Resale value can be found in planners’ existing strengths

Witha number of financial planners rapidly approaching their own retirement, succession planning has become a hot topic in the industry. The commonly held view is that planners should prepare for their exit by developing their replacement within the firm.

This is easier said than done for the small planning firms with limited resources. Unless the trainee planner has a genuine ‘feel’ for small business, it can be a costly exercise to employ a trainee, who eventually takes away the skills and knowledge, seeking a career path in a larger corporation. Sometimes, the trainee themselves aren’t aware at the start of their employment that this is the direction they will ultimately want to take.

Another view that is accepted in the industry is that focusing on the high-net-worth clients to increase the practice’s funds under management is the best way to increase the sale value of the practice. But with the increasing number of older planners looking towards their own retirement in the coming decade, the question is “are there enough high-net-worth clients to go around?”

For a smaller, mature practice where the practitioner has not focused on a niche market such as high-net-worth clients — professionals, self-managed super funds and so on — it may not be so easy to change the culture of the practice, particularly at this late stage purely in order to target specific groups in preparation for the sale of the practice. Often a practitioner may have been successful because they haven’t targeted any special group of clients.

So what alternative does the smaller practice or practitioner have?

Perhaps the sensible thing to do is to walk in the shoes of the potential buyer? Why would this buyer want to purchase this particular practice? It may be foolhardy to assume that the buyer will pay top dollar on the basis of a multiple of funds under management. What guarantee does the buyer have that all of those funds will remain with the new practitioner? There must be more to offer a potential buyer than the recurring income stream.

Rather than changing the focus of the practice to bring in more wealthy clients, practitioners may find it more worthwhile to consolidate the existing client base and operational processes to build value within the practice itself.

For example, if a buyer can feel reasonably sure that a very high percentage of funds under management will be retained in the practice and clients will be comfortable with the changeover and therefore less likely to move advisers and the buyer doesn’t need to ‘re-engineer’ the practice, then the buyer can satisfy their own due diligence requirements prior to purchase. And the buyer can also identify and justify what they are getting for their money.

Essentially, it all comes back to the quality of the client base and the quality of the practice, because a successful sale can collapse in a heap if there is a mass exit of clients. And that can happen if the practitioner has not taken steps to manage the sale process, if they have selected a buyer who does not fit their clients, or if the buyer experiences buyer remorse when they find they didn’t get what they thought they had paid for.

The practitioner can start then, by establishing a pre-progressive and post-sale game plan. This includes getting the practice into good shape with systems and compliance, preparing a strategy for targeting suitable purchasers, setting a realistic and fair value on the practice, preparing staff, having a plan to lead clients through the process, and stay around to help the new owner bed the practice down.

While all parties may have to compromise somewhere, aim for a win-win-win-win process, where the practitioner, buyer, staff and the clients all win.

Maureen O’Brien is a financialplanner who sold her own business earlier this year.