How to Develop a Succession Plan

Selling a book of business can take several years to complete. If you’re thinking of retirement over the next 3 to 5 years, now is the time to start planning your exit strategy.

A written and well planned Succession Plan will help you to ensure that your clients and employees are transitioned to the right person(s) and that you’ll receive the maximum value for one of your most valuable assets.

Take inventory of your objectives- The Early Stages

You’ll have to ask yourself a number of thought provoking questions in order to develop a Succession plan. Let’s start with some of the obvious questions that you’ll want to answer.

What is your succession timeline?

If you would like to be fully retired within 4 years, you have to keep this end date in mind and start planning accordingly. Many vendors often underestimate the time that is necessary to go through each step of the selling and transition process. As an example, the time required to find a suitable buyer, go through the buyer and seller due diligence work and have all of the legal work completed can take 3 to 6 months alone.

How will potential buyers view your business?

You never have a second chance to make a good first impression! When selling a house, a real estate agent would advise the vendors to spruce up the house to give the best possible impression to perspective home buyers. You’ll want to do the same to present your business in the most professional manner to get the most interest and value from potential buyers.

Whether it’s a coat of paint, updating some old and tired looking furniture or having the carpets steam cleaned, start with obvious physical items. Next, you’ll want to put some effort into developing an information folder that would provide serious buyers with an overview of your business and the important facts.

Sign up for our automatic blog updates to receive our upcoming article on Preparing Your Book for Sale.

Prepare your employees for the sale

Ensure that your key employees are aware of your intentions to sell. They will be concerned about their employment status after the sale and you’ll want to give serious thought to how you will answer their questions. Typically, most new owners will want to retain some or all of the key employees. New owners understand that keeping key employees, especially employees that have had extensive client dealings, is important to ensure an efficient transition to a new owner.

Develop a buyer profile?

You’ll want the new owner to share similar philosophies and continue to offer the same level of service that your clients have grown custom to. If a new owner can provide new services and benefits such as income tax preparation, your clients would view this as a positive.

Be prepared to itemize and describe your service offering in your information folder to potential buyers. You may also consider developing a checklist of questions that you’ll want to ask each prospective buyer.

What financial arrangements are you looking for?

Depending on whether you’re selling a corporation or proprietorship, you may need to consult with an accountant to help you establish the best way to sell your business. As well, an accountant can help you do some income forecasting from an income tax point of view.

Prepare your financial statements for potential buyers to view.

Nothing will scare away a potential buyer quicker than messy or aggressive financial reporting. A buyer must be able to easily understand the revenue and expenses that flow through the business. Potential buyers will want to see your financial statements for the past three years and will want to know that all taxes have been paid.

Remove any personal expenses from the business and clean up your financials. Again, you may need to consult with an accounting professional.

Inform your dealer or managing general agent about your plans

Dealers and MGAs are always keen to keep all of the business they have so they would be open to providing helpful information for your plan, suggest potential buyers that fit your criteria and may be able to provide details on available financing options.

Sign up for our Free Blog Updates

We’re planning to include many more helpful articles on Succession planning for financial advisors. Click on our link near the top right hand corner of the screen titled “Free- Click here for regular updates…” and you’ll automatically receive all new blog postings by email.

Good luck

Succession Planning - Will You Ever Retire?

In our travels and discussions with hundreds of financial advisors over the years, we have discovered that many independent financial advisors do not intend to retire from until they are forced to do so. Why is this? Many financial advisors will say that they love the business, love to help people with their financial objectives, and lastly, do not feel that current book valuations properly represent the true value of their business. One advisor once commented, “Why should I sell my book for three times annual gross revenue when I can stay in the business and earn more?” This logic could spell trouble for these advisors and our industry for many reasons.

Competition keeps heating up for Independent Advisors

The main competitors for the typical financial advisor in Canada are the major banking institutions. In recent years, banks have expanded their financial advisory businesses into effective and competitive units that not only retain assets but collect new assets from other sources. As banks continue to grow their business, established financial advisors are happy to just maintain their businesses and this could spell competitive trouble for financial advisors. If you’re not growing, you’re dying!

Clients want their Advisors to Plan too!

Clients of financial advisors, especially the ones that are younger than their advisor, have developed a long and trusted relationship with their advisor and they want to know that their needs will be looked after even after their advisor is no longer able to. A responsible advisor should have a plan that at a minimum would deal with an unexpected death or illness (see our sample Continuity Agreement below).

Selling to an employee or junior advisor

One of the main benefits of being a financial advisor is having so many options when it comes to retirement. You can choose to sell 100% of your business, 80%, 60%, 40% or perhaps you just want to keep a hand full of clients, maintain your self-employed status and have more free time. Once you decide, the most important step to ensure a smooth transition is finding the right person to take over. There is no shortage of buyers out there but finding the right person who compliments you and your business is of utmost importance. You have set the bar with your clients so the person taking over must maintain (or surpass) the level of service you have provided them over the years. Otherwise, they may look for a new advisor and the value of your business decreases.

