In the second part of his exit planning series, Phil Billingham examines standard plans made when considering exit from a professional services practice – plans around internal succession.

    Internal succession in terms of an exit strategy is the route that almost all principals hope for. Build the firm, then sell out to the staff and they can then carry on paying him while he travels / plays golf / lies on a beach. I’m sure we all remember Siegfried in ‘All creatures great and small?’

    “The first lesson is to understand what you are selling. Is it the shares in the firm or is it the ongoing income stream?”

    This approach could possibly work - but not all the time unfortunately.

    Let’s look at the positives first. In some cases, an internal succession policy works well because:

    • there is continuity of advice to clients
    • the prospect of being able to ‘buy in’ or take over the firm can encourage younger staff to join and stay with the firm
    • it can be done at a less stressful pace than a traditional sale, reducing stress and disruption to the firm.

    OK, that all sounds great. So what goes wrong? Often, it is the scenario outlined above. How many of you spotted that the principal wants to sell the business twice - the shares in the firm once and then receive the renewals / profit share on an ongoing basis? The sad truth is that even if the staff is willing, there simply are not the profit levels available in most adviser firms to do that.

    The first lesson then, is to understand what you are selling. Is it the shares in the firm or is it the ongoing income stream? In other words, how are you going to get the money out of the company and paid to you in Greece or Tahiti?

    The second problem comes when the principal comes up to retirement and looks around to hand over. The usual complaint is that there is no suitable staff to hand over to – in their opinion. They may be right. But who created that problem? To be fair, many principals have tried to grow successors, only to see them go off and set up on their own, taking clients with them.

    The third problem is actually looking at what there is to sell. Yes, that old chestnut. But if the firm is called ‘John Smith Financial Planning’, and is based on the old model of transactions with a loyal – but to the adviser John Smith - client base, then, bluntly, what is there for someone to buy? Apart from the ten filing cabinets of past clients that the seller is convinced contains the equivalent of gold nuggets. Frankly, if the clients in the cabinets were that good, they would already be being seen on an organised basis, but they aren't.

    So buy ins / succession plans often fail because:

    1. the successor has not been recruited / groomed / retained by the firm
    2. the firm has not been ‘groomed’ to be sold. That means:
      • it is not a limited company – so what do you buy?
      • the only ‘brand’ is the principal – that’s all clients and introducers know
      • the database is, at best, patchy
    3. the ‘successor’ has been treated as an employee and worked on a target – so has not built up value in the firm
    4. the successor is being asked to pay twice. Once for the shares / business / firm and then to pay an ongoing income to the retiring principal
    5. The principal does not actually retire but stays and ‘de-facto’ runs, or tries to run, the firm.

    How do you make them work?

    • Be honest and pragmatic. Are you really going to retire? If not, or not fully, what will your role be? How does the role of ‘chairman’ grab you?
    • Can you give up giving advice? It’s addictive you know. It’s what most principals love. If you are going to ‘run down’ and only look after a few clients, plan for this.
    • Consider handing over to a board, rather than an individual. That way you can be part of the board and discuss things around a table, rather than going head to head over issues that crop up. And they will crop up.

    Role model

    We came across the case below much too late to give meaningful help:

    Fred Bloggs, of Fred Bloggs Financial Planning, wanted to retire. He was 63. He had recruited a younger but qualified adviser, whom we will call Andy, a few years back and saw him as the natural buyer of the firm. There were two other advisers.

    The way Fred saw it, Andy should buy the shares in the firm and then pay Fred a high percentage of the renewals of the firm, for life.

    The way Andy saw it, Fred should retire, allow Andy to acquire his shares and pay for them over three years. He thought a three-year ‘Earn Out’ period to be appropriate.

    Fred saw this offer as Andy buying him out cheaply with his own money. And he was right.

    Andy saw that Fred wanted to pass on all the liabilities and admin and regulatory hassle to Andy and get paid for the firm twice. And he was right as well.

    The result was that Andy left the firm, taking a number of clients and one of the advisers with him.

    Fred sold out to a local firm and actually got a fair deal, based on his limited renewal stream, but remains unhappy with Andy who he blames for ‘messing up’ his plans.

    Andy is frustrated with Fred and cannot see why Fred was, in his words, ‘greedy’.

    Some of the above could have been prevented if we had started on a succession planning strategy earlier. As you should.

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