The Financial Upside of Succession Planning

M&A professionals suggest beginning succession planning at least 10 years ahead of transitioning a practice but only 6% of advisors are doing so according to a recent study commissioned by by NFP Advisor Services Group and produced by AITE Group.  Moreover, 42% of advisors who are within 2 years of transitioning their practice lack a transition plan.

In addition to the practice owner, succession planning benefits the advisors who take over the practices and clients who can feel torn by the transition to new advisors; and the earlier succession planning is done, the better it is for all parties.  Owners who view succession planning as a long-term process can minimize the pain and maximize the gain they achieve when they finally leave their business.

Advisors have unrealistic expectations about how long it takes to implement a succession plan.  Nearly 70% of respondents said it takes five years or less.  M&A experts say it takes 10 years to plan a successful transition as things can go wrong or take longer than expected.

Reliable earnings and client retention are key factors in practice valuation and not AUM as most advisors think.  Advisors can increase the value of their firm by paying attention to time, client retention and earnings before interest, taxes and appreciation (EBITA).  The more time there is before your transition, the more influence you can have over your firm’s valuation.  If your client retention rate is not high, buyers will cut your price.  Firms can improve their bottom line by increasing revenue and reducing expenses.  One good way to do this is by improving the firm’s technology efficiency.  Another method is putting contracts in place to help to retain key employees.

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