Pre-emptive resolutions to common obstacles

Or, how to overcome the five biggest hurdles to succession planning

Jul 14, 2013 @ 12:01 am

By Kirk Hulett

Even with the best of intentions and thorough planning, many advisers encounter problems along the way of handing over their practice to someone else. Being aware of them can help an adviser prepare better and avoid the most serious fumbles. The following five obstacles tend to be the most overlooked:


The first step toward successful succession planning is recognizing the central problem: No one is going to live forever. Advisers often think they will work until they die, ignoring the high probability that an illness or disability could cause them to leave the business before they leave this earth.

Succession planning is like retirement planning for clients. The longer advisers wait, the fewer options they have for transitioning the business when they need or want to.

Also like retirement planning, good succession planning takes time. An adviser wants to sell the asset — the practice — at the peak of its value, not out of desperation. Ideally, advisers should start planning at least 10 years before they think they will retire, using four key tenets:

High-quality cash flow

Convert transactional business to recurring revenue.

Segment clients by profitability.

Develop a sales and marketing system around a niche.

Low transition risk

Create a client service level matrix based on profitability or assets.

Construct a team-based ap-proach to client care.

Establish a brand name.

Thoughtful deal structure

Consider the amount of proceeds needed from the business to fund retirement or a legacy.

Look at seller financing options.

Evaluate tax implications.

Marketplace demand

Monitor practice buy/sell activity.

Look for potential successors.


Business owners in any industry have trouble separating the value of their business from their personal value. This is the baby they have labored over and raised to maturity. The idea of separating from their practice can leave some advisers with the business equivalent of empty-nest syndrome. As a result, they may procrastinate about succession planning or have unrealistic views about the terms of the succession.

On top of that, advisers who let their practice start to wind down as they age may not recognize the decline in value. They may base their expectations for the sale on what the practice was in its heyday. Outside counsel — from a trusted colleague, attorney, accountant or business consultant — can help advisers overcome their emotional obstacles to executing their succession plan or even creating one in the first place. Potential successors or acquirers should expect those emotional ties.


Succession plans don't happen in a vacuum. While the seller may be center stage, in the wings wait employees, spouses, children, grandchildren and others who will be affected. As the main supporting character, the adviser's spouse needs to be comfortable with his or her plan and successor, especially if the adviser dies and the succession plan is put into motion quickly and unexpectedly.

Children involved in the business get high priority on the communication list, as well. Assumptions about who will inherit what, when and with what strings attached have pulled families apart when a business owner decides to retire or dies. As uncomfortable as the conversations may be, taking an honest, direct and business-focused approach early will make things easier later.

Advisers also should not forget their employees. Staff members depend on their jobs for their livelihood. An adviser needs to be clear about long-term plans for the business, including who will succeed the owner and when the reins will be handed over. If an adviser has certain employees in mind to become owners or have key roles in the transition, the adviser shouldn't keep those plans a secret. Uncertainty and incorrect assumptions can destroy even the most tightknit teams, in turn decreasing the value of a business when it's time to sell.


As with any retiree, advisers face three key questions about a planned retirement: How long will I live in retirement? What will I do with my time? Do I have enough money to last my lifetime?

Once again, advisers should listen to the good advice they give clients and consider what they want to do with their time once they leave the business behind: volunteer, pursue hobbies, spend time with family, start another business or career. They should analyze expenses and the costs of fulfilling those post-succession goals.

Owners should take another look at their practice and what it might be worth. If sold today, would the proceeds be enough to fund their life in retirement? If not, what can be done to increase the value of the practice?

In a typical practice acquisition, the seller has allowed service levels to decline. That fact and general attrition have shrunk the book of business over time. Buyers know that giving more attention to the acquired clients and bringing them even one or two simple new ideas will get referrals and assets flowing back into the practice. They don't really have to do anything amazing to see an increase in revenue.

Advisers looking to sell should make sure they get the benefit of that upside by maximizing the practice's potential before starting to look for a successor or buyer. Sellers can also structure the deal to partake in any after-sale uptick.


Practice valuations are tricky. Advisers can't predict whether the supply-and-demand equation will be favorable when they decide to sell. Valuations may go up, down or remain level, depending on the number of buyers and the number of practices for sale. Like real estate, too many properties or too few buyers will lower the price. Valuations also may be affected as a practice shifts to focus on clients' distribution as they retire rather than accumulation, because cash flows can shrink as assets are distributed.

Sellers can mitigate this risk by creating their own market with a buyer, using a long-term succession plan that incorporates younger advisers into the business and continues to build assets. In addition, advisers should make sure they maximize opportunities to retain assets after clients die by engaging their heirs now.

Marketing outreach should include the adult beneficiaries on accounts in top client segments — whether that beneficiary is the client's spouse, parent, child or friend. Deepening those relationships now keeps new assets coming in and preserves future cash flow.

Kirk Hulett is executive vice president of strategy and practice management at Securities America Inc.


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