It’s never too early to get started on a succession plan

Kate Cowling


August 24, 2017


For many financial advice businesses, the challenges of servicing clients, keeping staff happy, managing compliance and continued evolution and education mean succession planning is relegated to the “future goal” pile.

The rationale for keeping the exit plan at a distance is simple: why think about something that is years or even decades away, when the market is changing so rapidly that any succession work you’ve done may have to be redone when it’s time to move on? With constant technological change, incoming professional standards and the chance that successors – whether they be individuals or other businesses – won’t wait until the timing is right, the succession-can-wait attitude is understandable.

It’s not something unique to financial advice, either. Research conducted by Heidrick and Struggles at Stanford University found half of businesses were not preparing a successor, while a third could not think of a single viable candidate.

That is concerning in the context of research closer to home that shows just how long those with experience of succession planning believe it takes to pull off. Two-thirds of surveyed business owners believe it takes at least two years to implement a succession plan, while a quarter believe it takes five years, according to a survey of 2000 business owners by RSM research. The perception of time varied depending on where the successor was coming from. For instance, if it was a complete outsider, respondents believed it would take longer than it would if the successor was within the business already – such as an employee or family member – with knowledge of the clients and culture.

However, only one in three financial advisories have a documented succession plan in place, according to Business Health and knowITdigital, which run research into the health of financial advice firms based on a number of factors like profitability and adaptation to change.

“Only 30 per cent of firms have some form of documented succession plan, and less than half of these have not yet identified a potential successor, let alone agreed any terms or time frames,” said Terry Bell, principal of Business Health.

Bell said this was surprising at a time of rapid change, with the emergence of fintech, the increasing moves to independent advice models and competitive pressures.

The proverbial elephant in the room is the fact businesses with ageing CEOs or principals could be heavily affected by unforeseen circumstances, such as illness – personal or family – or even death.

Magnus Yoshikawa, director of Jadeja Partners, who connects professionals with like-minded businesses with a view to succession, said he has seen the consequences of the above scenario many times.

An unexpected event can put a business in an extended holding pattern, he said, “and often, unfortunately, vultures will start circling around your clients”.

One factor businesses often don’t consider is the impact of one business partner taking extended leave. Yoshikawa has seen this many times in recent years with business partners suffering from mental health problems. As they get better, the firm’s value may erode because that partner held so much unshared knowledge and expertise.

In an uncertain world, his view is that professionals need to have an identified successor, along with clear and ready access to metrics on the value of their business.

At Professional Planner and the Financial Planning Association’s recent Best Practice Forum in Melbourne, Tony McDonald, director of T&C Consulting, stressed businesses should be keeping spreadsheets with their cash flow at the ready. His view is wealth businesses need to be ready to sell tomorrow if the right buyer emerges.

Chris Wrightson, chief executive of Centurion Market Makers, agreed there was consistent demand from prospective buyers for both financial and non-financial information, which includes client segmentation data, sales history and referral sources and frequency.

What’s in a name?

Succession planning, as a concept, means different things for different businesses and identifying the source of succession early will have a significant impact on how the plan is executed.

For example, for some a succession plan is transferring ownership from one party to the next via complete or partial sales (selling equity). In this scenario, parties need to consider the tax implications, such as how the assets are valued, trust structures or gifting, if it’s a family member involved, and capital gains tax.

If you’re disposing of a business, the Australian Tax Office expects you to keep evidence of each stage of the transaction, including the initial valuation, contracts, minutes of meetings about why and how the business was sold and a position paper or specialist advice documentation about the specific tax position you took and your reasoning.

The other definition of succession planning involves one leader passing the baton to another and then either exiting entirely or staying in the business in a reduced capacity. For example, if you’re the chief executive of your advisory, it means grooming someone over a period of years to take over and continue your legacy and carve out a new vision for the company. Succession, in this instance, involves a different set of considerations, including how staff and shareholders will adapt to the change of leadership.

According to the RSM research, a loss of vision or strategy was the second most prominent concern from business owners when considering succession.

The most prominent concern is the potential loss of sales value.

“The approach you take to succession will change or affect the valuation and the price you achieve,” Wrightson said.

