7 Things that Make or Break a Succession

Journal of Financial Planning: December 2015


You know the facts: advisers as a group are aging; the median age of a principal at an independent practice, according to Cerulli, is in the late 50s. What’s more, fewer than half of these advisers have a succession plan in place.

I’m not going to lecture. But I will remind you—as you remind your clients—that planning is the foundation of success. That includes creating and executing a strategy for the orderly transition of your business to a new owner, the capstone of an independent businessperson’s career.

In my role at Live Oak Bank, I’ve seen my fair share of business transitions. Some go right—and others go very, very wrong. From surprise last-minute changes to bumps along the financing trail, there really are no guarantees. In watching all of these deals, I’ve learned an important lesson: succession planning is not a mystery, though it may feel overwhelming. Think of it as a sale to an internal buyer, rather than an outside buyer. The key variables are the same: find a qualified and compatible purchaser (in this case, from among your colleagues or staff), structure and price the deal appropriately, and manage the transition smoothly. Easier said than done? Maybe, but if you approach it with a project mentality, make your plan, and check tasks off the list, it can happen.

Over the years, I’ve found that the following seven principles are the key to a successful succession. None of them will surprise you. What is surprising, though, is how often these key attributes go ignored.

1. Avoid the Mini-Me

Your successor should share your values and priorities for the firm but he or she doesn’t have to be a “mini-me.”

I hear many advisers complain that they can’t find a junior partner who will work as hard as they do, make rain the way they do, and even cold call the way they do. But why should the new principal have to be just like you? The business has been established, and now it has to be sustained—two goals that require different skills. Sure, having harmonious attitudes toward client service, investments, financial planning, office management, and demeanor are a must in order to retain current clients and staff. But unless you can clone yourself, you’ll never find your exact match, and doing so might not even be so great for the business.

Did you grow as a business owner? So will your successor. The most important thing is to feel confident in your successor’s ability to run and build the practice. Ideally, this person will have taken on some responsibility for client acquisition and retention long before you finalize the transition. Think about it this way: a transition is a big change; your clients will be wary. They chose you for a reason, and they want to make sure that they still are getting what they need to feel well-served and secure. The more comfortable the fit with your successor, the more reassured they will be.

2. Strengthen Your Financials

Your financials need to be strong. We are talking about a succession plan, not a rescue. You may feel fulfilled by looking back on your achievements, but your successor must look forward and find something bright to pursue. A well-managed, profitable, growing firm has good momentum to offer and will qualify for better financing.

Strong financials also lead to a stronger valuation. Nothing is more important when valuing a practice than growth—both in total size of a practice and in profitability. Not only does growth counteract the natural attrition of clients who move, divorce, pass away, etc., but it also provides a future for the staff who can advance and take on additional responsibility. Growth motivates everyone—especially your successor.

3. Think Through and Research Your Strategy

People and process—both need to be in place for your succession plan to be a complete success. Identify potential successors long before you need to; that way you can train, encourage, and share responsibility. Chances are that your junior partner is more eager to take over than you realize, so communicate your plans clearly and stick to them.

Make sure the successor feels like he or she is in the game. And just in case things don’t work out, have at least one Plan B. To build a sustainable business, you always have to be thinking about the next generation.

Process means making sure your financial strategy is in place. Consult your own advisers before you finalize the plan. The transfer of a business has tax implications and legal considerations—such as whether to choose an asset sale or a stock redemption—and your choices all play a major role in how much money you get to keep. Engage your CPA, your attorney, and your financier early so you can make the details work for you. Don’t mess up your deal by acting in haste. Develop the strategy for how you’re going to hand it off.

4. Backfill the Successor Chain

At a recent workshop hosted by InvestmentNews, Pershing’s Mark Tibergien told attendees that for every partner at the firm, they should have three partners-in-waiting. Three? This includes the fresh-out-of-school hires as well as senior advisers, with an ultimate goal of building an unbroken chain of talent to develop.

This wealth of talent will do more than make your succession plans robust—it also provides young, tech-savvy people an opportunity to work with new clients who are still accumulating wealth. If your clients are nearing retirement or are already well along, be aware that you will eventually need to replace them. Oftentimes, your clients’ heirs already have advisers of their own. Young advisers can learn to make rain by reaching out to heirs and prospects who belong to their generation, not yours. This future- and growth-oriented approach will make your firm more valuable and the transition to new ownership more stable. After all, your successor will need a successor too.

5. Know that You Probably Want More than Your Firm Is Worth

If you are the founder of your firm, it’s likely that you’ve poured your soul into it. You see the business as your life’s achievement. And you want to be rewarded for your success. That’s admirable, but your price tag is often unrealistic.

Rather than looking at your past, anyone buying into the firm will be thinking about your future. The valuation of your firm will be based on its revenues, profit, growth rate, quality and demographics of the client list, and other economic and intangible considerations. All those nights you spent working late don’t count—only their results.

6. Don’t Stick Around Too Long

Develop a strategy for the actual transition and get buy-in from your partners and staff before you sign on the line. This ensures an orderly handoff of responsibilities. If one principal plans to leave the firm, it’s essential to create a written and executable transition plan with benchmarks for the seller. A written plan focuses the attention, and the payout motivates the spirit—both buyer and seller need skin in the game.

Being that you have an internal successor, the new principal probably knows the clients. Even so, you may need to schedule some client meetings to explain the transition and talk up the new owner.

How long the seller is expected to stick around is flexible—the buyer may be eager for the seller to take off so he or she can start implementing changes, but balky clients may need the seller to stick around for a while and make a more leisurely transition.

Bear in mind that, eventually, you need to let go. Complete the transition and take your hands off the wheel. It’s the new owner’s turn now.

7. Never Let ‘Em See You Sweat

Clients deserve clear communication throughout the transition process. They don’t need to know every grisly detail, but they should feel like the succession is transparent and easy. You may discover that many clients resent the fact that any change has to take place. Some may find a transition to be their opportunity to vent about everything they’ve ever been dissatisfied about. The simpler and more harmonious the change, the more likely that clients will settle quickly into the new office routine.

Hewing closely to these principles won’t necessarily make the succession process easy, but it will make it more manageable. 

Jason Carroll is managing director and senior loan officer for IA lending at Live Oak Bank, which specializes in lending to independent investment advisers nationwide. As of Oct. 31, 2015, Live Oak Bank had lent more than $200 million to financial advisers for acquisitions, succession, working capital, and other business purposes.​

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Live Oak Bank is a valued FPA partner who participates in the Member Advantage Program. Their extensive financing options can help fund mergers and acquisitions, succession, expansion and recruiting, working capital, loan payoff, transitions, commercial real estate, and other business financing needs.

Learn more about Live Oak Bank and the dozens of other companies that provide services—often at discounted rates or special pricing—to FPA members through the Member Advantage Program in the November 2015 issue of the Journal of Financial Planning. Access the November issue today through the Journal app.​​

Succession Planning