In our recent IN Adviser Solutions Succession Planning Study, we identified several gaps in firms' preparedness for succession. One of the most critical is a gap not just in planning, but in understanding just how much planning is required for a succession strategy to be effective.
Very few of the firms that rated themselves as “ready to implement” a plan had developed a strategy for activities like talking to staff, or valuing the firm, or creating an equity participation plan for employees, or engaging outside help in any succession steps. Yet we learn from firms that have executed a succession plan that these are common and sometimes essential steps to success.
Clearly, firms that are “ready to implement” have a very narrow view of what a “plan” is. According to the study data, their plan merely entails identifying a successor and putting a buy-sell agreement in place to formalize the arrangement. Once those two elements are in place, firms believe they are “ready to implement” their “plan.”
What's dangerous about this approach, as one adviser put it recently, is, “The devil is in the details.” There are a lot of moving parts to a transition of ownership, and firms need to think through as many as possible before beginning.
Adequate planning is important for two reasons:
1. It can help identify additional succession options — an important benefit, as many firms find that their plans change as they move through the planning and execution process.
2. It can also help clarify the long-range preparatory steps required to achieve the firm's ideal succession option.
Let's start with the first reason: As firms move through the process, their options can change.
For example, selling to an advisory firm was an attractive idea very early in the planning process, cited by 19% of firms, but only 4% of firms pursued this strategy. Bringing in external candidates showed a similar trend: As firms begin executing on their plan, 21% favored bringing in an external candidate, but only 4% actually did. As firms began the implementation phase of transition, 78% of advisers expected to exit daily operations within three years, but among firms that have executed a transition plan, that number drops by a more than a third — to 50%.
Finally, selling to a consolidator does not even register as a preference during the planning stage, but 11% of firms end up pursuing this route as a succession solution.
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The finding is clear: You can't count on your ideal plan coming to fruition. So you do yourself a favor by preparing for, and thinking through, as many options as possible in advance — that way you are ready for any eventuality.
And speaking of “ideal” succession plans: The vast majority of firms selected “internal candidate” as their ideal succession strategy. But achieving this top strategic goal requires years of planning and development. So forward-thinking management of human capital — with an eye toward ownership eligibility and transition — is essential to building a solid succession plan.
It can take several years just to find the right candidate. In addition, the firm needs to have a wide range of human capital practices in place to take that candidate from hire to ownership: From documenting job descriptions, to creating a robust retention and incentive plan, to creating a career path and an employee development plan.
It's important to note here that a firm's development program should be aimed not just at ownership-track employees, but all employees. “Transferability” was a key concern among firms that have executed a transition plan — i.e., if your staff does not have the skills and capabilities to handle day-to-day operations without you, your business is less transferable to a new owner and consequently worth less to a potential buyer.
Firms thinking about succession need to anticipate these and a wide range of other human capital issues — all of which can take years to fully and effectively address. Practices need to be documented and built into the human capital plan upfront, so that the firm is rewarding the right qualities and behaviors in order to build a valuable business, and attract and retain the most suitable ownership candidates. These are candidates who will see the value in a firm and want to take over as the next-generation owner.
So among the key lessons from this year's study, one of the first ones that readers need to understand is that you need to start planning early, and plan as comprehensively as possible. Just because you have identified a succession candidate, that doesn't mean you have a “plan.”
Kelli Cruz is the director of research and consulting for IN Adviser Solutions, a division of InvestmentNews.