The valuation game

The valuation metric that often gets quoted for financial planning businesses is somewhere between two and 2.5 times recurring revenue, but Wrightson said the variance can be significant depending on factors such as the quality and profitability of the firm, market demand and scale and the exit strategy used.

“There’s a huge variance in multiples being paid for practices and shareholdings in the industry,” he said and stressed that cited valuations may be invalid if they differ from the structure of your firm’s chosen sale method.

For example, the most common statistics cited may be for full sales, whereas the most common transactions Wrightson has seen involve a co-location of one firm to another.

At a granular level, he said he’d witnessed partial client book sales of C and D clients at two to 2.6 times recurring revenue this year, versus financial planning practices that are sold and co-located with the buyer’s practice at 2.6 to 3.2 times recurring revenue. Meanwhile, a large standalone financial planning practice could go for as much as five to seven times EBIT.

“The ambiguity that’s created is that the buyers aren’t valuing recurring revenue,” he said. “Buyers, as we all know, are valuing the amount of profit they’re going to generate from buying this asset and owning this asset. The more profit they’re going to make from buying an asset, the higher the purchase price they’re willing to offer.”

One of the factors owners often don’t give enough weight to is the impact a buyer’s personal circumstances will have on how much they are willing to pay, which is another reason generalisation can be difficult.

Yoshikawa, who began his business advising accounting firms before branching into financial advice as well, due to the convergence of the industries, has seen a decline in the value being offered for advice businesses due to perceptions of how the growing compliance burden will affect future profitability.

While there is no silver bullet for managing compliance, businesses that can demonstrate a systemised approach may be more attractive to buyers.

For McDonald, the question of valuation must move beyond recurring revenue because ultimately buyers are looking to purchase future cash flow.

“I think there is emerging particularly now, a great sophistication about how to value wealth management businesses drawing on some of the science that’s in valuing industrials and that’s all in MVPs (early release), discounted cash flows and applying those kinds of standards to the wealth management industry,” he said.

“I think where we got a little bit lost is when recurring revenue became sacrosanct and I think that did us all a bit of a disservice to be brutally honest. I think we need to go back to MVPs, discounted cash flows and then recurring revenue.”

Think like a buyer

While it may be hard to generalise about the value your business may attract, there are certain things you can do as an owner or leader to make your business more attractive, much of which involves thinking about what a buyer would want in a market characterised by change and compliance.

In addition to profit, a buyer will want to know how sustainable your business model is, how likely it is to be usurped or fractured and whether there is potential to make more, either through cost saving or branching out into new areas, McDonald said. They’ll also likely ask what is different about your business compared to your competitors.

“It’s all very well in 2017 making a lot of dough, but if the buyer doesn’t think your dough is going to be there tomorrow, there’ll be a substantial discount to your valuation,” he said.

One thing advisories can do to ensure their business model is both sustainable and attractive to a buyer is “corporatising” relationships with clients, which means having client trust and loyalty as well as robust systems and paperwork.

“Those client relationships are what’s generating the cash,” he said.

Succession in a professional world

Beyond the financial factors that tend to dominate discussions about succession planning, it would be safe to assume Professional Planner readers would be driven by a number of non-monetary factors.

If you’ve spent the past few years or decades building a business with a strong value proposition and genuine desire to improve the lives of your clients – as many true professionals do – you are unlikely to want to sell your business, your clients and even your name to someone who may tarnish your legacy. That’s true for professionals even at an optimal price, McDonald said.

He refers to the “coffee test”, where prospective buyers have to be able to prove to you over a coffee that they have the right attributes to make them worthy of your business.

“[I’ve] walked away from coffee with a potential seller with the best P and Ls because the chemistry and the culture was wrong,” he said. “It just wouldn’t have worked.”

Do you have a succession plan in place? Take our poll at

TOPICS:   Best Practice Forum,  Business Health,  Centurion Market Makers,  Chris Wrightson,  Jadeja Partners,  Magnus Yoshikawa,  succession,  Succession Planning,  T&C Consulting,  Terry Bell,  Tony McDonald,  valuing an advice business

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