Colleges and Universities are training future advisors

The number of young people taking business and finance courses in college and university has increased over the last decade. Where they may lack in experience, they make up for in knowledge, strong business and technical skills related to this field. For example, Algonquin College offers a 3 year Business program with a major in Finance that includes the completion of the Canadian Securities Course, all CFP courses and a complimentary membership to Advocis (The Financial Advisors Association of Canada) during the course and for their first year in the business. They are also encouraged to attend the quarterly professional development days at Advocis during their school year which is a great opportunity for them to interact and network with their peers. It is also an opportunity for established advisors to meet potential partners.

Once you find the right person, the secret ingredient to their success is your guidance and mentorship. The best training for a new advisor is to sit in on client appointments with you and discuss the situation after. You cannot learn this from a text book.

You may also consider selling your business to one of your employees. Employees offer huge value because they already have a relationship with your clients and this often helps to make the transition seamless. As well, an easier transition of clients would also make your business more valuable. They know you and how you work, the products, procedures, systems and will probably require minimum training.

Take inventory of your employees skill set

If your employee is not licensed or may need additional training, take a moment to document a list of what the employee must accomplish prior to buying your book.
You may want to consider a training program focused on specific areas like networking, marketing, fact finding, compliance, business planning, financial planning software, and the client interview process. (IPG has a training program like this for new financial advisors which is also available to our affiliated offices).

As a Business Development Manager for Independent Planning Group, my objective is to help established financial advisors meet junior advisors. If you have any questions, please feel free to contact me at jchapman@teamipg.com.

My next discussion will be “Now that you found the right person, what are you options on paying them and how will they purchase your business”?

Next decade's hottest industries? Retirement planning near top

From the Investment News for Financial Advisors.

If you can't work in development of voice-over-Internet protocol, a career in retirement planning may be just the ticket for the coming decade, according to a study by industry and market research firm IBISWorld Inc.

With an estimated cumulative revenue growth of about 134%, the retirement planning industry comes in second on IBISWorld's list of winning industries for 2010 to 2019, right after VoIP. The alternative to traditional telephony, To learn more, click on the link below.

View the Investment News article

The Psychological Impact of Retiring

In a few succession planning discussions I’ve had with advisors, I’ve heard the comment, “maybe I should sell my practice and just retire!” From that comment I’d ask, “So you really want to stop working? Well, no, not really! I’d just like to have more time to enjoy my life while remaining in the business!”

I remember reading a recent Canadian Association of Retired People (CARP) study of the next retirement generation - the boomers – it found that 80% of retirees expect to work at least part-time during some of their retirement years. From that I wonder does retirement no longer mean "not working?" You might want to ask yourself, is retirement an option or a mistake?

Some important things to perhaps ask yourself are you truly ready to retire if your spouse is still working? The sitting at home waiting for your spouse to come home from work might not be your idea of enjoying retirement. Have you also considered the potential changes in your family dynamics? Recently I asked a spouse if she was looking forward to her husband’s retirement, and her reply was “not at all.” “I have my routine and enjoy our time away from each other too, so I’m concerned his retirement will disrupt all that.”

Another question to ask yourself is, will you miss working with your associates? For sure there will be a few you’re looking forward to getting away from, but you’ve spent perhaps 2-3 decades with some outstanding associates and suddenly this association stops. Another associate mentioned that “they used to value my opinion on many things when I was there, but now they don’t even tell me what’s going on anymore.” Will you miss the problem solving and the feeling of making the successes happen?
Think too of the places in the world that your business has taken you! Perhaps as a perk or opportunity that only unfolded because of your business and its success. Will you miss the travel and perks associated with your work? Will you be able to afford these luxuries when you start paying for them with after tax retirement dollars?

Have you considered the things that your practice provides you that you will now have to provide for by yourself? The tax deductible automobile expense, the lunches and private memberships, can you still maintain those in your new “current” lifestyle? Assess the impact of not only loosing your business associates, but if you have to give up your lifestyle associates too, how will that impact your retirement enjoyment?

Have you spent time contemplating what’s next? Listening to recently retired gentlemen saying that he started delivering pizza, not because he needed the income, but because he had to get “out of the house and missed the human interaction work offered, might not be what you wanted your retirement to be. But then again, I hear that Walmart is still hiring greeters!

In summary, there’s several things that you need to take into consideration before deciding to find a successor for your practice. You might want to start with your psychological impact of retiring first. From that each of us will have our own personal meaning of succession planning.

