A large part of many financial service professionals’ practices is
helping clients with business succession planning. Yet only 29% of these
professionals have created a formal practice transition plan for their
own businesses.
In this edition of The Wealth Counselor, we will look at some
of the steps involved in transition planning for a financial service
practice, including when and how to get started, valuing the
practice/business, and the timetable to consider.
This is a topic of particular interest and benefit to all financial
advisors and other professionals who work with, and can assist in
transition planning for, financial advisors. In addition, the general
concepts presented here easily can be adapted to other estate planning
professionals who need to consider their own practice/business
transition planning.
What Is Practice/Business Transfer Planning?
Practice/business transfer planning for the financial advisor creates an
orderly transition of the advisor’s “book of business,” clients and
multidisciplinary relationships to an approved eligible buyer.
If the advisor’s children are not interested in or are not the right
choice to take over the business, it will be necessary to recruit and
develop an individual with characteristics similar to the advisor to be
the advisor’s successor.
Much will depend on the contract the advisor has with the primary
companies he/she deals through or represents. Is the advisor an
independent? Is he/she a captive with outside privileges? Is he/she
restricted to one carrier only? If that is the case, the selling and
buying advisors’ agreements with that carrier must all be aligned;
usually, the carrier will want to approve the buyer and the selling
process (but not the selling price).
Why this Planning Is Important
Often the advisor does not have a vision of “life after practice” or
what might happen to his/her family, employees and clients should he/she
become disabled and unable to work, retire or die suddenly. Advisors
counsel clients on these issues nearly every day, but rarely take the
time to think about the issues for themselves. Succession planning is
just as important for the advisors as it is for clients.
Consider the clients with whom the advisor has developed close
relationships over the years. Who would service them if/when something
happens to their advisor? Will they have to call an 800 number and talk
to someone who doesn’t know them at all? Will they be “assigned” to
someone they don’t know? Ongoing continuous service leads to a continued
relationship; LIMRA studies indicate clients buy financial products
seven times during their lifetime, based on life cycles and style
changes. These relationships are important not just to the existing
advisor, but also to a younger advisor coming into the profession.
Also, the selling advisor has poured his/her life into building the
practice, with an investment of blood, sweat and tears over many years.
Many client and professional relationships have been developed during
this time. Properly introducing and integrating the buying advisor into
the practice can help to preserve these relationships and lead to a
faster and more efficient professional career penetration for the buying
advisor. The selling advisor should prepare marketing materials that
the new person can use immediately to clearly identify the buying
advisor as a part of the team.
Planning ahead for this transfer has advantages for all who are
affected: the advisors, spouses and families, clients, staff, business
associates, and the companies (carriers) with whom the advisor works.
Everyone wins when planning for continued service to existing clients.
Planning Tip:
According to a LIMRA advisor retirement study, advisors are getting
older - the average U.S. life insurance agent’s age is 52, while the
average U.S. worker’s age is 37. Fewer new advisors are coming into this
profession, so the pool of potential buyers is shrinking. The time to
start planning is now, even if the advisor doesn’t plan to retire for
several more years.
Strategy and Preparation
The advisor will need to evaluate strategic alternatives and various
selling strategies that are available. There is no one-size-fits-all
solution that will work for every situation.
There may also need to be some emotional preparation. For example, it
will be necessary to share some revenue with the new advisor, and it is
difficult for some successful producers to give up any of the income
they have worked for years to build. But with no planning, the surviving
spouse (who may not be licensed) would become involved in a crisis
management situation, trying to affect a practice transfer after the
advisor’s death. It is much better to start preparing five to six years
ahead of the target retirement date.
Planning Tip:
Putting the transition strategy into writing will make the process more
real than just thinking or talking about it and will help keep everyone
on track.
Finding a Match
It is critical that the buyer is someone whose personality works with
the seller’s and that they share the same values, beliefs, priorities,
characteristics and focus. If there are no family members to recruit,
prospective buyers often can be found through local meetings of
professional groups. Engage in preliminary discussions with these
prospects, not so much for the possibility of acquiring the business,
but more of character and professional development. Evaluate candidates
by getting to know both the potential buyer and his/her spouse. It can
be very helpful for the selling advisor’s spouse and/or another trusted
advisor to assist with this part of the process and to have several
meetings over time.
