We know from IN Adviser Solutions' 2012 Succession Planning Study that for successful firms, transition planning is a robust process and involves a wide range of strategic-planning and human-capital practices.
For other firms, planning is much less rigorous. In fact, for 50% of firms in the study, a lack of planning correlates to a much-higher likelihood of being forced to walk away. Although these “walk away” firms are much earlier in the process (they are in the “planning to create plan” or “not planning” groups), the danger is that a lack of action could foreclose other options quickly.
Identifying and selecting a successor, and creating a buy/sell agreement, are the primary areas of focus of firms in the “ready to implement a plan” group. But many firms may be less ready than they think.
What is surprising is what the data suggest about the perceived meaning of the word “plan.” Most of these “ready to implement” firms have yet to develop a strategy for talking to staff members, valuing the firm, engaging outside help or creating an equity participation plan for employees.
Clearly, these firms have a very narrow view of what “plan” means. To such firms, a succession plan means deciding whom your successor is going to be and then creating a buy/sell agreement to formalize that arrangement.
Once those two elements are in place, these firm owners think that the deal is done. They push all the mechanics into the future and don't address them until the actual “implementation” phase.
What is dangerous about this approach is that the devil is in the details.
We know from the study data, and from working with financial advisers directly, that succession is a long-term initiative that can take years to implement fully. It can take seven to 10 years to hire and fully develop an internal candidate.
It also can take years to build a fully functioning organization with transfer-able value. These and other elements of succession take years of diligent planning and execution.
Just because an adviser may have identified a succession candidate doesn't mean the firm actually has a plan.
A LEGACY TO LEAVE?
As firms move toward planning for succession, they become more and more concerned with the firm's legacy and transitioning to an internal candidate who can take over and run the business.
Advisers who are doing little or no planning are thinking more along the lines of: “If I can't sell it, I will just walk away.” Of the respondents from our study who aren't planning for succession — these are mostly younger advisers who are early in their careers — nearly 40% are considering the option of walking away.
The vast majority — 61% — said that the biggest difficulty with succession planning is a lack of viable internal candidates. Another 33% said that they have no time or resources to allocate to succession planning.
So advisers contemplating walking away may have to do just that. What this group needs to understand is that walking away may be a self-fulfilling prophecy.
Practices may grow quickly in their early years, but every firm that is too reliant on its founder eventually will hit a point of diminishing returns. It in fact will become less valuable over time as it becomes more dependent upon the founder to run and expand the business.
That dependency can make the firm less transferable and less attractive or valuable to a potential buyer.
I counsel advisers not to let emotional issues get in the way of making an informed succession-planning choice. Advisers need to understand that succession planning can easily get away from them and that full-scale succession planning may not even be right for every adviser.
Some advisers may be perfectly happy running their practice and serving their clients, and not taking on the more-complex tasks associated with building a business. Every owner has the right to make that choice.
Yet emotion can cloud the decision-making process and lead to procrastination. Avoiding making a decision is still making a decision.
Succession isn't about economics, it's about emotion.
And strong emotions, driven by issues such as client loyalty, control and identity, all can create inertia and interfere with succession planning.
Kelli Cruz is the director of research and consulting for IN Adviser Solutions. Visit InvestmentNews.com/ 2012successionstudy to order a copy of the 2012 Succession Planning Study.