If you are a financial advisor or financial planner who intends to retire in the next decade, you are not alone. According to the Certified Financial Planner Board, approximately 47% of its certified members are over the age of 50, meaning that many of these advisors are likely planning to retire within the next two decades.
So what does this mean for you? It may be time to jumpstart your own retirement or start thinking about your business succession so that you can get a leg up against other planners looking for buyers. With several advisors looking to sell at the same time, the longer you wait the harder it will be to leave when you want to. Starting the process of succession planning early also increases your chances of finding a qualified buyer.
Unlike a pizza shop owner, you can't start the process of selling and advisory practice and close the deal within a short time frame. Because of your responsibility to your clients and the nature of the financial planning business, there are several steps to prepare for, carry out, and finalize a sale. Hopefully you have built long-lasting relationships with clients based on trust and historical performance, so it could take years for a well-planned sale to happen.
If clients do not trust the planner who will be taking over, or believe that they will not perform as well as you have in the past, they will most likely leave. They may even leave before you sell if they feel like you are not adequately preparing for your own retirement, which can decrease the value of your practice. Clients don't want to be caught off guard when it comes to the management of their finances.
To prevent this from happening, here are a few tips for how you can get a head start planning for leaving your practice.
Retirement Planning for Yourself
Before you start looking for someone to buy your business, you first need to decide exactly what you want in retirement. This is a topic you cover all the time for your clients, but it's likely that you rarely sit down and evaluate your own retirement. Do you want to play golf all day? Work part-time? Travel? What does your spouse want to do?
Knowing the answer to these things will help you decide what type of sale to arrange for your practice. It will also show your clients that you have thought through every aspect of this transition and are not simply leaving on a whim.
Ways to Sell Your Practice
There are two major types of sales, internal and external. An internal sale targets a family member or an employee. An external sale occurs when you sell your business to another firm or an individual who has no connection to you personally or professionally. Let's take a closer look at each of these options to better understand how they work.
With an internal sale, you typically have to start planning earlier than you would for an external sale. Since the new owner is most likely a junior partner, you will need to train them to run the business and ensure that they can also handle all parts of the financial planning process.
You also need to be sure the business has the proper processes in place to run without you. Many business owners keep everything stored in their heads — get your business processes down on paper. You also need to ensure your clients are comfortable with the soon-to-be new owner.
An internal sale is typically financed by the advisor who owns the practice and is implemented over an extended period of time. You can even structure this as a form of pension by receiving payments on the business loan during your retirement. Typically, you will sell the business based on a multiple of the earnings, since the succeeding owners will keep all the existing infrastructure.
In an external sale, there are many ways to handle the transaction. You can sell the business with the transfer of your book occurring immediately as you oversee the transition for six to twelve months. You can also do a partial book sale, where you only transfer over a portion of your clients and retain some for your practice. This is typically done if you and the buyer are within the same broker-dealer network, if you are trying out a transition to see how it would work, or if you want to maintain some clients through a partial retirement. The final option is a merger with another company. You could stick around and receive a salary, but your company would be taken in by the other practice and someone else would take over every aspect of business management.
An external sale is typically priced off of a trailing 12-month revenue valuation, since you would most likely be selling it to someone who already has an existing business. These sales typically have a down payment and then are paid off after a few years, depending on which option you choose. Other payment structures include payments as a lump sum, a seller financed note or even an earn-out arrangement.
Finding the Right Buyer
If you are going to do an internal sale, you will need to decide which employee is ready and able to take over, ensure they want to buy the practice, and then come to an agreement on the price tag. If this person is not already on your team, you should start looking to hire them so that you have time to prepare them for their future role.
Finding an external buyer may require more research. You could hire a business broker to manage this process for you, or you can reach out to other local planners that may be interested. Then, over time, meet with them and ensure they are the right fit for your clients, with respect to both personality and investing style. In the case of a merger, also consider whether or not this prospective new owner will be compatible with your current employees and business processes.
Finally, negotiate a deal, fill out the required paperwork and officially begin the process of selling your practice.
Managing the Transition
One of the key components of a smooth transition is continual communication with all interested parties including clients, your staff and the new owner. If you are transitioning over a period of several years, it will help to write out the takeover strategy on paper and make it open to review and revision when necessary. Be sure to update this strategy as things progress or if there are any significant changes. When something happens that does not align with your initial plan, people need to know where they stand and how they will be taken care of. The risk of clients leaving – and its associated issues – will decrease significantly the more you communicate.
The Bottom Line
It is irresponsible to run a financial planning practice without a plan for how it will continue after you retire. First sit down and decide what you want from retirement, then find a succession plan that will make your dream retirement a reality while properly ensuring quality service and advice for your clients after you are gone.