A Lender’s View on Succession Planning

The investment advisory industry is dealing with an aging advisor force with an average age above 65. This reality has brought succession planning to the forefront of many discussions.  Advisors are constantly reminded of the need to put their own succession plan in place,yet less than 18% have a written succession plan. There are many benefits to having a succession plan. One benefit not always discussed is the monetary benefit of a succession plan, especially one that uses a phased approach for an internal succession. This approach can be executed with low risk and high returns to both the founding advisor and his or her successor(s), as well as a smoother transition for clients, creating a proverbial win-win situation for all parties.

Using this approach, an advisor can implement a succession plan that transitions the next generation into an ownership position without the need to self-finance the sale of a partial equity interest in the firm.  Furthermore, it can better position the next generation for the buy-out of the owner or retiring advisors as they are given the opportunity to build debt free equity over a period of time.

The days of being required to sell all of the practice at once are a thing of the past. Today there are cash-flow lenders, like ours, that understandthe value of a fee-based/recurring revenue stream produced by advisory businesses with little to no tangible assets.  While many 100% practice sales take place, a phased succession is great option for advisors that are $100MM and larger, have 1 or more owners nearing retirement, and currently employ the future owners of the firm.

Time value of money assumes a dollar in the present is worth more than a dollar in the future, so the historical scenario where sellers self-financed these transactions eliminated the opportunity cost of being able to put that money to work by reinvesting elsewhere.  With cash-flow lenders willing to accommodate internal equity sales, the ability to monetize a portion of your business using a phased approach and internal equity sale can be the ideal solution for those not looking to sell externally. 

Internal equity sales can be a windfall for an advisor(s) looking to transition into retirement over the next few years or as long as 10-plus yearsinto the future.  The idea of a succession plan involving a phased transition is by no means a new idea, but the ability to sell equity in tranches while receiving cashfor the value of that equity, rather than self-financing the deal, is now a readily available solution. 

As we’ve discussed in a previous post, phased successions have become more affordable to junior advisors and often generate greater returns to the owner versus doing a full practice sale. A phased succession also gives clients time to adjust to new leadership and to build a relationship with the successor before the founder(s) finally retire. This leads to a smoother transition for clients and less attrition. Clients who know a practice will continue even after the founder retires are more likely to remain clients, as well as to refer family and friends. This helps stabilize and grow the firm’s value over time. Also, advisors and staff who have an ownership stake in the firm will behave differently, often working harder and creating additional growth opportunities. Again, it creates a positive situation for all involved, and has many upsides compared to a traditional open-market practice sale.

Just as you would recommend and help preserve wealth for your aging clients, the same can be said for preserving some, if not all, of the wealth or value in your business.  An internal equity sale can accomplish the goal of preserving some of this asset value today, while creating additional value in the future.

Contact us today to learn more about financing equity purchases to support your internal succession.

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