Succession Planning

Technically, succession refers to the succession of ownership of a business and its clients. This can mean transitioning ownership completely to an advisor outside of your business through an external sale or sell & stay. Or, as it’s more commonly referred to at FP Transitions, it can mean the planned and gradual succession of ownership from within a team. This process of internal succession, often happens over the course of years (3-15) and relies on an incremental sale of ownership every few years or so to minority owners chosen from amongst the existing team of a business.

In the financial services industry especially, succession is planned–either through an external sale or internal transition. A succession plan is a set timeline and terms for the transfer of some percentage of ownership to another thus securing the ongoing stewardship of a business and its client’s assets. Continuity planning refers to the process of putting safeguards in place in case of unexpected death or disability of an owner so as to not leave clients without service or estates without realized value. For single-owner businesses this is usually an agreement made with a local colleague and accounts for the trigger, transfer, and compensation. Internal succession plans that include multi-owner, multi-generational leadership have continuity safeguards built in and don’t generally need additional agreements in place.

Part of succession planning is accounting for the fact that younger owners often don’t have the excess capital to buy a percentage of ownership outright. Additionally, advisors at the point in their career where ownership opportunities appear on the table often are of the age where they’re buying houses and starting a family. Our internal succession plans include the mechanism for using the first couple of years of profit distributions to pay for their shares using a variety of financing options.

Firstly, an important aspect of internal succession is creating long-term ownership and sustainability for the business, this means you should be choosing younger professionals to add to the ownership team. In terms of kind of skills and traits you should keep an eye out for, that depends on your priorities and your vision of the business in the future. Professionals who demonstrate a commitment to the success of the business as a whole and express interest in the non-advisory aspects of business ownership are already ticking some important boxes.

One thing to be wary of is choosing someone exactly like you. The same skills and mindsets it took to single-handedly build your business, or to take your firm to where it is now, are probably not going to be the exact same things that take things to the next level of growth. Internal succession is about building a multi-generational team of individuals who all utilize their individual strengths to ensure the business continues to thrive beyond any one career.

An internal succession plan can take anywhere from 3 to 15 years, perhaps more. The idea is that the transfer of ownership is incremental and gradual, so the time it takes for a minority owner to become a majority owner depends on the goals of existing and planned owners. It could be that minority owners take over only a small percentage of ownership and don’t add to that for several years, or it could be that after two years a majority owner may decide to fully retire and minority owners purchase the remaining ownership shares in a large chunk. Also, for some firms, it could be that internal succession is never-ending, as the ownership shares shift and some retire still more generations of owners can be added and this process can be continual for the life of the business.

It’s never too early to start thinking about internal succession and what your exit might look like one day. So, start now. The earlier you start, the more control you have over the plan and the more options you have. This doesn’t mean you have to start selling ownership and retirement next month, it just means that it takes time to build a business large enough to take on a team and to recruit top talent. Then it takes time to determine if they’re ownership material and work out the plan. And then the years it takes to actually make the incremental and gradual transfer ownership. Not to mention the time that might get eaten up if there are any hiccups that might set you back a couple of steps. If you start early enough, you can be building the business with the end vision in mind.