What is Succession Planning

Add your promotional text...

ARTICLE

What is Succession Planning?

Succession planning means different things to different people. For some, it means listing a business for sale and finding a buyer. Others look for a partner who can join the business and eventually purchase it. Some bring on employees, develop them into junior partners, and ultimately transition the business internally. Still others intend to work for as long as they can, while putting a plan in place for what happens to their clients and business when they are no longer there.

All of these can be good succession plans. But that does not mean any particular one is right for you.

A succession plan is a lot like an estate plan: it should be designed around the particular business, the people involved, and the owner's objectives. Many of the same tools can be used from one plan to another, but the important question is which tools are appropriate for your circumstances.

Succession planning has become a frequent topic in the financial-services industry, particularly as the advisor population ages and firms increasingly focus on continuity, ownership transition and enterprise value. But identifying the problem is the easy part. The more difficult—and more useful—question is how to structure a plan that actually works for a particular advisor and business.

There is no single answer.

Sometimes a particular succession strategy is presented as though it should work for everyone. It may be an excellent solution for certain advisors and businesses, but a poor fit for others. If the only tool you have is a hammer, the whole world begins to look like a nail.

Start With the Objective

Financial professionals already understand this concept.

When you develop a financial plan for a client, you don't begin with the product or solution. You begin by understanding the client—their objectives, income, assets, risk tolerance, time horizon and other relevant circumstances.

Succession planning should work the same way.

Before determining how a succession plan should be structured, you need to understand the business and its owner. That includes revenue and revenue mix, business structure, employees, infrastructure, client demographics, timeline, economics and other relevant considerations.

Most importantly, you need to understand what the owner wants to accomplish—and why.

Different Objectives Require Different Solutions

There are different succession strategies for different circumstances.

The first step is identifying the owner's objectives and determining what type of transition may accomplish them. The next question is whether the business currently has the characteristics necessary to implement that plan—or whether work needs to be done first.

Consider a solo financial advisor who wants an internal succession plan. That strategy may require hiring the right person, developing that individual into a key employee or junior partner, creating appropriate compensation and ownership incentives, building sufficient infrastructure and profitability, and gradually transferring responsibilities and relationships.

That process can take years. In some cases, it can take decades.

An advisor who intends to sell externally faces a different set of issues: valuation, buyer identification, deal structure, financing, tax considerations, client retention, transition responsibilities and the terms of the definitive agreements.

An advisor who intends to continue working indefinitely may have a different immediate priority altogether: creating a strong continuity plan so clients, employees and family members know what happens if the advisor dies or becomes disabled unexpectedly.

None of these approaches is inherently the “right” succession plan.

The right structure depends on the business and the objectives of its owner.

Succession Planning Is a Process

A good succession plan is rarely a document that gets drafted once and placed on a shelf. Businesses change. Revenue changes. Employees come and go. Potential successors develop—or don't. Owners' goals change. Valuations change. Life changes.

Succession planning should therefore be viewed as a process rather than an event.

The earlier an owner identifies the desired outcome, the more time there is to build the business, people, economics and legal structure necessary to achieve it.

And even when the ultimate transition may be years away, continuity planning can protect the business, its clients and the owner's family in the meantime.

The important thing is to begin with the objective rather than the solution.

Understand what you want. Understand the business you have today. Then build the path between the two.