Succession planning also involves your staff

Principals of advice businesses face many challenges. Notwithstanding the day-to-day challenges of managing staff and attending to the needs of their clients, there are the continued legislative changes that need to be addressed, the latest being the new Life Insurance Framework legislation. But what about an even bigger challenge, namely finding a suitable successor for the business they have built over many years? Given the ageing demographics of the planning industry (average age 58), many principals will be looking to consider their exit options within the next five to 10 years, or sooner. Of course, other factors such as health or partnership break-ups may intervene in the meantime.

Contribution of staff to the business

As a principal, ask yourself the question: how successful would I have been without the support of key staff? More importantly, what value do your clients place on your staff?

Planning for your succession is a critical process, and it is essential that key staff have buy-in with the process, thus ensuring any doubts are removed about their future in the business. Unlike you, the principal, they may well have plans to keep working for some years.

A succession plan needs to deliver good outcomes for all parties, being shareholders, clients and staff. This ensures that the business will continue to provide a high standard of service to clients, and remains successful into the future. Having worked on building the business over many years, principals will be keen to ensure there is a lasting legacy for others to benefit from.

Another issue that can have an impact on a succession plan being implemented is 'principal dependency'. In many cases, this will have a potential detrimental impact on the transition of the business. It can be avoided where key staff  have shared responsibilities along with the principal in the day-to-day running of the business.

If at some agreed time the principal retires from the business, with new owners assuming control, it will be a smooth transition for both clients and staff if the principal can step back from the business without any impact to the ongoing running of the business.

When is a good time to start considering your succession plan?

The reality is that many advice businesses do not have a documented and funded succession plan in place. Apart from the obvious benefits in having such a plan, in the event of unforeseen circumstances, there are other benefits to the business. This includes ensuring all your staff are on the same journey, and where appropriate also have equity in the business. It also enables other shareholders to progressively buy the principal out over time. This is more preferable than asking a younger adviser to later fund a majority buy-out, which might be prohibitive for them.

The reality is that some principals do not appreciate the benefits of spending time on developing their succession plan, believing that it can be adequately addressed at a later date. What they don’t realise is that it is something that cannot be done overnight, especially when giving consideration to tax and legal issues. Why would a principal, who has worked hard over 20 plus years in building a planning business, not allocate time to address this key issue? The fact is that succession issues need to be addressed well in advance of retiring, preferably when setting up the business and when key staff  join the business.

Legal and tax implications

Legal and tax implications also need to be addressed sooner rather than later when it comes to succession planning. It is difficult, and costly, to change business structures if necessary, so best to get the right advice from the outset. With the complexities of the advice industry and changing legislation, principals should seek advice that experts in this area can provide. This is legal advice that most suburban law firms will not be as familiar with.     

Control your destiny

Surprisingly, in what is a mature industry, many principals have not addressed their exit strategy, and don’t realise what the implications are for their business, including clients and staff. Some would argue that they have a buyer of last resort, if they are lucky, as their succession plan. But in reality it is not comparable with a fully documented and funded succession plan, which provides benefits to all parties – principal, shareholders, staff and clients. 

Principals need to be in control of their destiny, and not dictated to by factors outside their control. By having a succession plan that addresses all the key issues, they can be assured of an orderly transition of the business to their successors, at the same time realising full value for their hard work over many years.

Peter Fysh is a principal of consultancy firm Financial Planning & Succession