Rick Rummage, chief executive and founder of The Rummage Group, an adviser training firm based in Herndon, Virginia, is helping the wife of a client stricken with terminal cancer find a buyer for her dying husband’s multi-million-dollar advisory practice.

“It’s not easy,” he says.

The man, in his 60s, hadn’t made a continuity plan, and now selling has become critical.

“I value his business at two to 2.5 times revenue, but his-broker dealer, who is looking for some nearby firm in their group to buy it, is low-balling it at 1.5 times revenue,” Rummage says.

This is a cautionary tale of what happens when an adviser fails to plan for disaster, Rummage says.

Industry experts say there are three aspects of preparing for the departure of a principal: succession planning, sale of the business and continuity planning. The first addresses the gradual handing off of a practice to a selected person or team groomed for the job, the second means a full and fast change in ownership, and the last involves a sudden incapacitation or departure of the key adviser/owner.

Failure to plan for any of these eventualities can be costly, but this is especially true for emergencies and for smaller independent firms.

“A good continuity plan is contract-based,” says David Grau Sr., president and founder of FP Transitions in Oswego Lake, Oregon. “You need a contract that determines what happens when there’s a sudden loss of the practice’s principal, whether it’s immediate, as from an accident or a stroke, or over a period of months.”

The “ideal plan” for a smaller firm is to have an S-Corporation structure with a signed agreement that, should anything happen to one member, including the principal, the other members will buy out the departing or departed member’s share at an agreed-upon price based on the firm’s value, Grau says.

Such a contract protects the departing member’s family if that member has died, and, even if paid off over a period of time, provides income for the departing member if he or she had to leave because of a medical emergency or other personal reasons.

A key advantage of this planned contractual approach to continuity is that it avoids having to place the firm on the block in a fire sale.

“Without a good continuity plan, the loss or departure of the practice’s principal could end up leaving the principal’s family with an asset of little or no value overnight,” Rummage says.

In the situation with the woman whose husband has terminal cancer, “We’re working hard to find someone to take over a good business, but it’s not an easy thing to do at the last minute. Selling a practice under pressure is not the best way to go,” Rummage says.

This story is part of a 30-30 series on smarter succession planning.

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Dave Lindorff

Dave Lindorff is a contributing writer for Financial Planning and On Wall Street.