There are multiple phases to a succession plan. Understanding which skills are required at different times—and taking advantages of resources available to help make specific decisions—can help smooth the entire process. Here are tips one through four (of seven) to help find a potential successor and structure a successful transition.
1. Look broadly to find the right match. The vast majority of financial professionals in our recent survey (83%), expect to find a successor in their own firm or network. In fact, more than half (55%) of advisors see an internal sale to a partner or employee as the ideal outcome. But being in the same network may not mean that another advisor has the right experience or shares your business philosophy. Consider using a formal matching service to help widen your search. The best services offer a technology component to help scale your search, along with a strong community of likeminded professionals and a process to help qualify would-be successors.
2. Compare valuation methods. Nearly 10% of survey respondents said the challenges of valuing a business was a major deterrent in the succession planning process. However, the valuation process doesn’t need to derail your succession planning. There are three common ways to determine how much a business is worth:
- Examining comparable sales of businesses with similar revenue streams.
- Performing an earnings analysis, such as a discounted cash flow.
- Performing an asset-based analysis.
Each of these may be applicable for your business, so reviewing your options with a qualified valuation expert can help choose which is right for your situation. There are also times when it helps to use multiple methods and apply a proper weighting to each.
3. Consider a facilitator for negotiations and due diligence. Buyers and sellers both want a successful outcome from negotiations, but they bring different agendas to the discussion. Hiring a facilitator to handle negotiations can keep the process moving forward and encourage transparency from both sides of the table. “Normal closure rates in M&A transactions are around 30%,” says Cornick. “We’ve seen closure rates increase anywhere between 80% to 90% with the right facilitator assisting.”
An experienced facilitator can also help with the due-diligence process by creating a checklist of information to share between buyers and sellers, and by offering insights or benchmarks based on similar firms in the industry.
4. Explore financing options. In the past, advisory firm transactions often were seller financed, due to the perceived risk of these loans by traditional lenders and the challenges of handling a deal made up of intangible assets under the Tax Code. However, we have seen more lenders offering financing, as well as more firms creating acquisition lending programs. Explore which options are available to you and which would be the best fit for your transaction. For example, you may find traditional bank financing more expensive—and the process more time consuming—than securing financing from firms specializing in these types of transactions. Cornick notes that Advisor Group has worked to streamline the financing process by reducing the underwriting process and removing burdensome origination fees. “It’s made it easier for buyers and sellers to move forward with these transactions,” he says.