plan needs to be updated, so that bitter regrets don’t accumulate over time.
No annual succession planning check-in - The buy-sell agreement is sometimes compared to a marriage certificate, because the partners in a succession plan are committing to this business transition, just like a husband and wife commit to a new life together. Unlike a marriage certificate, the terms of the buy-sell agreement can be updated and it’s a good idea to review the terms every year. It’s also healthy for partners to ask how they are feeling about the transition, and if any processes or procedures need to be adjusted so everyone still enjoys working on the succession plan together. Not enjoying your life during a succession plan is one way I would personally identify a “failed” succession plan.
A failed succession plan doesn’t happen by accident. You can see it coming and avert disaster, now that you know what to look for. But have you thought about what success looks like in your exit plan? I encourage you to intentionally define your success metrics. These shouldn’t just be business goals, because your succession plan involves much of your personal life and your financial future. Consider your unique definition of success in all areas of your life. Stating your goals makes it easier to see when you’re on track, and what might derail all the hard work you put into the succession plan. It’s one easy exercise to secure the future of your family and your financial advisory firm.
Warm regards,
Brooklyn
P.S.
At Ellevate Advisors, we believe that advisors deserve to retire too. What does that look like for you, your family, and your business? Let’s figure it out together! Click here to schedule an initial phone call with our team today or get to know me on my bio here!