Succession Planning 101: How to Build a Foolproof Plan

by HighTower Advisors on September 04, 2019

Whether you’re an advisory group looking to scale or a firm principal nearing retirement, finding the right strategic investor for your business has implications for the future of your client relationships, your practice and your own personal wealth.

Firm owners interested in finding the right strategic partner should consider what they can do to make their businesses more attractive to potential buyers.
Here are three key considerations buyers look for:

#1 – Historical Growth (That’s Not Tied to the Market)

Asset growth tied to a bull market is both a blessing and a curse. If your growth in client assets is based solely on a rising market, and not on adding new clients, in the eyes of an acquirer or strategic investor, you’re not really growing. For strategic investors in wealth advisory firms, the most attractive, valuable businesses are the ones that are proactively growing outside of the market – growing their asset base by bringing in new clients or increasing their share of wallet from existing clients.

Many firms experience stalled growth as a result of an aging client base. Unless an RIA is actively bringing in new clients, their older clients eventually end up going from accumulation mode to distribution mode in retirement. While this looks great on paper when the market is up, when the market goes down, it will have a negative impact on firm revenues.

#2 – A Clear Focus on De-Risking the Firm

Firms that have “sticky,” long-standing clients, a well-defined client-service model and a diversified client base are more attractive to investors than firms that don’t. Some of the red flags RIA investors watch for include: a small or uneven client base, key-person risk and disorganized (or non-existent) succession planning.

First, having a diversified client base is key to closing a deal. It’s a risky proposition to have a large percentage of your AUM tied up in any one client. Most deals in the industry today require a 90 percent or 95 percent consent threshold. If you have one client that makes up 20% of your revenue, and that client is wary about your transaction, your deal could fall apart.

RIA investors also see “key-person risk” as a red flag. If one or just a few people in the firm control the majority of the client relationships, that means the future of the business is at risk when those individuals retire or pass away. Firms are more attractive to buyers if the owner has built a dedicated team to manage client relationships, so he or she can focus on business strategy and management of the firm.

When it comes to succession planning, some of the most attractive businesses are the ones that the buyer can grow over time, and investors can’t do that if the seller is looking to get out of the business tomorrow. If you’re looking to exit your business 5-10 years from now, you should be looking to do a deal now. Succession doesn’t happen overnight; it’s a multi-year process.
Buyers are more attracted to firms with efficient operations, a robust management structure and well-thought-out plans for future growth.
In many cases, firms that don’t get the price they want for their businesses are the ones that waited too long to sell.

#3 – Delivering Holistic Wealth Management

Clients who stay with their advisors for the long haul do so because there is an inherent trust in that relationship. If a firm has clients who are performance-chasers, that means the client base is less “sticky”—they may stay around when times are good and they’re beating their benchmarks, but when markets decline, they will ultimately flock to another advisor who is promising market gains.

For firms with value, clients are in it for the long-term because they view the RIA as their trusted advisor. Advisors are able to build trusting, lasting relationships with clients when they focus on the entire picture of a client’s life—not only their family and financial goals, but also helping them navigate major life events. Clients who are truly engaged with their advisors are less likely to switch firms just because the market is going down or sideways.

You can’t control what the market does, but you can control how you present yourself to buyers. This can have a significant effect on both your attractiveness as an acquisition target, and on your valuation.

Taking the time to think through your growth strategy thus far, finding ways to de-risk your firm and taking a deeper, more personal approach with clients can show an acquirer that your firm has what it takes to not only retain clients, but attract new ones.

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