Sample Continuity Agreement for Advisors

As a follow-up to our previous article on Continuity Agreements for financial advisors, we have posted a Sample Continuity Agreement for your review. To access the agreement, click on the link below.
Download the Sample Continuity Agreement

Succession Planning Series – What Happens if you Die Unexpectedly?

Each year, we hear of a financial advisor that has become seriously ill, disabled or has died unexpectedly. When this happens, one of the most valuable assets that an advisor owns (his or her client book) is left unattended and the beneficiaries and/or executors are left scrambling to sell the book, with little or no understanding of the value. With very little up-front planning, situations such as this can be easily avoided.

Financial advisors are so busy educating and helping clients with their own estate planning needs and we sometimes neglect to organize our own affairs. In some cases, advisors believe that their dealer or MGA will take care of everything in the event of a disaster, but this is an irresponsible assumption to make for many reasons.

Upon the death of an advisor, the dealer must immediately assign the clients of the deceased advisor to another advisor to ensure clients continue to be serviced. In most situations, the deceased spouse or beneficiaries will not be licensed and therefore commissions must be put in abeyance until a new owner is found. If the deceased was the main bread winner of the family, this could result in serious income problems for the living family members. To further compound problems for the estate, an executor that is not familiar with our industry’s valuations and practices will be at a significant disadvantage when trying to find a buyer and negotiate a fair price for the book of business.

A Continuity Agreement can help you to avoid these problems

Simply stated, a Continuity Agreement is an agreement that you should set up with another financial advisor and it would provide authority for the other party to step in to service clients and to buy the client book in the event of a sudden illness or death.

A properly drafted Continuity Agreement should be stored with your last Will. This will allow your executor immediate access to the important details, such as; the contact information of the person and the pre-defined price (more on valuations later). The agreement would also list other important contact information such as a dealer or MGA name. Your dealer, MGA and other product providers should also have a copy of the agreement in their files.

Your Dealer and MGA can help

It is imperative that your dealer/MGA is aware of your desire to protect your estate and in some cases, should be a party to the agreement.

Set up temporary income payments to spouses or children

A Continuity Agreement should provide direction to your dealer/MGA on terms to pay your family members or beneficiaries an income while your commissions are in abeyance and pending a new owner taking over the book. You should be prepared to pay your dealer/MGA a fee to offer this benefit.

How do you find an Advisor to take over your book?

If you do not already have a business partner or colleague in mind and cannot easily find an individual that would be suitable to take over your book, you should speak to your dealer/MGA to see if they can help you find a suitable candidate. A dealer/MGA would have a general knowledge of the advisors associated with the firm and may be able to suggest individuals that would match your objectives for a suitable replacement.

Structuring the Deal

There are many ways and options to structure the purchase of an advisor’s book. The purchaser may request that the purchase price be subject to a revenue or asset retention test for the first year of ownership. Clients of the deceased advisor may decide to move their business to a different advisor and this will result in lower revenue levels for the purchaser. This is a common concern among purchasers and can be easily managed if you properly communicate your Continuity Agreement to your clients, particularly your best clients. Your clients will be reassured knowing that you’ve structured your practice with a succession plan.

Payment Structure and Valuations

Consider basing your calculations on actual revenue generated by the client book rather than assets or other methods. Furthermore, the agreement should give direction to your dealer/MGA to release your gross annual revenue figures for the past three years to the purchaser. The purchaser can use the average of your last three years to calculate the final purchase price.

There are many ways to structure the purchase of a client book. One example is:

1. 1.25 to 1.75 times annual gross revenue
2. 0 to 50% of the purchase price as a down payment
3. balance paid in equal installments over a 3 to 7 year period
a. No interest and payments made quarterly


Retention Clause

Let’s assume for this example that a client book has typically generated $100,000 in gross annual revenue and that the purchaser has paid $150,000 with 50% down. The purchaser has also negotiated to pay the remaining $75,000 over a 5 year period with quarterly payments ($3,750) with no interest. After the first year, if the book generates less income than $100,000, here’s how a retention clause could work;

Annual Revenue $75,000 $80,000 $90,000
Selling price (1.5 x) 112,500 120,000 135,000
Less down payment (75,000) (75,000) (75,000)
Less 1st year pymts (15,000) (15,000) ( 15,000)

Balance 22,500 30,000 45,000
New Qrtly payments
for remaining 4 years 1,406 1,875 2,812

Under this example, the purchaser’s quarterly payment would change to reflect the new quarterly payment calculation for the balance of the four remaining years.

Any Plan is Better than No Plan

In closing, do not procrastinate. The first step in any succession plan is to investigate your options. You should develop of a Continuity Agreement, which is relatively easy to do. Protect your loved ones from financial loss and help plan for the unexpected.

If you would like to share any of your experiences on how to develop a Continuity Agreement or valuation formulas, please feel free to comment.