Unless modern medicine discovers the secret to immortality, all of us will one day leave our business behind. That means we have to ask ourselves how we want to exit, and start making the appropriate plans to transition on our terms.

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.



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.

* Marketing and branding. The companies that get the best valuations are those that have built a brand and aren't dependent on a single person. In short, people need to know and respect your company - not just you as the individual owner or leader. Buyers want to see that there are relationships in place that create a steady stream of new business, and that business development is not entirely (or even mostly) dependent on you.

* Client relationship management. You want a demonstrable pattern of high client retention, high levels of satisfaction, a strong tendency to make referrals and a predisposition to not be tied to a single person at your firm. Again, if you leave and all your clients leave with you, you'll have no luck finding buyers or you'll command a much lower valuation.

* Client base. Buyers will want to see that your client base is currently profitable and will continue to be so going forward, of course. But they'll also look at how concentrated those profits and those clients are. If you have two clients who together represent 80% of your profits, you'll command a lower valuation.

* Compliance. Simply put, you want a spotless regulatory record for maximum value. With some buyers, you'll need a spotless record just to be considered a worthy candidate. Compliance needs to be built into the culture of your firm.

You need all of these drivers to be in place to be highly appealing to buyers. You don't need to be perfect in all areas, but pay particular attention to fostering great results in marketing/branding, client relationship management and compliance. These are three areas that buyers often focus on the most.



Consider your exit options now so that you can develop the right strategy for when the time eventually comes. These options include a sale to outsiders (maybe a small bank or a competitor), a sale to a person or persons inside your firm (such as other partners or family), or no sale at all.

A strategy that Stone commonly recommends is to build your practice for an eventual inside transaction. An inside sale gives you the most control over the entire process and allows you to plan for the transition over an extended period if you want. Say, for example, that you've done a great job developing the key value drivers. You might now have a company that will grow predictably by perhaps 20% a year. If you do an inside sale and slowly transition out, you will be around for 10 or more years to participate in that growth and harvest more value from the equity created.

But if you sell the company to an outsider, the game is over. You might have an earn-out, but chances are that it will be just a smaller percentage of the firm's growth over a much shorter period.

Preparing for an inside sale won't stop you from conducting an outside sale instead. Since it takes a decade or so to build up your firm's value around the key value drivers, you can build for an inside sale but switch to an outsider if the market is enjoying an upswing when you want to exit.

Regardless of how, when and to whom you want to sell your business, it's vital to make the right moves sooner rather than later. Leaving your business will be among the most important decisions of your entire life, not just your professional life. So give yourself the same advice you no doubt give your clients every day: Having a smart plan can be the difference between a great outcome and a mediocre or undesirable one for you and your family. When it comes to exiting your business, you can add your partners, your employees and your valued clients to that advice list, as well.



John J. Bowen Jr., a Financial Planning columnist, is founder and CEO of CEG Worldwide of San Martin, Calif., a global training, research and consulting firm for advisors.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access