Is Your Advisory Business Market-Ready?

There are many succession options for retirement plan advisers planning for their own futures, but whatever route an owner may take, advanced planning will improve the process.

It’s safe to say that succession planning is not often a priority for retirement plan financial advisers.

Having spent the last 35 years advising business owners and running my own firm, I’ve experienced firsthand the lack of attention that advisers focus on planning for the future of their business.

Why this failure to plan? Because successful business owners are generally preoccupied with working in their business and managing the day-to-day responsibilities of running a firm. When opportunities or life situations arise that prompt a potential or even a necessary transfer of ownership, few closely held business owners have developed any real succession plan.

According to the Alliance of Merger & Acquisition Advisors, more than 80% of business owners interested in selling their company are turned away by potential acquirers or merger partners for not being “market-ready.” A fully developed succession plan will ensure that your firm is ready to go to market when the time is right, increasing the enterprise value, profitability and marketability of your business. Consequently, business enterprise value increases when risk, including owner dependence, is decreased relative to the certainty of future cash flows.

As a retirement plan adviser, your clients generate repeatable cash flows to your business. Succession options for this type of business vary, but all will benefit greatly from advanced transition planning and preparation. Some of the most common succession planning options include the following.

Sales to third parties

Strategic or synergistic buyers acquire another company with the objective of leveraging its existing business and maximizing economics economies of scale. As a result, this type of buyer will generally pay more for a business than other interested parties. The higher price is usually a result of the buyer’s ability to eliminate various operating costs of the existing seller’s business. However, these cost reductions may create other issues for the seller as a result of lost jobs, idle facilities and potentially the emotional end of a long-established brand.

Financial buyers or investors look to purchase a business, improve its financial performance over a period of time and ultimately sell it. This type of buyer may also acquire a business for synergistic reasons, but with the goal of building a larger organization by “bolting on” strategic pieces with the benefit of economies of scale and sale of the successor organization. 

Financial investors will generally not pay as much for a business as a strategic buyer, but can often work well with a seller who wishes to continue managing and/or owning part of the business. Sales to financial investors can create emotional and cost-reduction issues similar to those seen with strategic sales.

Sales to existing management/employees

Selling your business to one or more members of the existing management team is often an excellent business succession option because you are handing off your business to a trusted, familiar owner. This form of transition, however, requires advanced planning, training and conviction. In order to achieve a seamless transition, the current owner must first work to slowly remove themselves from the management of the business, making it less dependent on their leadership.

The endgame is to create a well-run, profitable business without the involvement of the current owner. To begin planning for this type of arrangement, owners should develop a detailed, written plan that outlines the transfer of the various business functions, roles and responsibilities. The plan may initially allow key individuals to become minor stakeholders in the business, while the final buyout takes place when both parties agree. While offering many benefits, these arrangements often require the sellers to provide at least partial financing for the sale. In addition, business owners often find it difficult to give up control.

ESOPs (employee stock ownership plans) are another option for transferring ownership to employees. Established under the Employee Retirement Income Security Act of 1974 (ERISA), ESOPs are qualified defined contribution retirement plans that allow employees to acquire stock ownership interest in the company and create a market for the business owner’s stock. These plans offer favorable tax treatment to the business and employees, while giving those employees a vested interest in the performance of the business. Essentially, the business owner who establishes the ESOP provides the financing for the sale with a payout over time. The set up and annual maintenance costs of such plans can be costly.

Sales by family succession

Transfer of ownership to family members requires much of the same advanced planning and execution as transfers to existing management. The objective is also the same—a well-run, profitable business without a significant level of involvement from the current owner.

Plans for a family transition should be written and clearly communicated to all family members affected by these agreements. Owners often provide financing or make gifts to accomplish such transfers. Some current owners maintain ownership interests to benefit their family estate tax planning. In addition to a business owner’s potential reluctance to let go, other family dynamics can introduce challenges to such transitions.

The bottom line

Your business is one of your most valuable assets. A well-crafted and documented succession plan can help reduce risk, enhance value and ensure a successful transition or sale. You have invested countless hours and hard-earned money into building your business; now it’s time to focus on how you can make the most of your investment in the long term.

* Note from the editor* 

Nick Giacoumakis, CEPA, is founder and principal of Business Succession Advisers, LLC, and the founder and president of New England Investment & Retirement Group Inc. (NEIRG). He has more than two decades of experience providing investment advisory and wealth management services.

This feature article is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of PLANADVISER Magazine or Institutional Shareholder Services.