Succession planning benefits consulting firms and their clients

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In a time of record mergers and acquisitions for financial advisory firms, the design and implementation of a succession plan has become a critical factor for success.

The size and scope of this M&A activity has increased the pressure and options for company owners.

The average valuation of a registered investment advisor has increased by more than 20% from 2019 to 2020, according to the RIA Deal Room in 2021. This has attracted the attention of many well-capitalized partners, as well as growth-oriented RIA platforms and investors looking to purchase or partner with advisory practices.

This provides companies with an unprecedented assortment of economic models, levels of control and time-out scenarios.

For company owners, this is good news. Not only is there increased options for exiting the business, but there is also support for independent companies looking to develop and implement a legacy solution.

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While succession planning is important to the company and its long-term viability, it is also important to the company’s customers and any investors. So clients should be concerned about whether their advisor has a plan, because it affects who gets to handle their money if the company owner leaves, retires, or dies.

According to a 2018 study by the Janus Henderson Investor and Financial Planner Association, while advisors are more likely to explore succession planning options as they near retirement, 73% overall lack any. any official succession plan.

Meanwhile, the industry has grown a new pool of talent, giving founders more options to transform the business they love has grown to the next generation as a solution. alternatives to external partnerships.

Advisors should create or review a business plan or their own plan to create more options and greater flexibility. The lack of a solid succession plan can create confusion, misunderstandings, and conflicts that disrupt – or even disrupt – business continuity.

Defined succession planning

Succession planning is a deliberate process that transfers the management, ownership, and goodwill of a consulting firm from one generation or entity to another. This is not an independent event. It should incorporate several factors:

  • Strategic planning: the process of mapping out the purpose, vision, mission and values ​​of a company, along with a tactical plan to bring that vision to life;
  • Continuity Planning: the process of planning for an unforeseen event; and
  • Sales planning: the process of preparing a company for sale to a third party.

The RIA market is increasingly complex as the ecosystem grows and competition increases. RIA has an attractive and flexible model, but the industry has no defined model or consistent approach for when an advisor needs to retire or leave the business.

As a result, succession planning offers strategic benefits and addresses several areas of risk:

  • Consumption risk of customers: Customers, especially high net worth customers, value continuity and stability and may decide to switch to another company.
  • Growth risk: Business discipline and succession planning will reduce the risk of a company’s growth stalling or slowing down as current owners reduce their professional contributions.
  • Employee attrition risk: Involvement of next generation professionals in succession and business planning will create a sense of commitment and foster a lasting relationship with the company.
  • Enterprise value risk: Valuations of RIAs based on discounted cash flow or free cash flow multiples, with discounts and premiums based on factors such as revenue growth, customer demographics, employee lifetime , stability and quality management. The lack of a plan can negatively impact pricing and attractiveness.
  • Option risk: Missing a defined plan or waiting too long to create one reduces the options available to owners. It’s usually not a quick process: Internal succession can take five to 10 years to implement, and a sale can take up to two years, according to Advisor Growth Strategies.

To build a succession plan, owners should start by setting personal goals and objectives. Are they looking to build a legacy, maximize financial returns, or both? Then, identify possible plan alternatives as guided by individual and business needs.

Companies should seek legal advice to determine voting rights for potential internal and external purchasers, events that will trigger the implementation of succession plans – usually death, disability and/or age – valuation methods for internal and acquirer succession rights and funding sources.

Owners must also precisely time their exit from the company, giving them enough time to find the right buyer or prepare an internal successor.

Meanwhile, do due diligence to identify potential buyers or successors. They should determine what is important to them and develop a scorecard to list the strengths, weaknesses, opportunities, and threats of each option.

Then, choose a model and agreement structure. Company leaders may hire a consulting firm or investment bank to negotiate on their behalf.

Once the plan is completed, it should be reviewed annually, at least. Succession plans typically have a long duration and will require updates as conditions change.

Implementing a succession plan is very important. Clients will continue to monitor the safety and security of their assets and will expect a blueprint from their consulting firm.

A well-crafted plan can be a competitive advantage for attracting new business, retaining customers, and increasing engagement and employee retention.

– By Sean Keenan, director of wealth solutions at BNY Mellon’s Pershing Succession planning benefits consulting firms and their clients

Emma James

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