Succession planning: It’s not the exit you expect; It’s what you plan for

The vast majority of respondents (92%) in our recent 2012 IN Adviser Solutions Succession Planning Study believe that not having a succession plan creates business risk.

It is much more than just the risk of approaching retirement without an exit strategy in place — although that is a significant risk. One of the biggest risks highlighted in the study data is the moderate to strong likelihood that a firm’s ideal succession plan may become untenable, or that more realistic options may present themselves as the firm moves to implement its plan.

Situations change, and firms often end up pursuing a succession strategy that may have looked unattractive during the planning stages. Issues that arise include:

• Preferred choices become unattainable: Internal succession is the top choice for transition, but more than 10% of firms end up pursuing other options. With external succession candidates, the path is even more difficult: 21% of “ready to implement” firms cite this as a preference, but only 4% of “executed a plan” firms ended up following through on this option.
• Financing becomes a challenge: Four times as many firms turn to third-party financing (20%), compared with the 5% that considered this option while they were in the planning phase.
• Selling becomes less feasible: Of firms that consider selling as a succession option (19%), only about one in five actually do (4%).
• Strategic goals change: The strategic goals of the transition (whether it is a sale, a merger or a succession) can change as the firm proceeds from planning to execution.

According to Armond Dinverno, co-chief executive and president of wealth manager Balasa Dinverno Foltz LLC, the long time horizon involved in succession means that nothing can be counted as certain: “I think people get overconfident. The world’s changing, and the industry’s changing, and valuations can change. I don’t know what our business will look like 10 or 15 years from now. We’re executing on a plan, but no one can say for sure whether it will succeed 100%,” Mr. Dinverno said. “I think it’s a mistake for people to think, ‘Oh, I have a plan. I’m all set.’ When I hear that I think, ‘Well, yes. But you don’t know if that plan’s going to work.’ You have to be able to adapt.”

The message is clear: Advisers making and implementing succession plans should expect the unexpected and regularly revisit and refine their succession plans. Succession options that look possible and desirable in the planning stage can end up being unrealistic or less than optimal when the firm tries to implement them.

Broad-based planning can help firms anticipate and prepare for a range of possible scenarios — not just for managing an adviser’s exit, but also for mitigating operational risk and planning for continuity of management.

Given the findings above, it should not be surprising that we found a divergence between advisers’ attitudes and practices around succession.

We believe that few advisers appreciate the broad scope of planning required for successful ownership transition.

However, the industry still appears to view succession as a way to plan for a single terminal event. According to the data, firms that have executed or are ready to implement a plan view it as a strategic management challenge that is focused on building transferable value and sustaining that value through a transition of ownership.

Data about the state of the industry indicate that, contrary to conventional understanding, succession primarily is not about an owner’s exit or retirement, or creating liquidity. Issues of firm legacy and sustain¬ability top the list of succession concerns and become more important as firms proceed through the transition process. In addition, we found that, according to the data:

• Institutionalizing the business to create transferable value is a hallmark of firms that have executed a transition. They prioritize human capital, strategic planning and communications practices at a higher rate than other firms.
• Firms often find that their succession path changes as the plans are being executed. Therefore, broad-based planning is essential to ensure that firms maximize their options as the transition process unfolds.
• Thorough planning may help avoid pitfalls, the most common of which are overconfidence, not thinking broadly enough and not thinking sufficiently long-term.

Based on the finding that sustainability and legacy are advisers’ chief succession concerns, they should be thinking broadly about what risks might have a negative impact on those goals. Effective succession planning should seek to mitigate any such risks, ensuring the long-term future of the firm and its ability to create transfer¬able value for a successor.

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Related Topics: IN Research, The Adviser's Consultant