Recently, I met for a scheduled coaching session with one of the independent advisors who I support. He has a successful and well-established financial-planning practice. He was concerned with the potential impact on the value of his books of insurance policies and mutual funds should he die or become incapacitated. As Vince Valenti pointed out in a recent article in this blog (Sample Continuity Agreement posted on January 8) , a well thought-out and drafted Continuity Agreement could protect the value of one’s book in the event of one of these contingencies, assuming a willing purchaser can be found. Until such an agreement is put into place, the risk of not realizing full value for years of sweat equity and ingenuity is very significant. Even if a Continuity Agreement can be put into place whereby there is a buyout in the event of death or disability, where will the purchaser come up with the funds to complete the agreement if a triggering event occurs? Insurance would seem to be the obvious answer so let’s take a look at the options.
As with buy/sell agreements between business partners, insurance is regularly used to fund these agreements. However, as an independent advisor, one may not have a business partner that shares profits from a book of business. Could one enter into a Continuity Agreement with a purchaser with whom there is no business relationship? Of course. But would insurers be willing to underwrite life and disability policies on the life of the seller owned by the purchaser? Recent inquiries with the underwriting departments of several major insurers found differing opinions. Some insurers felt that there was sufficient insurable interest in insuring an agreement for otherwise unrelated parties. Others were not comfortable with this approach. It seems that there is a need for advisors to educate and influence some underwriters until they understand and are comfortable with the business reason for insurance funding under these circumstances.
In his article, Vince also suggests that the dealership/MGA might be party to the agreement. One would think that since the advisor is contracted with the dealership/MGA, there would be an insurable interest. The buyer (in this case, the dealership/MGA) would own insurance on the life of the advisor to fund the Continuity Agreement. Again, responses from insurers have varied with some agreeable to insuring such an agreement while others not.
If, for whatever reason, it proves difficult to get a policy underwritten for a Continuity Agreement, consideration could be given to transferring the ownership of an inforce policy on the life of the seller to the buyer who subsequently makes himself/herself the beneficiary. If this is a recently issued policy without cash value, there are not likely to be any significant adverse tax consequences attributed to the seller. However, transferring ownership of a policy that has been inforce for some time or contains significant cash value could trigger a taxable disposition or give rise to policy valuation issues. So careful consideration should be given before doing so.
In the absence of a Continuity Agreement, an independent advisor could simply buy sufficient, life, disability and critical illness insurance to mitigate the potential loss caused by these events occurring. This gives either the advisor or his/her estate options at a time of crisis rather than being forced to sell the book of business at a fire sale price.
As advisors, we encourage business people to use insurance for risk management purposes. Aside from protecting the value of our practices, we should be a model for our business owner clients by implementing these types of insurance solutions for ourselves.
Friday, March 19, 2010
Wednesday, March 10, 2010
Consolidating Two Financial Planning Businesses - The 2nd 100 Day Action Plan
Congratulations, you’ve closed the deal after spending an extensive amount of time, money and energy dealing with legal agreements, bankers and accountants...whew, time to relax, right? Wrong!! It’s now time to begin implementing your second 100 Day Action Plan.
Why is this necessary?
History is littered with many business mergers and acquisitions that have failed due to poor planning after the deal is signed. Many business people will get so involved in “making the deal happen” that they believe everything will automatically fall into place once the contracts are signed. Sadly, this is not the case.
The second 100 day plan is absolutely critical to ensure a successful acquisition. The second 100 day planning should be discussed and mutually agreed to before the deal is closed so that both parties can begin its implementation immediately. This plan should deal with many important matters such as client introductions and transition, employee considerations and office amalgamation.
Your Client Message is Critical
During the initial due diligence, the vendor may have structured his/her clients in A, B, C and D categories. Plan to visit the A, B and C clients together and develop an aggressive strategy to accomplish this. It is important to have a dialogue with each client as quickly as possible.
What will be the main theme of your message to these clients? Rehearse your client message with family members or staff members prior to visiting clients. Clients may be nervous of the new ownership and will want to have assurances that their accounts will not be affected and service levels will at least continue, if not improve. It’s important to have new stationary available for the clients you meet along with any new or relevant marketing materials.
It is important to note any client nervousness or apprehension and develop an action plan on how to deal with it. You may decide that you may need to meet with the client again and provide the client with samples of financial plans and promote the typical quality of work that they can expect from you. You may consider leaving the client with testimonials from other satisfied clients.
