Transition planning should be a key concern for all financial advisors. It doesn't matter whether you're part of an RIA, a broker-dealer or a wirehouse. And it doesn't matter if you're 30 years old and decades away from leaving the workforce. In fact, that may be a fine time to start. A successful transition takes time and effort well in advance of any liquidation event. It's never too early to start making the business decisions that will lead one day to the maximum possible value you get for your practice or book of business.
That said, you're probably not 30 years old. The average age of an advisor is roughly 49 years old, and 14% of advisors are older than 60, according to research firm Cerulli Associates.
Do you have a plan to leave your business? According to planning firm Moss Adams, about two-thirds of advisory firms don't have a plan of any kind.
That makes transition planning all the more of a priority. The key steps are making a plan, creating maximum value and evaluating your options. These insights are derived from research that CEG Worldwide, my firm, did in partnership with two members of its advisory board: Jon Stone, a 25-year veteran of the venture capital and corporate planning worlds, and Simon Glinksy, who leads our strategy and consulting practice.
DRIVERS OF VALUE TAKE TIME
A lot of baby boomer advisors haven't thought about how to eventually sell their businesses or phase out of them, what their businesses are worth and what they really want to do once they leave. To realize value down the road, you have to create and build value now. The drivers of value within a firm take time to develop and hone - five to 10 years, at least. Likewise, tax and legal strategies involved in transitioning out of a business can take that long to implement fully. And, as we all know, market cycles in this industry can be long. In 2009, you probably couldn't have given away your company if you had wanted to. So you need to be well positioned to pull the trigger when there's an up cycle.
Additionally, you never know when you might be inclined to sell or transfer your business. You might experience a rapid or unexpected change in health, receive an amazing offer, inherit a large amount of money or simply become burnt out.
Regardless of the situation, the rule is the same: You attract buyers by preparing for them. To get that preparation going, start thinking about your transition objectives. Consider some high-level decisions: When do you want to exit your business? Whom might you want to sell to? How much do you want or need to realize from a sale? Do you want to exit all at once, or transition slowly out of the practice?
Asking these types of questions will help you see the appropriate next steps so that you can plan accordingly. If, for example, getting the maximum payout is very important to you, you'll want to assess various types of buyers differently than you would if your primary concern is ensuring that your staff and clients will be taken care of after you're gone.
The best way to ensure a great exit that accomplishes what you want is to build a great company. That means focusing your broad strategic efforts on the drivers of value in a practice. These are among the most important:
* Strategy. Financial advisory firms with great strategies have a clear and compelling value proposition, a clear competitive advantage and a clear definition of whom they serve and why.
* Management team. A great company has a team capable of leaving the company to the next generation and has a process in place to recruit, train and promote future managers. That means bringing junior employees up through the ranks, and giving them the skills and abilities to take the reins.
* Systems and processes. You should systematize the key functions in your office - from client service delivery to quarterly reports and compliance. It's a big advantage to show buyers that they can essentially walk in the door and expect everything to work as it should. The more standardized your operation is - in terms of decision-making, client contact and follow-through, and back-office functions - the less risk buyers see in taking it over, resulting in a better valuation.