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​​by Lewis J. Walker, CFP®; and Maria C. Forbes

The conversation centering on the age wave and the graying of the adviser ranks is growing in urgency. However, terms like succession planning and exit strategies may be turnoff phrases akin to, “Let’s discuss your funeral arrangements.” We must reframe the subject.

When the first class graduated from the College for Financial Planning in 1973, the leading edge of the baby boomer wave was age 27. The pioneers of our profession were entrepreneurial members of the Silent Generation and early-adopter boomers. Many of the first wave of innovative financial planners have died, retired, or in increasing numbers are about to do so. Leading-edge boomers turn age 68 in 2014.

In facing the realities of aging, many boomers are in denial, clinging to images of youth. We all will retire. You may go out the door on a gurney, or you can plan to extract maximum value from the enterprise you have built while serving clients, valued associates, your employees, your family, and your legacy.

We, along with Debra Robinson, an attorney with the Robinson and Miller law firm in Alpharetta, Georgia, delivered a two-hour panel discussion recently for FPA of Georgia. The lively conversation was well received. However, one younger adviser remarked that he saw virtually all older planners in the room. Where were the younger planners, the potential successors, he asked?

Succession and exit planning is not just about mature advisers. Younger planners, especially those seeking a path to ownership in a practice, have a vested interest. The focus should be practice growth and continuity. How does one build and participate in a sustainable and growing business with measureable enterprise value that can be monetized in the event of death, disability, retirement, or withdrawal for whatever reason? 

We know of younger planners who died too soon from accidents or illness. All of us will exit our practices someday, voluntarily or involuntarily. Will you leave a mess and bad feelings? Or will you transition with the satisfaction of a life and career well lived, meeting responsibilities to associates and employees, and fiduciary obligations to clients? 

You can exit your practice in various ways. There’s the unplanned exit—death, disability, regulatory, or legal sanction (generally messy). You could run your practice into the ground, letting your client base melt away as you age (perhaps a violation of fiduciary duty). You could engineer an outright sale, a clean exit with minimal or no ongoing responsibilities. Or you could stay through a transition period with an “earn out.” You may consider an internal succession, subject to the buyer’s ability to raise capital, a process that may be smoother for employees, associates, and clients. 

A merger strategy may foster a stronger combined entity with greater value than might be captured in a deferred payment arrangement or an outright sale. Mergers require a strong operating agreement and a growth incentive plan to increase enterprise value, plus provisions for a subsequent buyout of a senior owner’s interest. A merger may be an opportunity to broaden the demographics of the client base and capitalize on economies of scale to increase profits.

The Human Element in Valuation

Whether you are a buyer or a seller, valuations of ownership interests are a hot topic. Itis the bottom-line profit potential in a book of business that counts, and the extent to which that cash flow is in the future. Sustainable revenues from fees are more valuable than one-time commission revenues. 

The age breakdown of the client base is a factor. A $10,000 income stream from assets under management (AUM) for a 40-year-old client who is accumulating assets is more valuable than the same fee income stream from an 80-year-old client who is withdrawing money in retirement. With older clients, has a connection been made with a potential surviving spouse and/or adult children? Are you merely managing assets, or are you a family resource? The extent to which assets will stay with a firm when a client dies or an adviser departs is a consideration.

Often overlooked in the metrics of valuation is the value of internal human capital. Financial value and the transition of client relationships are not the only elements that constitute a successful succession plan. Relative to building value prior to a transition, consider: Do you have a staff, or do you have a team? 

People drive your business processes and their efforts will make or break your future plan. An understanding of human capital and team dynamics is key to success. The existing team should not necessarily be considered an inherited component of the business transition. Making assumptions about a team’s level of connection to your practice and the alignment of their efforts with your future plan is a dangerous move. 

Does your team or a new blended team share your vision? A fully engaged team is essential to business growth. If the team already is working well as contributors to a shared business vision, you have a good start. But what if you have questions and seek even greater levels of working synergy and performance? 

How will you communicate with a new, blended team moving toward shared goals? A human capital valuation is essential to business growth and sustainability. The evaluation includes both quantitative and qualitative measures of engagement required for success relative to each person’s role in the organization. If these measures are not in place, a pending business transition is not the time to skip a human capital analysis. You may have a road map for operational transition, but do you have a role map?

There are three considerations in the valuation of human capital—position, contribution, and response. Integrating the three will provide a planning perspective to help advisers achieve a complete transition plan. If you have people on your team who you hold in high regard, they are contributors to your growing practice and essential to success—you have a team, not a staff. A lack of understanding about team dynamics is one of the biggest impediments to progress. If advisers will shift their thinking about the people necessary to help transition the practice, the likelihood of success will increase. The frustration of figuring out who does what after the change can be avoided. 

A simple adjustment in thinking about people, their productive efforts, and how they will influence success will help owners understand human capital value in a business valuation. Tools and processes for assessing human strengths are essential to valuing a practice. Team role descriptions outline required skills and experience levels, compatible relational preferences, and instinctive problem-solving strengths. The holistic depth of a role description steers advisers away from an incomplete view of true individual and collective abilities. It replaces job holders and task managers that have only a short-term perspective of company matters with something more comprehensive and accretive to forward-looking shared success.

A Team-Based Transition

As a foundational component, a role description shifts the orientation of assessing human strengths to a view of people as unique contributors to a shared business vision. Now advisers and partners can envision who plays what part in the transition, identify capability gaps, and define the expectations for team member roles in executing the firm’s mission and raison d’être. Once the team is clear about each person’s role and their synergistic strengths validated, a role map outlines the current role and its transition into the future. The empowering result of mapping team roles enables current contributors to transition positively as each member takes part in outlining their future efforts in a new organization. The question, “Who does what?” is answered. Buy-in is achieved.

Unsuccessful engagement of successor candidates can occur when practice owners are attracted to the business framework of another adviser or the camaraderie of similar client relationship models without considering how that may sync up with what is in place now on each side of the equation.

Candidates for succession must be evaluated in much the same way as an existing team. A thorough view of the requirements for success in his or her role will enable effective decision-making by both parties. As owners reach out to peers, associates, and recruiters to identify prospects, expectations can be somewhat vague.

The valuation of a practice from both a financial and human capital aspect requires the usual continuity and succession planning consultants, plus a team development consultant. The latter will connect operational values with the human strengths necessary to successfully implement the future plan.

A well-defined track to managing transition involves more than owners and successors. The entire organization must know why the transition is important to the future and how they will personally influence its success as one body of properly arranged human energy—ensuring that the team will make the leap, and not jump off the train.

Lewis J. Walker, CFP®, is president of Walker Capital Management LLC and Life Transitions Advisors LLC in Peachtree Corners, Georgia.

Maria C. Forbes (​) is a Kolbe™ certified specialist and team performance consultant in Norcross, Georgia.

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