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Retirement plan advisers need to start planning for their own succession

Many expect to sell their business to fund retirement, yet aren't preparing properly to do so

Nov 22, 2017 @ 11:00 am

By Fred Barstein

It may seem odd that financial professionals who help clients plan for retirement rarely do a good job planning for retirement themselves. Beyond the cliché that a shoemaker's children often go barefoot, it highlights the fact that most successful plan advisers have little experience building and running a business.

Most retirement plan advisers are successful because they are good at sales and investing, adding technical expertise relative to the Employee Retirement Income Security Act of 1974 along the way. Rarely have they had the opportunity to learn how to build and run an enterprise either through corporate training or through exposure to a successful entrepreneur or business mentor. Most plan advisers have become successful based on their own skill and hard work.

Many expect to use the sale of their business as a primary source of their retirement funding. But even the most successful plan adviser with staff and infrastructure finds that their "business," which might be generating good cash flow and funding a nice lifestyle, is really a "practice" that has little value to a buyer. Even if they have been saving for retirement, most plan advisers have a hard time walking away from their practices and the cash flow unless someone is willing to pay them a fair price. Which is why so few walk away.

(More: 401(k) referrals rare from wealth managers despite DOL fiduciary rule)

The difference between a practice and a business, which is worth three to five times more than a practice, is that with a business, the principals can walk away for an extended period of time without any major disruptions or client issues. Practices rely too much on the principals to either run the business, service clients or generate new business. Practices are usually named after the principals.

Plan advisers approaching retirement age, and even those just starting a business, should start with basic questions such as:

• When do I want to retire?

• What does retirement look like: not working, or working less?

• Who are potential buyers?

• Do I want to pass the business on to employees?

These questions should not be asked in a vacuum. Family members, especially spouses, should be included, as well as business partners if the adviser is part of a larger group. Key employees should also be part of the discussions.

Metrics matter

Once personal decisions are made, the difficult work of realistically looking at the value of the current business or practice begins with a basic accrual and cash-based profit and loss statement, as well as a balance sheet and cash-flow statement. Not surprisingly, many plan advisers do not know their profit margins or, in basic accrual accounting terms, EBITDA (earnings before interest, taxes, depreciation and amortization), without which it is nearly impossible to determine value.

Value is in the eye of the buyer, so plan advisers who decide they someday want to sell their business should understand the drivers of value. Beyond healthy growth, profits and cash flow, advisers need to determine the drivers of these basic metrics. For example, which clients are actually profitable and generate additional business? Which employees are really contributing? What investments in systems, technology and infrastructure are actually paying off?

(More: Smart data can improve behavior, outcomes for retirement savers)

Is there a written and repeatable system (an operating manual) to keep the business successful after the adviser exits through sustainable business operations, technology and, most importantly, people? Is the business well-positioned for the future given regulatory changes or basic economic trends? Basics, such as buy-sell agreements with partners, need to be created, as well as an estate plan and possibly an employee stock ownership plan (ESOP), depending on the decisions made.

But probably the most important decision is one plan advisers preach to prospects and clients every day — hire a professional to help. Not only do they have the necessary experience, they are not emotionally invested; emotional investment can lead to imprudent decisions or, even worse, inertia.

When advisers are ready to begin succession planning, it's helpful to work with a checklist, such as the following:

• Determine when or if I want to retire.

• Determine whether retirement means working less, or not at all, in this field.

• Create a decision tree.

• If I want to sell, list potential buyers.

• If I want to pass business to employees or partners, set up a plan like an ESOP.

• Start conversations with partners in my firm about transitioning out.

• Start grooming or hiring potential successors within my firm.

• Create plan to buy other firms.

Partner with or join noncompeting firms (wealth/benefits firms, etc.).

• Buy out or sell to current partners.

• Create quick buy-sell agreement.

Gauge what percentage of clients would leave if I retired or sold the practice.

• Create P&L/financial statement.

• Determine drivers of valuation. Determine whether drivers of valuation differ by potential buyer.

• Refocus business and staff on drivers of valuation.

• Review client base to determine value of each.

• Establish value of new clients as part of pricing exercise.

• Find out valuations of firms like mine.

• Change name of firm to remove my name.

• Determine whether business is viable without me.

• Hire outsourced CFO or adviser.

• Create an estate plan.

Fred Barstein is the founder and CEO of The Retirement Advisor University and The Plan Sponsor University.

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