Succession planning, Aussie style

Regardless of differences in regulation, compensation or specific products, there is one issue that unites financial advisers around the world: succession planning.

Whether here or abroad, the adviser community continues to gray, and succession is becoming more and more pressing.

As advisers seek to realize the capital value of their practice, they are asking themselves the same key questions: Should they seek to exit now or later? How can they assure an equitable price for their business? Who will acquire it?

For whatever reason, U.S. advisers have been slower to do serious succession planning than many of their peers around the world. Fully 85% of U.S. practices don’t have a written succession plan in place.

Perhaps some of the lessons learned by Australian advisers, many of whom have successfully addressed succession issues as a result of regulatory changes that prompted better business management practices, would be helpful.

Here are the five major components of successful succession planning in Australia; most could be implemented immediately in the U.S.

Start before the need arises. Without doubt, the single-most-important element in a successful exit is early planning. In fact, planning should start well before the need arises.

Ironically, concentrating on an exit and what it will take to ensure an optimal payout leads owners to review their internal systems and processes, make necessary improvements and put it all in writing.

Our research in the U.S. has found that practices with an effective succession plan in place achieve a 62% higher level of revenue per principal than those without a plan in place.

Document the plan. Every practice should have a documented agreement covering the four key events that trigger succession: the death, disability, retirement or resignation of one of the owners.

The succession scenario for each of these events must be openly and honestly discussed by the owners. After agreement is reached, it must be fully documented.

The agreement should address how the exiting owner’s share is to be handled, including whether it is to be offered to the remaining owners first; how the owner’s family will be treated; how the business will be valued; the time frame for any payments to be made or shares transferred; and procedures in the event of a dispute.

The plan itself should involve input from a legal expert during the drafting stage, as the cost of getting this wrong can be enormous.

Don’t assume. Many owners assume that they have an automatic succession plan in place because their son or daughter works in the business. Recent research has shown that adult children often have no desire to follow in their parent’s footsteps in the advisory business, a fact that the parents may not know.

Similarly, if someone other than a child is intended to be the purchaser, make sure that’s actually the case by asking him or her to confirm an intent to purchase your share of the business.

Communicate clearly. Transparency on your part instills confidence that there is a clearly thought-out plan in place for the future of the business.

Having a succession plan that you talk about openly translates into clients’ being more likely to stay with your firm and refer their friends and family. And it encourages staff retention and assures alliance partners such as attorneys and accountants that they can still refer clients to you with confidence.

Money. The key question is how the remaining owners can secure the necessary funds to buy out the exiting partner’s share.

The business can protect itself from an unexpected event such as death or disability through appropriate insurance. To overcome significant differences in the cost of the insurance where the owners are unwilling to pay the premium jointly — due to age or health issues, for example — consider the business itself funding the cost and accruing it as a debt owed to the business.

Although an owner’s retirement is foreseeable and can be planned for, finding the necessary dollars to pay out at the time may still prove a challenge. If the remaining owners don’t have sufficient personal assets that are available at the time of the stipulated payout, a visit to the bank may become necessary.

Regular contact with your bank manager, with updates on the development of your practice, will give him or her confidence and help to prepare the way if you need to seek a financing arrangement.

Rod Bertino is a partner and director of Business Health Pty Ltd., an international consulting firm specializing in financial services.