Do your clients know your plans?

Nearly six years ago, I told the readers of my company’s newsletter how the firm would function if I got run over by a beer truck.

Apparently, the editors of InvestmentNews found this openness so odd that they asked me to write a column about it. But why the fuss? Why not put my business succession plan out there for all to see?

Current and prospective clients already knew that I was not immortal, even if I was only 44 at the time. And so they needed to know how the firm I founded would continue to provide their families with tax services, financial advice, estate planning and investment management if I checked out early.

My employees also needed to know. Given the scope and high-end demographic of our practice, I prefer to recruit the brightest people I can get, directly out of college, and have them develop their technical skills after they arrive. I tell applicants to expect to spend about 10 years becoming experienced advisers, comfortable across all of our practice’s disciplines. Could I ask people who are decades younger than I, and talented enough to succeed anywhere, to devote themselves to my company without telling them what happens to them when I’m gone?

Succession planning is about building a business, rather than just leaving it. A business that cannot exist without its current owner has little enterprise value. You do not solve this separate-existence problem merely by incorporating a legal shell. You breathe life into a business by giving customers and the people who serve them a reason to stay after current management is gone.

If you run a business, you already have a succession plan. It might not be one that you like or acknowledge, but it’s there. Popular variants include:

The cornflake model. You intend to go to your office every business day until the morning you land face down in your breakfast cereal. When that happens, your business is over. But so are you.

The central committee model (Beijing-style). Your business operates as a partnership, and a select group of partners selects who enters the partnership, and at what time and price. The select group also selects successor selectors. The process is opaque. Eventually, the selectors will select you to leave, if you have not already retired or died.

Selling out. Your employees or partners, if you have any, do not have what it takes to keep the customers happy without you. Your best chance to maximize value is to sell to an organization that can deliver the greatest satisfaction to, and thus command the most revenue from, the client list you have assembled. You will have only a transitional role in the successor organization; your colleagues may or may not find a professional home there. (I expect my firm to make future acquisitions from sellers in this position.)

Selling in. If your partners and staff are, from the client’s perspective, at least as competent as you are, and if you can work out details of structure, price and financing, this option can be the best for everyone involved. Clients see the least disruption, staff enjoy the greatest opportunity, and you can realize the enterprise value you created. This is the plan I outlined years ago in my newsletter.

Yes, some studies indicate that professionals who sell to employees receive, on average, inferior prices and terms compared with those selling to third parties. But we have to consider whether typical employee-purchasers have technical and management skills that are as strong as those of third-party buyers. Also, do employees have equally efficient legal and financing mechanisms, so they can raise capital to buy the business? A firm’s compensation structure, such as employee bonuses and deferred-comp arrangements, can be designed to support a buyout, especially if planning is done far in advance.

Most importantly, does having, and proclaiming, a “selling in” strategy allow you to attract and retain more talented employees who help you build a bigger, more-profitable business long before succession becomes an issue?

My firm’s business has grown substantially since I first wrote about our succession plans. We had assets under management of about $200 million then; we have about $1.25 billion now. My staff already handles nearly all client work while I run the company.

Clients appreciate our service and they know and trust the people who provide it. This is a succession plan in action. I will try to dodge the beer truck, but if it finds me, we’re ready.

Larry M. Elkin, an accountant and certified financial planner, is president and owner of Palisades Hudson Financial Group LLC, which provides comprehensive fee-only financial planning services from offices in Scarsdale, N.Y., and Fort Lauderdale, Fla.