This is excerpted from a column that originally appeared in The Adviser's Consultant, a monthly practice management newsletter published by InvestmentNews.
No single succession plan will be right for every firm. Succession plans will be as different as the individual firms doing the planning.
That said, however, the data from this year's study point toward promising practices and several potential sticking points that every firm would do well to consider when approaching succession planning.
1. Think strategically. Advisers need to think beyond the conventional task-oriented approach to succession planning, i.e., the need to create a transition. Properly understood, succession planning is a long-term effort focused on creating value within the business, and then transferring it to a new generation of owners who can sustain and build on that legacy. It is a strategic challenge, not a transactional one, and should be managed accordingly.
2. Plan broadly. Although most firm owners cite “internal transition” as their ideal succession option, data show that some end up having to settle for less than the ideal. Think through all the possibilities, even less appealing ones, because they may become more viable as the time approaches to execute the plan.
3. Take a long-term view. Owners who have prior experience with a transition are the least optimistic about transition timelines. So stay realistic, and be prepared to extend your exit horizon if necessary.
4. Focus on transferability. Owners who already have been through a transition are the least optimistic about transferability of value to a firm's new owner. Pay close attention to this area. For example, how well can the business run without you in such areas as daily operations and client growth and retention? The better the business can operate without your oversight, the easier it is to transfer and the higher its potential value.
5. Link to personnel planning. Succession should be phased in, starting with daily operations and proceeding to management, then ownership. Personnel planning is essential to making sure that the firm has the right people in the right jobs at the right time. In addition, compensation is considered the biggest issue in a transition, so think how an owner will be paid for taking on different roles.
6. Use broad criteria for candidates. Well-prepared owners use a wide range of criteria to judge potential successors, but leadership and vision (rather than who can afford it or is the best at business development) are the most important. And the two qualities gain importance as succession plans are carried out.
7. Valuation. Owners should be using more than one method to arrive at their firm's value. Remember also that valuation isn't static, but changes as the business grows and becomes more profitable and sustainable.
8. Funding/financing. Self-funding is the most common financing method, but owners need to take a more active role in helping potential successors find financing if they are to secure the best candidates. Third-party funding options may be more attractive in the future, so keep an open mind.
9. Revisit and revise. Confidence in the sustainability of a succession plan drops after it is implemented, so don't be surprised if you have to amend your plan regularly as circumstances change.
10. Get external advice. Fifty-seven percent of the study respondents said the biggest roadblock they face is a lack of expertise. In addition, owners who already have been through a transaction are more than 40% more likely than others to use outside experts. Based on those data, we think third-party specialists can be a valuable resource during the planning and implementation phases of a transition.
Kelli Cruz is the director of research and consulting for IN Adviser Solutions. Visit InvestmentNews.com/2012 SuccessionStudy to order a copy of the 2012 IN Adviser Solutions Succession Planning Study.
