A conversation with a friend and veteran financial planner has Matt Fogarty contemplating post-FoFA succession planning but one thing remains the same: exiting a business takes almost as much time, effort and consideration as setting up a business from scratch.
“I am happy to sell down my ownership progressively over the next five-to-seven years, but I need people around me who have the same belief, passion and, importantly, cultural values as us. I don’t want to sell to just anyone!” So the conversation went a few weeks ago with a long-time friend and financial planning veteran.
This type of conversation is being played out within practices and dealer groups on a daily basis, and highlights the fact that the strategy of succession planning is as much about good luck as it is good planning. For institutional dealer groups in the new Future of Financial Advice world, the quality, depth and options within their succession solutions will continue to determine their ability to attract new firms to their value proposition.
Once the FoFA dust settles it will be interesting to see how these dealer succession options might evolve, with leasing models, financing arrangements, transition support, partial equity plays and practice mergers all part of the succession puzzle.
Who said leaving was easy?
Planning to exit the business takes almost as much time, effort and consideration as setting up a business from scratch. As someone else said to me the other day, “You should always start your business idea with how you are going to get out.”
This is obviously a high priority if you are in business for the short term, but most owners of financial planning businesses are in it for the long haul and tend to put off succession issues. Their business is their retirement plan – for these people the thinking often is, “When I am ready to get out, I am sure it will be fine”. The reality is, getting out sounds a lot easier than it really is.
A July-8 commentary in The Australian Financial Review (“Finance industry not so easily renovated”) highlighted the current thinking of many planners and the dilemma they face. Many practice principals are saying it’s better to retire gracefully and leave it to the young folk to figure out how to survive in a world without trail commissions. “All sounds perfectly feasible,” the newspaper says, “apart from the leaving bit”.
Personal relationships and resources
The transition risks in succession are significant, especially given the strong personal relationships many planners have with their clients. Dealer groups are well placed to help the succession process but often struggle to supply the required resources.
Market volatility has also ruptured the value of some practices over the last few years and there is also the impact of FoFA, which has led to buyers of financial planning practices being more discerning about what sorts of legacy issues they are acquiring, which in turn is having an impact on how practices are being valued and the types of terms being applied to any deal.
Getting back to my friend: this is an issue that has occupied his mind for the best part of 12 years. He has had a few false starts and a few wins along the way. Despite frustration with the succession planning process, he often comes back to a basic principle which will ring true with many in the profession: “I want my clients to be looked after, and I want the business I have built to continue and be successful.”
Matt Fogarty is national practice development manager at The Encore Group.
Thanks Bill, like many practice management topics succession often gets a run. I couldn’t agree more with your views which i was partly trying to highlight in my friends example…the formulae he got offered was the right number but didn’t meet that third element. My sense is that it is still a highly relevant topic for many planners and they are keen to hear different ideas on how to make their succession plans work.
Terry Dwyer makes a good case for employee buyouts. These are great vehicles. But, in general, they only work in environments where culture of mutual trust exists. And, their value is enhanced only when they are accompanied by participative management practices. Whilst these are commonplace in successful employee owned businesses elsewhere in the world, they are still (sadly) not well practised in this country. So, my point here is this: an employee buyout can deliver the benefits described by Terry Dwyer. But, on their own, they are not sufficient. This means that the context of succession requires significant change in practice and behaviours. Hence, the meshed approach I described below. Without this meshing succession is most likely going to be flawed. Drucker’s observation that “culture eats strategy for breakfast” describes one of the icebergs confronting ownership succession. The other icebergs are hidden by the human condition of all stakeholders.
Actually, incoming buyers who become co-directors can use an employee share plan to help finance an acquisition. There is more flexibility than most people think. All kinds of employees can be, or not be, in an employee share plan, from the newest to the oldest.
Dr Terry Dwyer
Dwyer Lawyers
http://www.dwyerlawyers.com.au
Few business owners seem aware of the commercial advantages of selling their businesses to their valued colleagues/employees through an employee share plan. Goodwill is worth most to those who help generate it. They will often pay more than obtainable by the owner from a trade sale. An employee share plan can help both parties get to yes by easing the financing problem.
Dr Terry Dwyer
Dwyer Lawyers
http://www.dwyerlawyers.com.au
Thanks for an interesting view on succession. Financial planners are not the only ones who face the combined pressures of ageing and disruptive changes to their industry. Having thought, researched and consulted in the succession space now with over 300 client firms I am amused that at this time of the financial year we see repackaged versions of the same story. Succession is hard. Planning is easy. Leaving isn’t. Succession is a holistic journey that meshes the need for process, financial reality, and a number of behavioural elements that underpin the human condition. Practice managers and dealer groups focus on the first two and ignore the third. My doctoral work and in-practice experience (which achieves the meshing of all 3) is proof that an “instrumental” approach to succession is flawed and its solutions are not formula-driven. But, that will remain the approach as will be evidenced by the appearance at the same time next year of a similar bunch of articles.
Bill Hovey
bill.hovey@linchpingroupaustralia.com