Building a Succession Plan

Advisers help many individuals prepare for a comfortable future, but who is helping advisers prepare for their future?

For many advisers, their business is their proudest achievement, but too often those businesses are transitioned in times of chaos, i.e. divorce, death, etc. Advisers need to have control over the transition of their businesses.  

Speaking at the National Tax-Sheltered Accounts Association (NTSAA) 2013 403(b) Summit, Paul T. Lally, III, president and co-founder of Gladstone Associates in Conshohocken, Pennsylvania, said most advisers have not created an asset base outside of their business equal to its value, and only 10% have a written succession plan in place. Many advisers have created a lifestyle or job for themselves and not a company. “Every day, do you think of building a transferrable asset?” he asked Summit attendees.  

He offered some sobering statistics: According to the Small Business Administration, 70% of small businesses fail in the transfer to a second generation, and the average age of financial advisers right now is 57—very few are entering the business.  

Succession planning is the process of deciding when and how you want your business to be transitioned and managed to protect the business and its value, as well as employees, according to Lally. Without a succession plan, wills and trusts become your succession plan documents. He said it takes about five years to successfully transition.

Advisers should first determine when and how they will leave their business. Choices are:  

  • Recruit a successor – Lally said advisers should make sure the successor is a cultural fit with the business; 
  • Sell the business – Lally noted that the best time to sell a business is when it is doing its best; 
  • Pass the business to a family member; 
  • Wind down the business – Lally said this is a choice when the adviser cannot find a buyer, the business is too much about the owner, or to solve a family inheritance issue; and 
  • Do nothing. 

In preparation for transition, advisers should maximize the value of their business, Lally advised. “Treat succession planning as an every day activity, and put together a corporate structure," he said. “Do not try to do it yourself; get advice from investment bankers, lawyers, accountants and valuation specialists.  

According to Lally, the process of deciding to transfer or sell starts with considering value. “Businesses do not trade on multiples of revenue, they trade on multiples of free cash flow. Buyers look at the amount and stability of free cash flow,” he stressed. A valuation may use estimates of cash flow out three years discounted back to present value.  

Factors affecting valuation involve whether the business is viable without the adviser—industry status, client relationships, strength of management team, cash flow and long-term demographics (number of clients in and out). Lally said for most advisers that do not sell, it is because they have an unrealistic valuation expectation.  

Lally recommended advisers design a succession plan to meet their wants and needs, and evaluate it every six to 12 months. Begin to step aside, he said. And, advisers should have a contingency plan in case something unforeseen happens.