The stock market has driven valuations to unprecedented levels for many registered investment advisory firms, or RIAs, over the past decade. As a result, many financial advisors have given less thought to the internal organic growth required for succession planning than they have in other periods.
But as the great physicist Isaac Newton said, “What goes up must come down.” And with inflation at historic levels and the Russo-Ukrainian war raging in the markets, advisors need to recognize that their final plans call for more proactive efforts might require. Although a solid succession plan requires many detailed steps, here are six quick, important tips consultants should consider as they begin this project:
- start today
- Begin and be aware of the end.
- Get an assessment now.
- Get professional help.
- Build contingency plans.
- Don’t let easy wins become a crutch.
Serious. If you wait until tomorrow, you’re already a day behind.
Many consultants may feel that they are years away from contemplating retirement. However, if you get ready today, you will actually make more money than you dreamed of as you will have more years of the right activities working in your favor. You can even customize your final plan, as the achievements that come from growing your business consistently and methodically will open new doors for you.
Begin and be aware of the end
When you give yourself enough time to achieve your goals, you have the luxury of thinking big. Early on, it’s time to assess what you think will be the most successful outcome for your business.
Some important questions that need to be answered are:
- Do you have a dollar figure in mind for the company’s ultimate value?
- Would you rather sell the law firm completely or look for a successor from among the junior partners?
- Would some or all of your children have an interest in continuing the company in the next generation?
- Would you like to leave immediately or move more slowly away from the main tasks of the company?
An additional and often less discussed part of this step is defining what the next chapter of your life after discipleship should be. For many consultants, but also entrepreneurs, their office is the focus of their daily life. Psychologically, losing that primary focus can be unsettling. Transitioning from day-to-day job responsibilities to a new adventure, whether it be a world tour, golf outings, philanthropic activities, or other worthy goals, can still feel like a loss. Therefore, planning the first steps of your new life is crucial.
Get an assessment now
Determining your starting point is just as important as planning the end. You need a baseline for the distance your business needs to travel to achieve your goals. Best of all, you also create a road map to ensure you reach your planned destination.
Advisors often learn that the gap is larger than expected. Perhaps they were allowing the continued stock market values to overshadow a lack of new customer acquisition activity or an aging customer base. Postponement or health problems can also restrict the schedule. Understand the state of the country so you can make course corrections that allow for a graceful transition.
Get professional help
Just as a doctor asks a medical colleague for an objective opinion, a financial advisor needs professional advice.
Many financial and insurance advisors have additional training and expertise in succession planning. Your specific experience can be invaluable in setting the goals needed to achieve desired results.
A successor coach can make sure you weigh all your options. For example, it may seem counterintuitive to cut back on some of your company’s services or reduce the number of customers, but doing so can buy time to focus on activities that maximize the value of your company.
It’s equally important to consult a CPA or tax attorney to understand the tax implications of each option, as well as an estate planner to ensure the plan will continue unhindered when your successor takes over.
Build an emergency plan
The best way to achieve a successful outcome is to reduce the risk that unexpected events could thwart your plans.
A national study by the Exit Planning Institute found that while 64% of business owners believed there would be no emotional impact from the sale of their business, the reality was that 75% of business owners experienced seller regret in the 12 months following the transition . They may have come to believe that their business was worth more than the sale price, for example, or that they should have planned the sale at a different time.
However, only 4% of study participants had taken the time to plan their next chapter. For the others, the anxiety associated with a perceived loss of identity may have been exacerbated by family dynamics. Health issues can also arise in such cases, further complicating the emotions about the sale.
Unfortunately, changing course and returning to the old state can be too much of a challenge. Avoiding regret starts with having your own financial plan in tip-top shape, including:
- Fully funded retirement plan.
- Disability insurance while still earning income.
- Long-term care insurance to avoid savings.
- Life insurance, especially if the succession strategy involves a buyer making a series of payments. This coverage can provide important tax leverage and potential creditor protection in some states if the buyer fails to meet their obligations.
Finally, if your company’s valuation depends on a strong stock market, make sure to diversify your income sources. You would never advise a client to keep their entire retirement savings in a single stock investment. Shouldn’t you seek advice yourself?
Don’t let easy wins become a crutch
According to a survey by the Financial Planning Association, a whopping 73% of financial advisors have not created a succession plan, although 93% of them acknowledge that doing so poses at least some risk to their financial livelihood. Meanwhile, the stock market’s successful run has allowed too many advisors to shirk this responsibility. Preparing for the discipleship can give you the personal clarity and confidence to become more meaningful in your field.