4 Steps to Building a Successful Internal Succession Plan for Your Advisory Firm

financial advisor succession planning

Remember what it was like when you started your firm? Those days when you transitioned from being one advisor among many to being a CEO. It felt like your concerns changed overnight – everything suddenly seemed more challenging and complex.

Once you’ve successfully established your own business, the next transition is just as vital and will come just as quickly: leaving a legacy. The true test of a firm is if it can stand on its own without you. Internal succession planning is something you can – and need to – start planning for long before the “day of.” Finding and coaching your successor is an intuitive, organic process that can’t be simply checked off a list like any other task.

Our Vice President of Mergers and Acquisitions spoke with several advisors about internal succession. Everyone is interested, but most haven’t chosen someone to fill their role and don’t have a plan to do so.

Click here to watch our on-demand webinar, “M&A from the Inside: How Advisors can Build a Successful Internal Succession Plan.”

Getting the process started doesn’t have to be difficult. Here are the four main steps to preparing your legacy.

Step 1: Look for Winning Qualities

The right successor possesses certain essential qualities. You obviously won’t choose just anyone to take over the legacy you’ve built, so you need to look closely for the right skill set.

  • The right successor will have a grasp on how the business is currently running and will possess the energy and vision to move it forward.
  • They will have technical know-how and a genuine personal interest in the advice industry – not just in making money.
  • They will have a strong ability to build client relationships and retain those relationships while developing the business through cultivating new relationships.
  • Finally, they will have leadership skills – not all great advisors make great leaders. Is this person motivating the team to its full potential? Is this person augmenting brand credibility and reputation in the community and business worlds? Does this person come at the business with their heart – not just their mind? The right successor should leave little doubt that they can pick up where you left off and carry the business forward.

Step 2: Create a Path to Partnership

You’ve found the perfect fit for your successor, now you need to prepare them. No matter how talented they are now, your successor likely won’t be ready to take the reins without a good deal of guidance. Create a path to partnership in your business. Identify key characteristics you want to see in order for them to become an equity partner in your business. Create a roadmap for them that shows exactly how they can become your partner and eventual successor. Hold the candidate and, just as importantly, yourself accountable for sticking to the roadmap.

As you coach, clarify your successor’s strengths and weaknesses. Dialogue like this creates a culture of transparency and open communication, which is vital for preparation. Defined incentives and rewards (e.g., goal-driven compensation or leadership responsibilities) are also helpful in inspiring confidence and ownership. It can be difficult to let go of control, but you want your successor to have the necessary leadership experience. You may even have to let them fail sometimes. As they say, failure is the best teacher.

Step 3: Execute the Financial Transition

Now there’s cash on the barrelhead, and the abstract transition becomes concrete. At this point, your successor will take the reins financially and begin to buy you out of your equity ownership. This is usually an ongoing process and not done in just one fell swoop.

In most cases, the best option is to have them buy some or all of your equity over a period of time. You might even consider having your successor “earn” some equity as a bonus or incentive initially, or explore the possibility of them putting up some of their own personal capital, although this is unlikely to be a realistic option. This part of the process usually involves putting at least some risk on your side through some sort of seller-financing while the successor finds their feet and strives to meet profit goals in order to simultaneously maintain the business and buy you out.

Bank loans are becoming more and more prevalent for internal equity transfers, as banks are getting more comfortable with the nature of wealth management businesses. There are even some national players out there such as Oak Street, Live Oak Bank and Succession Lending. In my experience, the most successful transitions happen with a combination of two or all three of these options: seller financing, personal capital and bank loans.

It’s important for both the “successor” and the “successee” to remember that owning equity requires taking on risk, and that neither side should expect to completely eliminate risk in an equity transition.

Step 4: Avoid Common Pitfalls

Though internal succession can be handled many ways, you’ll want to avoid the mistakes that befall many firm owners and advisors.

Doing Too Much Too Fast

One common pitfall I’ve seen is offering equity right away to a new hire, and/or giving too much equity away too quickly to someone who isn’t ready. Unwinding a deal like this can be costly and time-consuming for everyone involved. Remember, the only thing worse than not getting a deal done is doing a bad deal.

Setting Unclear Expectations

Another vital step to avoiding pitfalls is to set expectations clearly. Speak transparently to your potential successor as you coach them toward partnership. Explain how a buyout works and what it looks like to be a partner and eventually a successor.  The more you can do to be fully transparent in the beginning, the more likely you are to be successful in the end.

Focusing Only on Shortcomings

As you and your successor set out on the path toward an equity buy-in, avoid focusing only on their shortcomings. Speak toward your successor’s strengths, encouraging them to address issues in their own timing and style rather than how you’ve always done it. This reminds me of one saying we have at Carson: if it ain’t broke, break it. Allow your successor to find a style, system and vision that will take the business to the next level, even if they don’t do things the way you have in the past.

Bottom line: Keep the dialogue going. Your candidate will need coaching, and you’ll need time to help them develop before taking the wheel. Simply taking a break and sitting down for coffee and conversation can help build your relationship – and therefore your internal succession plan – immensely.

This Isn’t Just a Job for You

You’ve put your life’s blood into your business – this isn’t just a job for you. Choosing a successor is the hard work of finding someone who can hold this kind of legacy and carry it forward. These steps will help you start the process on the right foot.

Click here to watch our on-demand webinar: “M&A from the Inside: How Advisors can Build a Successful Internal Succession Plan.”

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The Essentials of Succession Planning for Financial Advisors

The Essentials of Succession Planning for Financial Advisors

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