Passing the torch without any burns

It is most definitely a fact that a succession plan is the most profitable way to grow or exit a business.

Selling a business is not cut and dry and can greatly impact both you and your clients. The latter, of course, contributes greatly to the value of your practice. Your clients chose you as their adviser initially, so doing the best for them is ultimately the best for your practice.

A succession plan is also a requirement of the Financial Advisory and Intermediary Services Act (FAIS) for this very reason.

Hitting the reset button

Imagine if your clients have to start all over again with a new adviser or firm – all of the paperwork associated with a financial needs analysis and other compliance requirements consumes precious time.

This would be necessary if your practice was sold to someone completely new who has had no introduction into your practice, or interaction with your clients, and could result in your clients opting to go elsewhere.

Instead, your clients should be assured that if you were to leave the practice, perhaps due to retirement or passing away, that they will be well looked after by your successor and that the business processes you have introduced will remain unchanged.

A matter of price

You may value your practice at a certain price, but this will only be relevant if you have an appropriate succession plan in place. Often, buyers rely on the business cash flow to fund the purchase price.

The reality is that you actually require a successor that can bring value to the practice, with adequate funding not being solely dependent on business cash flows. You want someone who your clients will also trust in your absence so that they remain clients of the practice, benefitting from its profitability.

Common mistakes

A common mistake is to delay succession planning until death or attrition of clients. This of course is too late and any clients who remain will most likely leave your practice due to feeling unsupported.

It is also a common misconception that instead of worrying about selling your practice at some point, you can simply leave it to a beneficiary in your will. An advisory practice is a complex asset to run, and cannot just be left to someone to inherit.

Your beneficiary would have to comply with regulatory licensing and qualification requirements to be legally entitled to run the practice. Your beneficiary might also not have the experience to run the practice as effectively as you, resulting in clients not receiving the same service and ultimately leaving. Your beneficiary will then likely have to sell the practice, and usually for a price much lower than it is actually worth.

A succession plan is the best way to mitigate these risks while sustaining the value and running of your practice.

Steps to succession success

• Partner with the right people - You need to integrate qualified business partners, compatible with your business values, who can assure your clients that the practice is still best for them. In this way, it will not all depend solely on you; your clients will trust that they will be in capable hands. You must also ensure your shareholder and or partnership agreements and contracts are water tight so that the business will be transferred successfully to the successor or successors when the time comes.

• A proper back office is key - Client renewal processes run effectively and automatically if your back office is in good working order, with a well-structured administrative team in place. Your clients sustain the practice so client service should be seamless.

There is no time like the present to get your succession plan in place. You don’t know what could happen tomorrow, so it is best to be prepared today.