Clients may ask the vendor how long the vendor plans to stay in the business. This is a critical question that must be answered carefully. Put yourself in the client’s shoes, would you want to hear that your long trusted advisor is leaving the business? You may consider communicating that you will continue to have access to the vendor for longer than the transition period. Clients may feel encouraged to hear that an agreement has been developed whereby you can ask the vendor to work on a contractual basis if the need should arise.
New stationary – Develop a Co-Brand for Stationary and Newsletters
Consider developing new stationary to show a co-brand of both individual or company names and communicate a sense of a joint venture rather than an out-right purchase. You may want to continue using this stationary even after the vendor’s transition period has expired, with the vendor’s permission.
Employee Management
By now, both parties should have a plan for each of their respective employees. In many cases, the vendor and purchaser may insist on the vendor’s assistant(s) staying on the payroll to help with the transition and to help reassure clients that not everything is changing.
It is very important to keep your employees informed of your plans from the beginning, especially for vendors. Employees can become nervous about their future employment status when their employer is considering a change of ownership. Employees will want to know how they will fit within the new company. Will they have new responsibilities and will they need additional training.
Develop a “To Do” List
Both parties along with their administrators should discuss the various details that will need attention. As an example, will signage need to be changed, offices and staff relocated, new training for staff, changes to existing forms, bank account updates, re-directing commissions and so on.
If you have access to a competent administrator that is able to manage complex projects, you may consider asking this individual to be the transition coordinator and be responsible for planning, tracking and organizing the changes that will have to be done.
In closing, planning, planning and implementation is key to a successful acquisition of another advisor’s book. If you fail to plan, you are planning to fail!
Why is this necessary?
History is littered with many business mergers and acquisitions that have failed due to poor planning after the deal is signed. Many business people will get so involved in “making the deal happen” that they believe everything will automatically fall into place once the contracts are signed. Sadly, this is not the case.
The second 100 day plan is absolutely critical to ensure a successful acquisition. The second 100 day planning should be discussed and mutually agreed to before the deal is closed so that both parties can begin its implementation immediately. This plan should deal with many important matters such as client introductions and transition, employee considerations and office amalgamation.
Your Client Message is Critical
During the initial due diligence, the vendor may have structured his/her clients in A, B, C and D categories. Plan to visit the A, B and C clients together and develop an aggressive strategy to accomplish this. It is important to have a dialogue with each client as quickly as possible.
What will be the main theme of your message to these clients? Rehearse your client message with family members or staff members prior to visiting clients. Clients may be nervous of the new ownership and will want to have assurances that their accounts will not be affected and service levels will at least continue, if not improve. It’s important to have new stationary available for the clients you meet along with any new or relevant marketing materials.
It is important to note any client nervousness or apprehension and develop an action plan on how to deal with it. You may decide that you may need to meet with the client again and provide the client with samples of financial plans and promote the typical quality of work that they can expect from you. You may consider leaving the client with testimonials from other satisfied clients.
Clients may ask the vendor how long the vendor plans to stay in the business. This is a critical question that must be answered carefully. Put yourself in the client’s shoes, would you want to hear that your long trusted advisor is leaving the business? You may consider communicating that you will continue to have access to the vendor for longer than the transition period. Clients may feel encouraged to hear that an agreement has been developed whereby you can ask the vendor to work on a contractual basis if the need should arise.
New stationary – Develop a Co-Brand for Stationary and Newsletters
Consider developing new stationary to show a co-brand of both individual or company names and communicate a sense of a joint venture rather than an out-right purchase. You may want to continue using this stationary even after the vendor’s transition period has expired, with the vendor’s permission.
Employee Management
By now, both parties should have a plan for each of their respective employees. In many cases, the vendor and purchaser may insist on the vendor’s assistant(s) staying on the payroll to help with the transition and to help reassure clients that not everything is changing.
It is very important to keep your employees informed of your plans from the beginning, especially for vendors. Employees can become nervous about their future employment status when their employer is considering a change of ownership. Employees will want to know how they will fit within the new company. Will they have new responsibilities and will they need additional training.
Develop a “To Do” List
Both parties along with their administrators should discuss the various details that will need attention. As an example, will signage need to be changed, offices and staff relocated, new training for staff, changes to existing forms, bank account updates, re-directing commissions and so on.
If you have access to a competent administrator that is able to manage complex projects, you may consider asking this individual to be the transition coordinator and be responsible for planning, tracking and organizing the changes that will have to be done.
In closing, planning, planning and implementation is key to a successful acquisition of another advisor’s book. If you fail to plan, you are planning to fail!
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