- 2-Minute Article
Steps to a Successful Succession Plan
As you near retirement, what are your plans for the long-term future of your practice?
You’ve devoted your life’s work to building your practice, earning the trust of clients, and getting them ready for retirement. But what about your own long-term goals? Have you mapped out a succession plan to protect all of the hard work you’ve put into your practice?
If not, you may be surprised to learn you’re in the majority: even though they know it’s necessary, only 27% of advisors have next-generation owners in place.1 Common barriers include uncertainty about recruiting a successor and ways to accurately value the business.
Here’s how to get started creating a succession plan that protects you and your practice:
1. Finding a successor
You’ll want to find a successor who is not only a good fit but also can afford to take over your practice.
Given that a majority of succession transactions are owner-funded, he or she will also become your creditor. Unfortunately, financing is not always readily available for successors hoping to acquire a practice.2 You’ll want to make sure your chosen successor is able to overcome this potential hurdle.
Keep in mind, also, that your ideal successor will be taking over the client relationships you’ve built over a lifetime. Once you’ve selected a possible successor, do your due diligence to ensure he or she is a good fit for your practice and your clients. Start the vetting process by:
- Utilizing your professional network
- Talking to a trusted coach, mentors, or peers who know you and your practice
- Leveraging advice from a recently retired financial professional
2. Valuing your practice
Gain the advantage at the negotiation table by knowing how much your practice is worth. Engage the services of a consulting firm that specializes in business valuations to make the job of calculating your firm’s valuation easier.
On average, financial professionals believe their practice is valued at 2.8 times total revenue.3 However, research found buyers paid roughly 2.2 times annual revenue for advisory firms in 2014.4 Having an external perspective minimizes any discrepancy.
3. Making the transition
Once a plan has been established, expect to work with your successor for at least 3-5 years before fully handing over your practice.
To help the transition process, consider hosting quarterly client appreciation events where your clients and successor can become acquainted with each other. Also, consider assigning your successor to an increasing number of cases that will allow him or her to develop client relationships over time. This gives you a chance to address any business matters before you retire from the practice.
Committing to a solid continuity plan early on will ensure a smooth transition to your own retirement. Then you’ll be able to rest easy knowing your book of business, your clients, and your practice are doing well in your successor’s capable hands.