Practice Management

When to Plan for Transitioning Your Business


Written by George Hartman on April 05, 2018

Advisors often ask me “When should I start planning my eventual transition from the business?” My stock answer is “Manage your business as if you will run it forever, but always be prepared to sell it at any time, to the most qualified buyer for the highest price.” 

I think this incorporates both the advantage of early planning with the reality of life — because we never know when one of the “Big D’s” — death, disability, divorce, disaffection, disagreement, disinterest, etc. might strike. Obviously, the outcome will be much better in the event of one of these contingencies, if you have a plan to deal with it.

I favour a long runway to retirement. It gives you more options and improves the chances that the outcome will be what you want. That said, here is how I would broadly break the timing down, based on the strategies you might pursue.

10 years (or more)

If you have a full decade to plan and implement, you can develop a strategy of inspiration. You will have sufficient time to fashion the business to maximize its value and assure your legacy. I differentiate between ‘succession plan’ and ‘exit strategy’. Although we often inter-change those two terms, in my mind, they represent two different perspectives. I define a ‘succession plan’ as “what happens to the business after the founder is gone” and an ‘exit strategy’ as “what happens to the founder after the business is gone.” 

Given these different viewpoints, ten years is a sufficient time to answer such questions as:

  • What do I want my legacy to look like? How do I want people to think of me when I am no longer in the business?
  • When will I be both emotionally and financially prepared to exit the business I have spent my life building?
  • What will my exit look like – will it be on a specific date or a gradual withdrawal over time?
  • How am I going to spend my time once I have transitioned?
  • How do I position my business to give my successor the best chance of continued growth?
  • What monetary value would I need from the sale of my business to fund my retirement lifestyle?
  • Who can I groom, coach and mentor to carry on my business?

3 - 5 years

I call a 3 to 5-year plan to succession a strategy of perspiration because, if you want the best result, you will have to do a lot of work in a relatively short period. While three to five years may seem like a long time, there is much to be done to prepare your practice for transition. For example:

  • How will you make your business more saleable? You have tailor-made your practice to work for you through systems and processes that you designed, technology that you put in place, and customized approaches that fit your philosophies and way of doing business. Will your way work for everyone? Perhaps for many, but to the extent you can make your business adaptable to the needs of a potential buyer, the more attractive it will be.
  • How will you make your practice scalable? Just because you have reached the size of business you aspired to, does not mean potential buyers will be satisfied with where you are. You will want to demonstrate that, under their management, your business can grow even bigger than what you have created.
  • You have to find, negotiate with, and integrate the right successor. What skills and experience do they need? Where do you find them? What kind of a deal do you want? How do you introduce them to your clients so they are reassured and stick with the new advisor? What if your first choice in a successor is just not a ‘good fit’ and you have to start over?

1 – 2 years

Now we are down to a strategy of desperation. With the time until your transition measured in months, you will find yourself scrambling to get some of the things done that are required for any reasonable transition.

  • If you do not have a successor in the wings, you will begin a frantic search for one. Advisors who are planning their exit tell me that the toughest challenge they face is finding a suitable successor. While there are currently many buyers out there, most of them you would not want to sell to because they just don’t fit your view of how your clients, your staff, and your business should be treated.
  • Desperate sellers attract opportunistic buyers looking for a bargain price, so realizing the full value of your business will be difficult.
  • Client retention is often reflected in a ‘claw-back’ clause in an Agreement of Purchase and Sale. The less time clients have to get used to the idea of a successor, the less likely they are to remain with the practice once the advisor on whom they relied for years leaves. This could have a significant impact on your ultimate payout.

Less than 1 year

Finally, I would add that if you hope you have a successful transition with less than a year of planning, you are pursuing a strategy of hallucination — it just isn’t really happening.

The truth is that you will leave your business one day — voluntarily or otherwise. The big question is “Will you be in control of your exit or will fate and circumstance dictate what happens?”

Learn more about the process of succession in our webinar Succeeding at Succession.


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