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Succession planning: Practice what you preach


Brent Willeford, Director – Internal Practice Development with Waddell & Reed, Inc.

Great Practice Solutions

As an advisor, it’s a situation you might be familiar with: a grieving family burdened with the consequences of the financial decisions – or lack thereof – of their deceased loved one. It’s part of the planning process you pay particular attention to with your clients. But do you have these types of decisions in place for yourself and your practice? Planning for the continuity and sale of your practice provides direction and peace of mind for you, your family and your clients. The Waddell & Reed Practice Development Team helps advisors create succession plans that can be implemented within 30 days by following these six steps:

  1. Value your practice.

Typically, a buyer will undervalue the book while the seller overvalues it. The actual value usually lies somewhere in between, and the negotiating period (step 3) can eat a big chunk out of the sale process. A CPA may be able to help you determine a valuation range on your book of business. There are also service providers who specialize in valuation for a fee. Waddell & Reed advisors can engage the Practice Development Team for help facilitating this process.

  1. Identify a buyer.

It is critical to identify someone with the capabilities to handle your practice. You can accomplish this by grooming a successor through your practice, teaming with another advisor or offering your practice for sale and identifying interested parties. Regardless of the methodology, make sure the purchasing advisor is a good fit for your clients and your practice. Putting these pieces in place now may allow you to have more options at the time of selling your book. It also leaves your clients in the hands of someone they are already familiar with.

  1. Negotiate.

Once you’ve determined your valuation range, it’s time to take it to the selected buyer and begin negotiations. Understanding the financial aspects of your book isn’t about the gross revenue of the book – though that can impact grid position – but more about the earnings it has produced. Providing a five-year cash flow statement to the buyer offers quick insight into the financial mechanics of your book. Building the recurring revenue – asset management fees, planning fees that are charged yearly, automatic investments, etc. – provides the most consistent evidence of steady revenue. This warrants a higher multiple in a valuation formula than any other form of revenue. A long history of consistent, nonrecurring revenue – investment sales, insurance sales and one-time planning fees, for example – may also warrant higher multiples. However, when selling a book, you should understand and be able to explain the nature of your nonrecurring revenue and prove its consistency if you hope to earn a premium. A book that doesn’t have a history of consistent recurring revenue may warrant a lower multiple or even no consideration in the valuation, depending on the case.

  1. Do Your Due Diligence.

As you begin to research, ask yourself two questions: Do I want this person to buy my practice and work with my clients; and are they able to pay me based on the terms we agree upon during the negotiation phase? Making sure the purchaser is financially stable is important and may involve asking for a credit report and financial statements.

  1. Strike the Deal.

Once you reach an agreed upon valuation for the practice, the remaining terms of the deal must be considered. Figuring out the length of the payment period, down payment, protection clauses for both sides, insurance amounts, and the legal language can happen quickly. In most cases, the details will be discussed during the practice valuation and due diligence processes. Both sides should talk with legal counsel to put the details of what they’d like in the final agreement. For the selling advisor, the details on payment timing and methodology, protection against default by the buyer and collateralization may be points that need to be covered in the agreement. Thorough discussion of the aspects most important to each party creates an environment that protects both sides.

  1. Create the Succession Agreement.

The actual legal agreement between the two parties simply contains the aspects agreed to during the negotiation process. The Waddell & Reed Practice Development Team offers affiliated advisors a succession planning template to help them through this step. If your firm doesn’t offer a template, you should consult legal and tax advisors during this phase. The details of the deal should be layered in writing that satisfies both sides. Once this part of the agreement is complete, the document should be sent through legal and compliance departments for review. Once approved, the agreement will be ready to execute.

Taking the time to plan and prepare for the future of your clients and beneficiaries is one of the most valuable acts you can do for them. Don’t put it off any longer.

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