When the decision has been made to bring this potential buyer into the
office, the advisor will need to prepare to mentor him/her according to
the “whole person” concept. Not only may the new associate need to learn
prospecting, sales techniques, how to set appointments and manage work
time, but he/she may also need to learn how to balance work, family,
church, learning the business and perhaps even learning an entirely new
profession. Plus, this concept will give the advisor the best chance of
deciding if the potential buyer is really the right choice.
The selling advisor should provide the new associate with an office,
desk, phone and staff (at no charge) and let him/her listen in on
conversations with other professionals. The new associate should be
taken to professional meetings and given assistance to obtain the needed
training and professional designations. Realistic production goals
should be set along the way.
Communicate with clients via a letter of introduction of the new
associate, letting them know that he/she is now on board and can assist
them in the event something happens to the existing advisor. The new
associate should be personally introduced to clients on reviews and
appointments, explaining his/her role.
The selling advisor must have the correct mindset of give and take, and
realize that the time it takes to mentor the new associate is an
investment in the transition process. This relationship is a top
priority.
Planning Tip: The
buyout should not be mentioned too early. The selling advisor will want
to take time to develop the new associate and make sure the buyout is
right for both of them.
The Deal Structure
Conduct a practice valuation to make sure the selling price is fair to
both the buyer and the seller. There are general rules of thumb for
valuing different sorts of practices, but they are just that - general.
Every business is unique and the owner is typically not objective in
determining its value. That’s why it is a good idea to get an objective
opinion of value from a professional business valuator. The purchase
price can then be negotiated from a position of knowledge, and terms and
structure can be discussed and resolved.
Planning Tip:
Consideration should be given to whether this is a practice transfer or
a business transfer. A practice is defined as a sole producer driving
all revenue. A business is defined as having multiple value drivers in
the practice (associate producers, CPA alliances, product specialists)
supporting revenue. If there is enough time (eight to ten years),
consider adding value drivers now and build for the future.
Closing and Implementation
Once the deal has been structured, each side should do their due
diligence. An attorney should prepare the purchase agreement. It should
include a unilateral buy/sell agreement with its performance secured by
life and disability insurance on the buying advisor and its value
secured by life and disability insurance on the selling advisor. Once
all agreement elements are in place, close the deal and begin to
implement the process.
Planning Tip:
Most banks will not finance this kind of sale because there is no
guarantee that clients will stay, and the existing revenue stream could
decrease. It is more likely that the seller will need to finance the
sale, structure an installment note, and be prepared to get back in the
business to protect the investment if that becomes necessary.
Planning Tip: It can be very helpful for the selling advisor to stay on for another year or so to ensure a smooth and successful transition.
Conclusion
While most estate planning professionals are quite familiar with helping
their clients with succession planning, many do not have transition
plans of their own. Much of this newsletter has been written from the
financial advisor/agent perspective; however, the general concept can
easily apply to other disciplines within the community of estate
planning advisors.
The best time to start planning for a practice transfer is a minimum of
five years before a potential transfer. Since none of us knows when we
will die or become disabled, that means now. Start writing a plan.
Define a planned transfer date. Time permitting, add value drivers for
additional revenue now and for the future. Follow and modify the plan as
needed. The financial risks of death or disability of the seller or
buyer can be hedged by a buy/sell agreement funded with life and
disability insurance. And finally, use the multidisciplinary approach
(attorney, valuator, financial advisor, CPA) that we recommend for our
own clients.
To comply with the U.S. Treasury regulations, we must inform you
that (i) any U.S. federal tax advice contained in this newsletter was
not intended or written to be used, and cannot be used, by any person
for the purpose of avoiding U.S. federal tax penalties that may be
imposed on such person and (ii) each taxpayer should seek advice from
their tax adviser based on the taxpayer's particular circumstances.