When it comes to retirement, advisors are the first to tell their clients how important it is to plan for the future. After all, clients cannot expect to fulfill their retirement dreams by developing and implementing a plan only a year or two before retirement. But when it comes to their own practice, advisors often put their own succession planning off until the last minute.

As the industry becomes more competitive though, it is obviously important for advisors to have a plan to build a transferable business. Ideally, transition planning — the structured process for evaluating your practice, setting business objectives and developing a strategic game plan to meet those targets — should be part of an advisor’s quarterly business review to ensure the success and longevity of their practice. An “exit” strategy evaluating what happens to the practice, clients, staff, and the firm’s reputation when the time comes for an advisor to retire, should be part of that review.

Properly negotiated transitions can be a win for all involved. From the buyer’s perspective, if the deal is structured correctly, overpaying is a non-issue since the vast majority of all transitions today are done on an earn-out basis. In other words, if a buyer gets less revenue than anticipated, a lower final purchase price is paid to the seller. From a seller’s perspective, if a buyer receives more revenue than anticipated, a higher final purchase price is paid.

To protect your clients and the value of your business it is essential to think ahead and consider different alternatives for your own eventual exit. Fortunately there are a number of options (internal succession, merger, acquisition or outright sale), but all have important financial, legal and organizational implications for you and your business.

In my experience, mergers or acquisitions involving external candidates are the most challenging. The fact that independent financial advisors are entrepreneurial in nature further complicates potential partnerships. Of all transition options available, mergers and acquisitions have the lowest success rate for several reasons:

1. No clear strategy

Without a clear strategy, there are a number of risks and obstacles that can affect advisor transition plans.

Incompatible client base

Buyers and sellers talk about “synergy” as a concept, without taking the time to examine their client base and the processes in place to support those clients.

Lack of commitment

If you are planning to merge with another practice, it is important to ascertain the other party’s level of commitment, and their reasons for wanting the transition.

Failure to add capacity

Buying a practice is a great way to increase your revenue but you must ensure you have the resources to address the needs of your existing and newly acquired clients.

No transition plan

A transition plan that defines roles and responsibilities for the buyer and the seller must be incorporated into the agreement, along with a timeline discussing when each party will execute certain tasks.

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