Without an exit strategy, the value of an advisor’s business can wither on the vine.
With 25 years of experience in the financial services sector, including 20 as an advisor, Jerry Butler offers succession planning as well as business-brokerage services for advisors, whether they are looking to buy or sell a book of business.
Many of the senior advisors today, especially on the MFDA platform, started in the business in a career agency system. People came into the business to make a good living, control their destiny and have more flexibility than a nine-to-five job. It was a great job for many, but in the end it was just a job.
Less than 20 years ago, retirement was either dying or yelling out your office door “who wants my clients.” You decided at breakfast you were leaving the company and you came home at supper with a box of your personal “stuff.” Back then, companies owned the clients and the business.
But now it is your business! Those who treat it like a business do well and create value. Those who act like it is just a job, usually don’t do either. As I tell advisors all the time – you have a business NOT just a book of business!
Any mergers-and-acquisitions book you pick up will tell you – whether you are starting a business or buying one – the first question that you should ask yourself is: “what is your exit strategy?” An exit strategy to a business owner is like a will for the general public – “what do you mean I am not going to be around forever?”
A good exit strategy involves planning to create value, protect value and get the maximum amount on your way out.
There are three basic exit strategies:
1. Maximize Your Income: Truth be told, this strategy is by far the most popular succession strategy I encounter – but it’s less of a strategy than a default. “Why would I sell my business when I am making such a great income?”
This strategy is designed to reduce expenses and milk your business for as much as you can and for as long as possible. It does not require investing back in your business as there is no plan to sell in the future. This remains a viable alternative in our industry due to the compensation structure. And frankly, for many advisors it is the most effective strategy. Some of the problems include: dying, disability, paying more income tax than necessary, and seeing the business that you built over the last few decades start to decline.
Continued on p.2
#pb#
2. Monetize Your Business: This is the strategy toward which I see many advisors gravitating. It enables you to put a lot of money in your pocket in order to diversify your investment portfolio as you keep working. This strategy allows an advisor to pay off personal debts, buy the perfect second home or build a personal investment portfolio. There are a couple of methods ways to accomplish these goals. One is to “sell and stay.” By selling your business and having an employment contract with the buyer, you will get a higher price for your business by dramatically reducing the transition risk. Plus, it allows you to work with your favourite clients on a split-commission basis. Around 70% of advisors say that maintaining a working relationship with their key clients is the main reason they don’t have a succession plan. One of the most successful transitions we have been involved with was a vendor selling 100% of his business, buying his dream second home, and working only two or three days a week – and just with his favourite clients. This is the part of the business he loves, and it’s up to the successor to deal with management or personnel issues. The result has been a similar income, a retreat from day-to-day operations, and a lot less stress.
Another method we are using with clients in this category is an “exit-entrance strategy.” Under this strategy, a senior advisor partners with a qualified, hand-picked, junior advisor. The junior typically has been in the business for more than five years and has proven that they are here to stay. They will have clients of their own and will have pursued industry designations – such as CFP or CLU. The senior sells part of his business to the junior, with the midterm plan being that the junior will acquire more assets as the senior approaches his target exit age. This strategy allows the senior to have an exit strategy, provides time to see if junior is the right fit, and enables smooth transfer of clients (thus retaining and building value). As well, the junior can be part of the continuation plan in the case of unforeseen events such as disability.
These strategies allow the senior advisor to put money in their pocket in a tax efficient manner – capital gains and tax free – and have a solid succession plan. It serves to establish a value for your business, protects that value and allows for an effective exit.
Mergers and Acquisitions: An M&A method will normally net the advisor the best return but it also requires the most planning, typically five years or more. You will have a successor in place and time to “prepare” yourself and your business for a transition. With a longer timeline you are able you to clean up your business by improving the value drivers, those attributes that increase the price. You also have time to prepare your clients. Also, you can prepare yourself mentally to move to the next phase of your life. Often, that means slowing down without your business losing value.
I talk to many advisors about merging and most are not interested. But, remember that two $500,000 businesses combined are worth more than just $1 million. There is a size premium in the valuation that comes with getting bigger and creating more value. Also, there will be a continuation plan and a succession plan in place. Finally, through M&A it is easier to attract junior advisors and start the next-generation succession plan.
Queenston Consulting is a business valuation and succession planning consulting company specializing in the Financial Services Industry. It provides advisory and broker services involving mergers, acquisitions and divestitures of financial services businesses.
