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Unlocking Succession Gridlock

Despite the interest rate environment, there are several succession planning structures that benefit both parties.

With interest rates as high as they are, you may be questioning whether now is the right time to plan your exit strategy. You and your potential successor may feel stuck, with neither of you able to make a move forward. Fortunately, there are several succession planning structures that benefit both parties. But first, here are a few questions that are probably top of mind:

What About Interest Rates?

Today’s high interest rates may seem daunting to borrowers, but it’s important to recognize that interest rates alone do not dictate whether a transaction is too expensive. If the overall deal is accretive to your business, it may be a good transaction despite high interest rates. Also, interest rates don’t stop a person from aging; owners still need succession plans, no matter what the macroeconomic environment looks like.

Is Now the Right Time to Plan for Succession?

It can be difficult to give up a business you’ve spent decades building. You want to make sure it’s in good hands, and you may wonder what you’ll do after you leave the firm. Fortunately, you don’t have to leave your firm all at once. A staged succession can help you transition out over time while your successor learns the ropes and you get comfortable with your post-career life. Even if you don’t activate the plan immediately, having it structured and in place provides peace of mind for you and your successor.

How Do I Choose a Successor?

Many RIAs are fortunate to have identified a successor from within their team’s ranks. Handing off the reins to someone who is already part of it can be reassuring to you and your clients (who are, after all, your firm’s biggest asset). If you don’t have a potential successor within your organization, consider your contacts throughout the RIA industry. As you talk with colleagues at conferences, look for signs they share your approach to clients and company culture. Ask about their future plans—are they looking to expand? Pay attention to other RIAs’ blog posts and LinkedIn activity to get a sense of whether they’d be a good fit as your successor.

What Does Staged Succession Look Like?

A trusted lender can provide a variety of lending options to facilitate a staged succession. Which one you ultimately use will depend on factors including the firm’s organization, your timeline, and your successor’s managerial readiness and financial situation.

  • Different percentages of ownership over time – this structure can be as simple as the successor (second generation owner, or G2) purchases percentages of the firm’s assets in stages over time.
  • Shareholder buyouts – In a shareholder buyout, the incoming owner purchases the owner’s shares in a firm that is organized as a C or S corporation with shares.
  • Management buyouts – In a management buyout, the owner may sell to a single member of the firm or to a team of managers who will own the firm jointly.
  • Partner buy-ins – When a second generation (G2) is ready to start taking steps to lead a firm, it’s time to start discussing a partnership buy-in agreement. Lenders can be especially helpful in these situations where a partner’s leaving may come about unexpectedly, and G2 may not have the immediate liquidity to purchase their shares without financing.

Succession planning should always include reassurances to your clients that your high level of service will continue under your successor(s). Once your G2 is identified, communicate clearly and frequently about the process, and coach them as they take on new responsibilities. Be prepared to have the firm serve as backstop to succession loans made to your G2. Lenders recognize that most successors will not have the cash to buy in to the firm all at once and will expect the firm to guarantee the loan, ensuring that distributions to the G2 will cover the loan service on a monthly basis. Starting a conversation with your lender will get the ball rolling on your succession plan and get you that much closer to reaping the benefits of all your years of hard work.

Alicia Chandler is president of Indianapolis-based First Franchise Capital, a First Financial Bank company.

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