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Advance Planning: Who to Leave Your Business to

Advance Planning: Who to Leave Your Business to

If you’re starting to think about retirement, who will inherit your business is likely one of your top concerns

Advance Planning: Who to Leave Your Business to

If you’re starting to think about retirement, who will inherit your business is likely one of your top concerns. Read on for some important things to consider as you are assessing your options.

For starters, when you’re looking for a partner consider your clients and their well-being very carefully, said Michael Bilotta, managing director at Gladstone Associates LLC, an investment banking firm Conshohocken, Pa., that focuses exclusively on the financial services industry. "You don’t want anything bad to happen to your client."

You also have to decide whether you’re interested in passing on the business to someone within your firm, a family member, or whether you’ll be looking for an external buyer. Which route you choose will determine how you proceed. Either way, however, you’ll need to evaluate potential successors thoroughly, making sure it’s not just about the economics.

Indeed, advisors should strive to make sure they find the right match with respect to the way they and the buyer approach the business. "That’s the hardest piece to solve," said John Hyland, a founding partner of Morristown Financial Group, in Morristown, N.J., which is LPL Financial’s largest branch office.

One place to start is by grooming a potential successor from within your firm. It’s important to start early because you may have to go through two to three junior advisors to find the right fit, which is why planning in advance is so important, said Brian Heapps, executive vice president of sales and business development for Boston-based John Hancock Financial Network. "Trying to do this at the last minute would be nearly impossible."

When you’re assessing an internal successor, factors to consider include their interest in taking over your business, their qualifications (including proper designations and education), management capabilities, investment management abilities, client relationship management, loyalty, character, and financial wherewithal to buy the firm, said Aaron Jackman, an analyst with ECHELON Partners, a Manhattan Beach, Calif.-based investment banking and consulting firm for the wealth management industry.

"Oftentimes, a potential successor won’t have all of the characteristics you’re looking for, even if they excel in a lot of other areas. In that case, you should start the process of mentoring and coaching," Jackman said. Doing this for two to five years prior to your planned transition can help fill in the gaps and "turn a good candidate into an ideal candidate," he said.

That said if you’re a solo practitioner, as many advisors are, you might not have someone within the firm to turn to. In that case, you’ll need to look at outside partners.

If you’re looking at external partners, consider what kind of firm you’d most like to be aligned with and how your clients would respond to the firm, said Bilotta of Gladstone Associates which mainly works with advisors with $200 million to $2 billion of assets under management.

Start with your own rolodex, Bilotta advises. Are there firms you admire? Are there firms who have a similar culture, client service philosophy, business outlook, and investment strategy philosophy? Ask questions like: Will my clients get the same level of service that I’ve been providing for years? Does the principle of the new firm have a succession plan in place? If so, who is that third party?

Keep in mind that selling your business isn’t like selling a house or car, said Chris Heckert, vice president and supervising principal of Generational Capital Markets Inc., an M&A and advisory firm in Dallas.

"You have to do it so much more cautiously because what happens if word gets out that you as a financial professional are looking to retire or sell your business?"

According to Heckert, there’s a fine line between marketing your business and being closed-lipped because if information gets into the wrong hands, competitors could use it to their advantage to try and poach clients. "If you get it to the wrong person, or if someone tries to use it improperly, it can be damaging," he said.

One way to protect yourself is by carefully vetting potential partners upfront. Also, make sure you sign confidentiality agreements with prospects. "The marketing process isn’t always as easy as throwing it up on the Web or taking out an ad in the newspaper," Heckert said.

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