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Succession Planning - Crunching Numbers to Avoid Financial Failure

By Frank Serebrin

Talk about unprepared! Were we? Well, let’s jump in.

Financial advisors, RIAs, and financial planners, all 600,000 or so in various permutations, are as a group rather unprepared for passing on the business to the next ownership entity.

Devoting the time to develop a succession plan can help improve the value of your business, position you financially for retirement, maximize tax efficiency, transfer wealth, and ensure that your business thrives into the next generation.

According to Carson International Alliance, the majority of financial advisors are currently unprepared for their exit. (See infographic).

Lack of a Marketing Plan

  • 42% of advisors surveyed by Carson who were within two years of exit had not started a succession plan.
  • 60% of all advisors did not have succession plan in place. For those firms that have a plan in place, though, only 7% could be realistically implemented.
  • 75% of advisors have not contacted a third party firm that specializes in succession planning for an independent evaluation.
  • 90% of advisor’s plans were not tied to the actual value of their business.

But there’s hope for those who have not yet planned. Advisory firm owners that have implemented a succession plan saw, on average, three times the revenue and twice the profits of business owners that planned ad hoc.

Build a Business Blueprint

According to FP Transitions, a business succession planning firms for advisory practices, there are five steps to building a business of enduring and transferrable value.

Determine the value of the practice. The Market Comparison method measures earnings or revenue valuation based on recent transactions, and compares metrics to similar companies. The Income Method applies a discount rate to determine the valuation of the business. A discount rate is used to calculate the present value of future cash flows.

  • Benchmark the practice value versus peers and, just as critical, benchmark value against other advisory practices of greater value.
  • Create a set of specific and flexible blueprints to guide business decisions.
  • Build enterprise strength through proper entity structure, competitive compensation, and best practice profit distributions.
  • Build revenue strength via a cohesive sales and marketing strategy, strong operations, a culture of trust and responsibility, and referrals.

Succession Planning for Clients

How about your clients who own their own business? Do they have a succession plan in place – and are your prepared to advise them?

“More than one quarter of family-owned businesses expect to change hands in the next five years. Almost half of them do not have a succession plan in place,” said the Family Business Institute.

Succession planning is also primary vehicle to provide for your family. “In the event of the disability or premature death of the owner, a succession plan will help ensure that family members have access to cash or liquid assets,” said Rob Thompson, President of TruCore Business Development.

“Few small-business owners participate in retirement plans,” said Mr. Thompson, “And many must sacrifice personal savings in order to continually invest in their businesses.”

It’s critical for business owners to minimize taxes when transferring wealth, Mr. Thompson noted. “Estate taxes and other costs can take their toll — and often cause businesses to fail — without a proper plan in place,” he said.

What’s more, Mr. Thompson noted, “A solid succession plan makes a business more attractive to potential buyers – and can result in receiving more favorable terms from banks in financing arrangements.”

When should financial planners begin to plan for their succession, and that of their clients? How about now?

This article was originally published on Iris.xyz

Frank Serebrin is President and founder of InCapital Marketing. Frank oversees the creation of content-driven inbound marketing for Registered Investment Advisors, financial advisors, and alternative investment managers. Previously, Frank was SVP and Director of Marketing for ING Investment Management; VP of Marketing Communications for AIM Investments; head of Institutional Marketing for William O’Neil + Company; and AVP of Marketing for Dean Witter Funds. Frank is a graduate of Northeastern University in Boston, Massachusetts, with an MBA in Marketing, and a graduate of the University of Minnesota with a BA in Journalism. Learn more here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.