Why Ignoring Succession Planning Could Cost You Millions
You’ve built a successful RIA and created value for your clients. But have you considered what happens to your firm when you retire or can no longer work? Believe it or not, many business owners are not prepared.
In this article, we will discuss the following:
One of our ADP clients, Lynn Ballou – managing partner of Ballou Plum Wealth Advisors, which sold to EP Wealth Advisors – explained that she was thrust into succession planning because her business partner, who was a few years older than her, simply didn’t want to work anymore. “She had been saying that for five years and I was saying ‘eh, it will all be fine.’ But then she threatened to take vacation days seven days a week, ha ha!”
Lynn said she believed that she would just buy her partner out. “But what shocked me, was what our company was worth. It was a good shock. It made me realize – why would I, in my 60’s, spend millions of dollars of my own money, not knowing how the market’s going to do or how my health is going to go? That’s nuts. I don’t want to take on that kind of risk. And it was obvious: we need a succession solution.”
Lynn’s experience is common in our industry. CEOs and managing directors love their jobs. Thoughts of retirement and not running their company anymore? Those are questions to answer tomorrow. Yet, in their recent Report on the State of Succession Planning in 2023, Sigma Assessment Systems Inc.’s data shows that many leaders underestimate the value of succession planning. For example, almost 50% think succession planning has operational benefits but no financial benefits.
Protecting & Enhancing Enterprise Value
Although it can be difficult to motivate and plan for the end of something when we are living within its present glory, succession planning is critical to the growth of your RIA. It isn’t just about building a legacy you can be proud of, it’s also about protecting and even increasing your RIA’s enterprise value — to benefit you of course, but also your staff, your clients, your family, and other key stakeholders.
Below, with more terrific insights from Lynn Ballou, I outline how the right succession plan can help retain talent and clients. I discuss how the buyer you may be expecting may not be the buyer you get – and why that’s a good thing, and finally why the right M&A advisory partner is key to a successful transition plan.
“I don’t believe in 5-year plans. The world is moving too fast,” Lynn told us. “You build an A++ business with the best team, and then when it is time to get to this point of sale, you’ll be ready. It’s so important to have a succession plan.”
Succession Plan to Retain Talent
A succession plan sounds like an ending, but it can actually create long-term continuity for staff. When your employees know the future business strategy of your RIA, and understand how their careers fit in with growth, they will likely be more motivated to stay with your firm.
Talent retention also makes your RIA more attractive to potential buyers. As Sigma says in their report, “Without a defined succession plan in place, a vacancy to a critical role can create confusion and be a massive risk to an organization’s stability.”
Many M&A deals include a percentage of the total paid up front and the remaining paid 3-5 years after the initial transaction date. Buyers pay a higher premium when they are more secure in the long-term value they are getting with a partnership.
When Lynn and her partner sold her firm, for example, they gave a good payout to employees. Partly because she knew their employees truly helped them build their company from the ground up, but also because management wanted to ensure they retained clients, “and retaining staff was the best strategy for that.”
Succession Plan to Retain Clients
When strategizing on succession, a lot of work will be done to understand your client mix. Not just for proper valuation, but to consider how your critical high net-worth individuals and institutions will react when their trusted advisers merge with, acquire or sell to a new firm. Understanding your clients’ potential future needs and expectations is harder when you are unclear about how you will support your clients for the long run.
“I call it the ‘friends at the supermarket’ issue,” said Lynn, about when her firm was acquired. “Because I live in the same community where I work, a lot of my clients are neighbors and if I run into them in the vegetable department, and I’ve done them wrong by leaving them in bad hands, that’s really terrible. That’s the legacy. Do you feel you did everything in your power to find a fantastic, next-step solution for your clients.”
In fact, many RIA owners may assume that looking for the right buyer or partner starts with finding the right cultural fit, but Lynn recommends going deeper than that. Ballou and Plum had an initial deal almost completed, but they canceled at the 11th hour because they learned about activities surrounding a previous deal of the buyer’s that they didn’t agree with.
