Successful succession planning
One of the big challenges I see for financial planning practice owners this year will be business succession planning.
Growth through practice acquisition has become a cornerstone strategy for some dealer groups through approaches like equity partnership models, but is still an evolving area of ‘test and learn’.
Succession planning has the potential to reinvigorate older practices with new youth, but achieving cultural alignment between buyer and seller takes time, skill and real-world experience, rather than being formulaic.
It’s a complex process which requires advisers to seek the right expertise in multi-faceted capabilities covering strategic planning, advice on pre-exit business improvement, acquirer/successor identification, funding solutions and transaction support. There are licensees with professional teams who can provide succession solutions for practices who might not have the skills internally.
But don’t keep your succession plan a secret. A well thought-out succession plan is a long-term process that takes time, effort and money.
Here are some critical considerations for practice owners to ask themselves:
- What is my ‘why, what and how’ for doing this?
- Be clear about why you want to acquire or exit a business, and what you need to be successful.
Determine how you’re going to achieve that objective by looking at:
- Prospect criteria. Acquiring the right business is the key to acquisition success.
- Your target should fit into your overall strategic vision, adding value to your business.
- Determine what this business looks like, and to find it, develop your prospect criteria.
- The same approach should be applied to finding a suitable successor.
- Skills. Determine what skills you need to be successful (should you up-skill or outsource to professionals?)
- Cultural fit. Assess the cultural fit of your prospect. Understand whether you like the seller or buyer of the business, and if you’ll work well together while negotiating a deal and implementing a transition.
Plan succession early
Business succession transactions need to be enacted at least five years before a principal wants to retire. However, most planners don’t have a succession plan. For planners nearing the final years of their career, they will need to accelerate their approach because they have misjudged the time involved in planning and transitioning into a deal. Likewise, young advisers often underestimate the time and capital needed to buy or sell a business.
Are generations seeing eye to eye?
Interestingly, I see more succession plans being initiated by younger advisers as a result of Future of Financial Advice (FOFA) reforms. For instance, as the new FOFA regulations aim to create consistency in advice processes and systems in the financial planning sector, lots of younger Gen X advisers are meeting more than ever with the older generation of Baby Boomer owners.
Most transactions are occurring between these two generations, because their values are close enough to allow most deals to happen smoothly between these two camps. Gen X also has the time and respect for seasoned Boomers who helped form the industry many years ago.
Do your due diligence
Due diligence serves to confirm all material facts in regards to a transaction and if the process provides new insights along the way, don’t be afraid to renegotiate the transaction.
Buyers also need to consider the following list as sacred when venturing into an acquisition or succession:
- Buyers should create a bespoke due diligence checklist, as each transaction is unique.
- Records must be accurate, up-to-date, and impressive. Sellers should be open about all aspects of the business that might affect the sale, otherwise, once the real facts are revealed during the due diligence (as they will be), the sale may be lost.
- Experience always counts, but if it’s your first transaction, take time to make sure you’re aware of everything you need to know.
The impact of ‘grandfathering’
The Government recently announced proposed changes to FOFA, including amendments and clarification to grandfathering provisions. This would alter the regulations which apply to the grandfathering arrangements for existing clients – enabling advisers who move licensees to continue receiving grandfathered benefits.
The Government is also seeking amendments to clarify the operation of the grandfathering arrangements with respect to the sale of financial planning businesses, superannuation-to-pension switches under multi-product offerings, and employed advisers becoming self-employed advisers.
These are welcome and important changes when considering succession planning. While the industry requires clarity on these changes, I would recommend that advisers stay where they are for now. It is my, and many of my industry peers’ belief, that the proposed changes will come into effect around March.
Simon Harris is head of dealerships at Suncorp Life.
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