Five ways to walk away from your practice

Advisory firm owners have a handful of options when it comes time to walk away from their businesses.

Each option has pros and cons, but most experts agree that the more time an owner is willing to invest in the succession process, the more he or she can expect to earn from the sale of the business.

Here are five ways to exit your practice:

Cultivate a successor

The entrepreneurial adviser who expects to have 20 years to plan his or her exit from the firm can afford to pick a successor. In that time, the owner can hire a crop of young advisers, and train and nurture them within the business, essentially readying them to take over.

In this scenario, the first 10 years are focused on adviser development. The second 10 are spent making sure that someone at the firm can afford to buy the business, said consultant David Selig, chief executive of Advice Dynamic Partners LLC. The process often involves phasing in retirement over a number of years, selling perhaps 5% of the business at a time to an incoming partner.

“This allows for a gradual transition from one generation to the next, and it’s easier on clients,” said David Grau Sr., president of FP Transitions.

As the prospective new owners work their way up through the firm, they have the opportunity to become acquainted with the clients. The owner also benefits from an income stream as the equity parter gradually takes the reins, Mr. Grau said.

Of course, the greatest difficulty of such a strategy is that if an adviser doesn’t have 20 years, there’s no moving the clock back. Also, there always is the risk that something could happen to the person designated to take over the firm, or that he or she decides on a different career path.

Recruit a successor

An adviser who doesn’t have an internal successor — or the time to cultivate one — might be able to recruit one from outside with the aim of having this person eventually take over the firm.

The candidate must be a good fit culturally for the firm’s other key players and employees, as well as its clients. His or her skills should complement the head adviser’s to offer the widest range of services, Mr. Selig said. Over about six or seven years, the owner makes sure that the heir apparent will work out.

Clients see this as an internal transfer of power because they already have a relationship with the new owner when the founder bows out.

“It’s internallike to the client’s eyes, and most won’t see this change as too risky,” said Mark Tibergien, chief executive of Pershing Advisor Solutions LLC.

Importantly, though, advisers should recruit three candidates for every owner who needs to be replaced, he said. Not everyone works out or stays with the firm long term, Mr. Tibergien said.

So though this strategy is easy on clients, it can take quite an investment in personnel to see it through.

Find a buyer

Advisers who haven’t spent much time or energy coming up with a succession plan still can sell their businesses. About a third of advisers end up going this route, according to Mr. Grau.

“If they don’t plan, they sell externally,” he said.

Buyers can include other sole advisers or large advisory firms. Increasingly, private-equity firms and consolidation firms are looking to buy or invest in advisory firms.

It is a seller’s market, according to industry observers. The process, however, can be taxing on the adviser who goes about the sales process alone. Many will interview a seemingly endless supply of potential buyers, Mr. Grau said.

The larger the business, the more important it is to hire outside help such as an investment banker to negotiate the sale, Mr. Tibergien said.

“If you do it on your own, it will be a distraction from the primary business,” he said.

The first step in a sale, which typically takes six to 18 months, is to work on a valuation of the firm and establish a range the owner will accept for the enterprise. Firms that have prepared management and clients for a transition and have established a solid business model for growth will be valued higher, Mr. Tibergien said.

The sales process can be easier for advisers who are affiliated with larger firms because those firms can help identify buyers within the network that will be a good fit for the seller’s clients.

Joni Youngwirth, managing principal for practice management at Commonwealth Financial Network, said that her firm has a team that supports both the buyer and the seller in such transactions, all with an eye on what has to happen administratively for each household and each account, she said.

An external sale can be difficult for clients, who have little or no involvement in the selling process and probably won’t get have much time to get to know a new adviser before the old one departs.

“If you wait too long on succession planning, it reduces your options,” Mr. Tibergien said. “Then you are forced to do a fire sale.”

Merge with another firm

Advisers also can consider merging their firm with another advisory firm as a way to plan for their exit.

In this case, a younger adviser who has been in business for at least five to 10 years and has an established book of business comes into the union essentially using that book as a form of currency, said David Goad, president of Succession Planning Consultants Inc.

With a merger, the junior adviser should have similar business models and management styles but have complementary skills and be about 15 years younger, according to Mr. Grau.

“This isn’t just a change in personalities. Now it’s a value-added,” he said. The younger adviser benefits by joining an established firm and not having to spark that growth alone.

The advisers who join operate under a shareholder agreement for partnerships with benefits on both sides. The original owner can then retire on his or her own timetable, Mr. Selig said. It is even more beneficial if the combined advisers can grow faster than either did independently, he said.

The biggest downside for any sale or merger is that it can be disruptive to clients, according to Mr. Selig. An integrated communications plan is crucial to making sure that clients don’t flee, he said. Also, the original owner probably loses some control as other shareholders gain it.

“They must learn to share until they decide to retire,” Mr. Selig said.

Die with your boots on

A final, unglamorous approach to succession is to “work and die in your boots,” Mr. Selig said.

Some advisers never retire or monetize their business. Not interested in leaving a legacy, their only planning may have been to draft a letter to sent to clients upon their death telling them to go find another adviser, he said.

This approach probably offers the adviser the least paperwork and legal headaches. But it seems a waste to build a business and have nothing to pass on to future generations. And clients aren’t likely to be happy about being left to fend for themselves.

Of course, there may not be many of these firms left. Increasingly, succession planning is important to clients, too.

“Clients are more interested than ever in their adviser’s succession plan,” Mr. Goad said. The recession has helped clients bond with their advisers, and in many cases, clients think about and inquire about what they would do without them.

Client surveys in the past two years at broker-dealers and large advisory firms have shown that clients rank an adviser’s succession plan in the top three of their concerns, Mr. Goad said.

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