10 essential issues that every succession plan should address

Excerpt from the newly released IN Adviser Solutions Succession Planning Study.

No single succession plan will be right for every firm. Succession plans will be as different as the individual firms doing the planning. That said, however, the data from this year’s study point toward promising practices, as well as several potential sticking points, that every firm would do well to consider when approaching challenge of succession planning:

1. Think strategically: Advisers need to think beyond the conventional task-oriented approach to succession planning — i.e., the need to create a transaction. Properly understood, succession planning is a long-term effort focused on creating value within the business and then transferring ownership to a new generation of owners who can sustain and build on that legacy. That is a strategic challenge, not a transactional one, and it should be managed accordingly.

2. Plan broadly: Though most firms cite “internal transition” as their ideal succession option, data show that some firms end up having to settle for less than their ideal option. Think through all the options, even the ones that may seem less appealing, as they may become more realistic and viable as the time approaches to execute your plan.

3. Think long-term: Firms that have been through an ownership transition are least optimistic about transition timelines. So be realistic and be prepared to extend your exit horizon if necessary.

4. Focus on transferability: Firms that have been through an ownership transition are least optimistic about transferability of value to a firm’s new owner(s). When planning for succession, pay close attention to elements of transferability — i.e., how well the business can run without you in areas such as daily operations, new-client growth and client retention. The more independently the business can operate, the more easily it can be to transfer to new owner(s) and the higher its potential value.

5. Link to personnel planning: Succession is a process of phased exit that starts with daily operations, then proceeds to management and then ownership. Personnel planning is essential to making sure the firm has the right people in the right jobs at the right time to make that happen. In addition, compensation is reported to be the most challenging issue during transition, so it’s best to think through all components of a new owner’s compensation (e.g., base, incentive, distributions) and how the owner will be compensated for his or her different roles in the firm.

6. Use broad criteria for candidates: As one adviser told us: “If your only criteria for new owners is who can afford it, then you’re probably not going to get the best candidates.” Well-prepared firms use a broad range of criteria to judge new owners, but the most important were leadership and vision — not who could afford it, and not who was the best business developer. Leadership and vision gain in importance as firms execute their succession plans, so firms would be well-advised to build those criteria into their recruitment and development plans for employees.

7. Valuation: Most firms do not have a rigorous approach to valuation; they should be using more than one method for a full picture of the firm’s value. Also remember that valuation is not a static number; it changes as the firm changes (i.e., changes in growth, profitability, sustainability, transferability and other factors).

8. Funding/financing: Self-funding by new owners is the most common financing method today, but firms need to take a more active role in helping new owners find funding if they are to help secure the best ownership candidates. Third-party financing options may be more attractive in the future than they are today, so firms should keep an open mind — particularly firms that need to create large liquidity events.

9. Revisit and revise: Confidence in the sustainability of a succession plan drops after it is implemented. So don’t be surprised if you have to revisit and revise your plan on a regular basis as circumstances change. One firm we spoke to said that it has implemented several transitions over several years, and only now is it beginning to feel like its succession plan is flexible and mature enough to suit any situation it may face in the future.

10. Get external advice: The most common roadblock to succession planning among 57% of firms was a lack of expertise. In addition, firms that have executed an ownership transition are over 40% more likely to use outside experts, compared with firms that have a plan ready to implement; and more than twice as likely, compared with firms with a plan that needs refinement. Based on this data, we believe that third-party specialists can be a valuable and important resource during both the planning and implementation phases of a transition.

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Related Topics: IN Research, The Adviser's Consultant