The Dangerous Gap in Succession Planning

Succession planning is a mainstay of the work advisors do with their clients, whether that’s incorporating estate planning considerations into a long-range financial plan, or a more complicated exit strategy and succession plan for a business owner. Yet, advisors too often fail to follow their advice when it comes their businesses. A study a few years back co-commissioned by the Financial Planning Association found that almost three-quarters of advisors lacked a formal succession plan.

I doubt the numbers are different today.

It’s something all advisors, and really any business owner, should implement. I’m only 49 years old and like to think I look younger, but just the other day a prospective client asked, “What is there to this firm besides you?” It’s a fair question to ask and one a solo practitioner might be hard pressed to answer. To be a business, a company has to have a life of its own and continue functioning in the absence of the founder or top executive. I may be our firm’s CEO and CIO, but I have competent and experienced partners who can step in should anything happen to me. We have contingency plans.

My father, who is now past 80 and still working, never thought about succession until he was around 60 and clients started asking when he was planning to retire. His answer at that point was a pointed, “never,” but it got him thinking.

I’ve been working with my dad for over 20 years, and after the first few years we gradually transitioned to the point where I took over what had been his day-to-day role. He’s still a senior portfolio manager and sees clients. But letting go of control, as it is for most people, was difficult. There were trying moments in the early days, but that’s to be expected with any transition.

Having worked with dozens of business owners on exit strategies and succession planning, I’ve seen how hard it is for someone who has built a business to let go of it. It can be especially difficult within a family when it’s from a founder to a member of the next generation, whether a son, daughter, niece, or nephew. Accepting your adult child as an equal can be difficult, but it can be rewarding to acknowledge the person they’ve become.

I always counsel clients who would like to keep the family business in the family to have the next generation work somewhere else first. It provides a valuable experience and a look at how other businesses operate. It also makes the young person prove that they can make it on their own, not just because they are related to the boss. In my own case, I took a financial services job on the other side of the country and worked there for several years before my father asked me to join his team.

The succession plans that come off with the fewest disruptions are those that are implemented over an extended period, especially when the successors are not family members.

That was the case with one of our clients who owned a small HVAC business. He was getting older and looking to phase out of the company. Two of his employees, who were in their 40s, had been with him for 20 years and wanted to buy the business but couldn’t come up with the $5 million that we estimated the business to be worth. We helped them structure a buyout agreement where they would buy his ownership over time until eventually, they would have majority ownership. Ultimately, the former employees became the majority owners, but the founder still had an ownership stake and as a result, continued income from the business he had started. It worked out perfectly for everyone.

This type of buyout agreement is very common in an advisory practice. It makes the transition much smoother and it’s much more likely that the clients will stay if the exiting advisor introduces the new advisor to clients long before they plan to leave. That allows them to gradually step back over a couple of years while the client and the new advisor build a relationship of trust and confidence, which can go a long way toward maintaining client retention.

Above all, the key to a successful succession plan is finding the right successor, whether that be a next-generation family member, current employee, or someone from outside. That person has to have the personality, requisite skillset, and a passion for the profession and the business that matches or exceeds that of the founder. For the business to have a life of its own, the successor must be someone who wants to spend their life in that business.

One of the things that I discuss with clients is having a backup to their succession plan. Often, business owners are so wrapped up in running their businesses that they don’t think about what will happen to the company if a key person either becomes incapacitated and can’t work, or they unexpectedly pass away. That’s something that clients/customers are more likely to think about than the business owner, but it’s something advisors should keep in mind.

 I advise clients in that situation to make sure they have put buy-sell agreement insurance or key man insurance in place as part of the planning process, so that the company can continue to function if a key player is no longer in the picture. Those are some of the more granular aspects of succession planning that advisors should consider.

In my firm, succession was relatively uneventful because my father and I are both passionate about what’s most important – taking care of others. He’s been extremely generous in sharing his knowledge and experience with me and everyone else here. There are five partners in this firm, and we make important decisions by committee. If there are varying viewpoints on certain topics, everyone gets a chance to weigh in and then we come to a consensus.

No one here, including my father, has any concrete plans for leaving the business, but should that happen, we are prepared for what comes next.

Published, Nov.  15, 2022, VettiFi-Advisor Perspectives