Many advisors postpone succession planning, believing they can tackle it at a later date. However, unforeseen circumstances like personal health crises, significant economic challenges or sudden changes in market conditions can turn this oversight into a detrimental error. Implementing a comprehensive succession plan is crucial for maintaining operational stability, safeguarding client relationships and enhancing the overall worth of your practice when it’s time to transition ownership.

Internal vs. External Succession: Choosing the Right Path

When it comes to succession, advisors typically have two primary options:

• Internal Succession: Transitioning ownership over time to a junior advisor or business partner within the firm. This approach ensures continuity and client retention but requires years of mentorship and structured buyout planning. This option typically assigns a discount to the employee buyer(s). With an internal succession, the owner/advisor can generally dictate the terms of the transition and how long the transition will take for her/him to exit the business.
• External Succession: Selling the practice to an external buyer, such as another financial advisory firm or aggregator. This option may result in a higher valuation but requires careful vetting to ensure cultural and service alignment. With an external succession, the owner/advisor typically cannot dictate the terms of the transition, and the timing is up to the acquirer. The acquirer often wants to ensure the transaction is accretive to their bottom line as quickly as possible, so external successions can move very quickly.

Preparing Clients for the Transition

Consistency, trust and client communication are key to a successful transition. Without proper communication, a sudden leadership change, whether in majority or minority owners, can lead to client attrition. Preparing clients well in advance of your transition plans can ease concerns and ensure a smooth transition. Best practices include:

• Introducing successors early: Gradually involve potential successors in client meetings and decision-making processes to build rapport and trust over time. Slow and intentional introductions are best.
• Providing clear communication: Regularly update clients on the status of your long-term plans, emphasizing the stability and benefits of the transition.
• Educating clients on the transition process: Host individual client meetings to address concerns, explain the transition structure and highlight the successor’s qualifications.
• Educating staff on the transition rationale and timeline: Ensure all staff members are cognizant of the ownership changes underway.
• Gradual role-shifting: Allow clients to see the successor taking on more responsibilities over time, reinforcing their confidence in the new leadership.
• Ensuring a seamless client experience: Implement detailed transition plans that include clear handover strategies, consistent service standards and ongoing support to minimize disruptions. Without proper communication, a sudden leadership change can lead to client attrition. 

The Cost of Inaction: What Happens Without a Plan?

John, a seasoned financial advisor with a thriving practice, always assumed he had plenty of time to plan his succession. Unfortunately, an unexpected health crisis forced him to step away from his business abruptly. Without a clear transition strategy in place, his clients were left uncertain, and many sought other advisors. His staff struggled to maintain operations, and the business’s value plummeted. In the end, his family had to sell the firm at a fraction of its worth, leaving John with far less financial security than he had anticipated. This scenario is avoidable with proactive succession planning. Advisors without a succession plan risk:

• Sudden loss of business value if an unexpected event forces a sale
• Client attrition due to uncertainty
• Legal and financial complications for heirs or business partners

Succession planning is not just about retirement from your business — it’s about creating a legacy and ensuring the continued success of your practice and your clients. Whether you are years away from exiting or considering a transition soon, taking proactive steps today will position you, your team and your clients for a smooth and successful handoff.

Have you established a succession plan? If not, now is the time to start the conversation. Contact Tom Croxton at (916) 907-0640 / [email protected] or Christopher Mercado at (650) 445-0460 / [email protected] to get started.

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