Succession Planning: The Equity Equation

Monday, May 03, 2010 11:56
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Succession Planning: The Equity Equation

Tags: broker-dealers | investing

I’m in the business of succession planning. When I say that to an advisor, the typical and quick response is, “I’m not ready to sell my business yet.” And my equally quick response is, “I know.” 

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Since founding FP Transitions over ten years ago and helping over 5,000 advisors with their succession plans, I’ve learned a few important lessons: 1) Succession planning isn’t about selling your practice. Succession planning is about building a business of enduring and transferable value; 2) There is no traditional retirement age or retirement plan, or standard retirement strategy for advisors or their broker-dealers or custodians to effectively plan for – that is why it is such a challenging process for all of the stakeholders involved, and; 3) Practice equity has steadily grown into the single, largest, most valuable asset most advisors own – protecting and realizing that value is imperative. 
 
Most advisors do not understand and have never experienced the mechanics of accurately determining their practice value. Of the 1,200 practices valued by FP Transitions between 2007 and mid 2009, only 18 had previously had their practices formally valued by a professional, even though these practice owners had an average value of about $1 million and an average age of 53, with close to 20 years in the industry. As a result, it is understandable that the focus of most advisors as they consider their retirement options is on the monthly cash flow from the business, and the length of time that cash flow or compensation can be enjoyed. 
 
For independent advisors, the retirement process has always been about control, convenience, and compensation. As small business owners, advisors can work as much or as little as they like, and can scale back operations to an income level and work level that they alone deem appropriate and necessary to support their lifestyle. While this approach maintains the status quo in terms of control and compensation, it unnecessarily exchanges the equity value of a practice for the monthly/annual compensation that it generates. From the clients’ perspective, especially those served by a small business of just one or two owners, it leaves their future, and that of their children and grandchildren, in someone else’s hands. 
 
There is a better way – a new practice management/succession planning process that is rapidly growing in popularity called “equity management.” I’ll explain how this process works and why it matters to you in my subsequent blog postings. Learning to professionally manage the equity in your practice, whether you’re a sole practitioner or one of five partners, is, quite simply, the most important step you can take as an independent business owner.   As you’ll learn in the course of these postings, succession planning is a powerful business building tool that can help you work smarter, not harder, and build better value and compensation, all while making sure that your clients’ needs are looked after for generations to come.  
 
Thanks for listening.

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