Outside voices and views for advisers

Internal or external succession: What's right for you?

How you have structured your practice may help you decide how to exit the business

Mar 12, 2014 @ 12:01 am

By Joni Youngwirth

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With so many advisers contemplating retirement, the chatter about succession options has become constant. Forget valuations, terms of the deal and buy/sell agreements. Far before you get to that point, you need to anticipate what the future business could and should look like. Do you want the firm to continue without you (internal succession), or do you want to sell your business to another firm (external succession)? Each approach has its pros and cons.


External succession is the transition of one firm to another firm. The original owner (often the founder) exits the business within a year or two of selling the practice, and clients are securely transitioned to another adviser. While a couple of years may seem like a long time frame, external succession is generally a much shorter process than internal succession.

Who's a good candidate? This approach may be particularly appealing for advisers who wish to remain solo throughout their careers. Some advisers would rather avoid the compromises involved in teaming up with another experienced adviser, not to mention the responsibility of finding, hiring, training and mentoring a junior adviser. Many advisers simply want to focus on working with clients; managing the business side of the firm isn't their preferred use of time. For these advisers, remaining solo, selling the business to an outside firm and staying in place just long enough to transition clients is an optimal situation. For the solo adviser, there is something to be said for closing the door and walking away. When it's over, it's over.

(Related: Will switching firms before retirement double your money?)

External succession is especially compatible with a lifestyle practice, where the adviser enjoys a semi-retirement lifestyle years — and maybe even decades — before an actual business transition. The trick for potential buyers of a lifestyle practice is to conduct sufficient due diligence to ensure that the practice hasn't begun to wilt on the vine.

A seller's market. Solo advisers who choose external succession may receive offers from several eager buyers who are willing to pay full price. After all, while an ensemble firm will likely sell only to another ensemble, but a solo adviser can sell to another solo or to an ensemble.


Internal succession refers to a transition to another adviser within the same firm. Unlike external succession, it requires finding, hiring, and developing a successor to fill your shoes when you retire.

Grooming a successor. Internal succession involves a much longer lead time than external succession. The career development process typically begins a decade or more before the senior adviser's retirement. (It's important to be aware that things don't always go perfectly the first time around, and advisers may need to go through at least one hiring and termination rotation before finding a suitable successor.) Because of the time they've spent working together, the senior adviser and his or her successor tend to be philosophically and operationally aligned, promoting a smooth transition for clients.

(More: Get your succession plan going today by following these tips)

Apart from the time commitment, another challenge to internal succession is the lack of new blood in the industry. As the number of senior advisers anticipating retirement grows, there may not be enough junior advisers to go around. Many advisers joke that they plan to stay at the firm “until they drop.” That's fine — as long as the adviser relinquishes responsibility for running the business to others.

Who's a good candidate? Firms that favor internal succession are typically larger businesses. They continue to increase their top line, and they tend to have well-developed infrastructure and processes in place, such as internal career development plans. Discounted valuation is not uncommon in internal succession deals.


If you've been a solo adviser throughout your career, it may be difficult to decide at the eleventh hour that you want to keep your name on the door of the firm. A lasting legacy typically reflects a lengthy affiliation between the retiring adviser and his or her successor. Whether you anticipate internal or external succession, keeping your name on the door may only be an illusion of a legacy if everything changes once you're gone.

When it comes to succession planning, every adviser must decide what's right for his or her practice and personal situation. Don't be overly influenced by talk in the industry. Remember, we all will leave a legacy. The strength of that legacy will have less to do with a firm's branding than with the quality of the relationships you leave behind.

Joni Youngwirth is managing principal of practice management at Commonwealth Financial Network.


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