Bill is a 60-year-old man who has spent his career in the wealth management business. He grew his company into a thriving business that employs several employees, including his daughter Angela. The business now represents the vast majority of his retirement assets. Bill isn’t slowing down, and hasn’t even thought much about retirement.

In other words, Bill is the prototypical small investment adviser. Although they are paid to counsel clients on retirement matters, more than 40 percent of them lack a written succession plan, according an article on Investopedia. It’s the proverbial case of “Do as I say, not as I do…’’

Bill’s story could have a happy ending. More likely, however, are the following scenarios: the value of the business may decline; the market for acquisitions of investment advisors’ firms may slow; because of Bill’s failure to plan, the business may not be salable; and his daughter Angela may be unwilling or unable to manage the business. Any one of these events could leave his lifetime of work and millions of assets under management next to worthless.

These same principles apply to other service businesses that are managed on a cash-flow basis, have relatively few assets and rely heavily on a small number of individuals to generate revenues. Many of the risks facing owners of these businesses cannot be eliminated, but they can be managed through planning and preparation. But this often requires years, and the guidance of experienced professionals.

Selling to third parties

For a variety of reasons, Bill may prefer to sell his business to a third party. First, he may simply want an immediate cash payment for his business. Second, a third party might offer scale, distribution capabilities, and operations assistance that could allow the business to thrive, not just survive, when he retires. Finally, Bill may not believe that Angela has the skills or motivation necessary to run the business.

Different types of business will have different prospective buyers. For example, Bill’s firm may be of interest to a regional competitor and a national, full-services financial services company. A realistic analysis of the potential buyers of a business is important, because different buyers will have different motivations and preferences that will affect how much and when Bill will get paid. Bill may want to consider hiring an investment banker or other professional that works in the area.

Bill will also need to prepare the business for a sale, which typically involves cleaning up and improving financial results and managing the business in a way that will allow it to someday be effectively transferred to a third party. Experienced M&A advisers can help identify problem areas and develop a plan to address them. Importantly, even after the business has been made presentable, it may still take a year or more to complete a sale. Additionally, any buyer will likely require someone in Bill’s position to continue to work with the business for a period of a year or more following the sale.

Bill may decide that Angela should take over the business. What better gift to your daughter than your life’s work, which should ensure young Angela a good income and financial security for life? If not Angela, what about other members of the firm’s management team?

However, Angela may not be interested in owning her dad’s business. And even if Angela wants the business, will she have the vision, skills, and discipline that will be necessary to succeed? Will Bill’s clients stick with Angela? Will the projected performance of the business be sufficient for Angela to simultaneously run the business, pay herself and pay Bill? All of these issues surface in any transition of a business to an internal successor, which is the most common succession plan for investment advisory businesses.

Even if Angela is interested and qualified, she probably doesn’t have all the skills she will need. Bill will need to make his clients comfortable with Angela so that she does not lose their business when Bill retires. Angela will need to learn all aspects of the operation, even those that have never been part of her job description. Both Bill and Angela will need to effectively communicate the transition to employees, and make sure that current employees do not become disgruntled or quit.

Bill and Angela will also need to agree on a value for (or method for valuing) the business, and a timeline for the transition. They will need to agree upon the consequences if the business does not meet expectations, and how to appropriately allocate the risks associated with the transaction. And they will need to negotiate and reach an appropriate agreement, all while maintaining a positive professional and personal relationship.

At some point, all business owners must exit their business. If an owner is proactive and begins planning early, he or she can watch the business thrive after retirement. Those who procrastinate will fail to achieve the best value for their business, if they are able to sell or transition it at all. Unfortunately, by failing to plan, a business owner allows one of life’s most important decisions to be made for them.  

(As published in the 12/23/12 Star Tribune Business Forum)