“People say they’re looking for a cultural match, and I’m not going to disagree with that,” said Lynn. “But culture is what culture is – one day you are all wearing surfer shorts to work or taking the staff to Starbucks or whatever it is… For us, it’s about an integrity match. Integrity is everything.”
Who Will Take Over the Business May Surprise You
Succession planning isn’t boilerplate nor is it cookie-cutter. While common approaches exist, the right M&A advisor with years of experience will help you understand all the potential succession paths to help you achieve your goals.
And what you think may be the obvious succession path forward may not be.
When Lynn and her partner were initially planning the future business strategy, they expected G2 and other employees would want in. “We had wonderful and exceptional people, honestly the best in the business, why wouldn’t they want to buy us out? We loved them. But — they didn’t want to own a business together.”
Lynn told me the story of an RIA owner who didn’t start succession planning early, assuming they would simply sell to their employees. Yet, when the time came for the owner to step down, the employees couldn’t afford to pay what the business was worth. And the owner was forced to essentially give it away.
“It can be stunning that employees don’t want to buy, or can’t afford to buy, but there all sorts of reasons,” said Lynn. “They may not see this as their long-term career or perhaps they know they will be moving their families to a new city down the line.”
When it comes to assuming G2 wants to take over your business, Lynn says she learned a valuable lesson from one of her many mentors: “Don’t even consider an internal succession plan unless someone on your team has taken the initiative to approach you. If someone doesn’t come up to you and really want it, don’t even pursue it.”
When you work with us at Advice Dynamics Partners, we discuss a range of ways to do succession, including internal succession, selling your firm, buying another firm, and merging with another firm. There are many options, and they are not mutually exclusive. Although your employees may not want, nor may not be able to afford to buy your firm, there are deal structures to ensure you get what your firm is worth, and your employees are adequately compensated. We will leave no hybrid approach unturned.
“We were saying ‘we can’t do this anymore…we don’t want to sell, we don’t want the hassle, we don’t want the liability.’ But ADP hadn’t given up on us. They met a firm that they really believed was the partner we were looking for.”
Building a Legacy Takes the Right M&A Advisor
A succession plan for your RIA is similar to creating a trust for your personal life. Your RIA is your biggest asset, and you need a plan to protect it. Still, many advisors think the succession plan journey will be turbulent and long. We believe the right advisory and transition planning firm can make it a smooth ride.
With Ballou and Plum, Lynn and her partner, were on the path with us (Advice Dynamics Partners) to find the right partner for a long time. As mentioned above, a potential deal didn’t go through, and at one point we had had serious discussions with 23 firms.
“At that point, a lot of us would say, ‘I’m just going to die with my boots on…’” says Lynn. “And that’s where we were. We were saying ‘we can’t do this anymore, we’ll just shut down, people will find another advisory firm, or we’ll refer them to another. We don’t want to sell, we don’t want the hassle, we don’t want the liability.’ But Advice Dynamics Partners (ADP) hadn’t given up on us. They met a firm that they really believed was the partner we were looking for.”
ADP has helped many RIAs find common ground and achieve their goals. We are masters at navigating the storms and ensuring management alignment around goals. As Lynn so kindly said about the deal with EP Wealth Management, “David didn’t give up on us, even though we almost gave up on him. That is the sign of a great partner.”
Conclusion
“I don’t believe in 5-year plans. The world is moving too fast,” Lynn told us. “You build an A++ business with the best team, and then when it is time to get to this point of sale, you’ll be ready. It’s so important to have a succession plan. It helped us to clean up the business, and when we started our transition, we had our act together.”
At Advice Dynamics Partners, we specialize in succession planning – specifically in M&A advisory, valuation services, and transition planning for RIAs, wealth, and asset managers. Although succession planning may seem like a maze of information to wade through, and loads of hurdles to jump, we will find the right path forward for you and your RIA.
Contact us today to learn how our experienced staff can help you create the right transition plan that will protect and enhance the enterprise value of your firm.
This article was written by David Selig, founder and CEO of Advice Dynamics Partners. David has over twenty years of experience in M&A, management consulting and financial services. He serves as a champion and advocate for Advice Dynamics’ clients, as he shepherds them through their complex transactions.