Planning my exit strategy

Principals of financial planning businesses face many challenges. Not-with-standing 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. 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 57), many principals will be looking to their exit options within the next 5 to 10 years. That is of course unless other factors such as health or partnership break-ups intervene in the meantime.

Succession Planning Improves Profits

Research reveals that many planning businesses do not have a documented and funded succession plan in place. Apart from the obvious benefits in having such a plan, to cater for an orderly change in ownership, there are some other substantial benefits to the business. Research by the consulting group Business Health, which has been assisting practices for over 10 years, reveals that those practices with a succession plan are in fact much more profitable (over 100%) than those without. Why? There are a number of reasons for improved profit, including the business being focussed on the future with all planners and key staff engaged. Uncertainty within the business is removed as a result, and importantly the business owners know that the future of the business is assured, including the needs of their clients, into the future once there is a change in ownership.

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 + 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. If the right tax and legal structures are not in place at the start, it is very hard (and costly) to change these after being in business for many years. This will also influence what the ultimate sale price of the business could be.

Legal Advice Essential

Peter Townsend, Principal, Townsends Business & Corporate Lawyers, has been providing legal advice to business owners for many years. Given his knowledge of the Australian Financial Services industry, he is well placed to advise principals on legal aspects of their succession plans. His experience is that all too often principals have not given adequate thought to the best legal structure, and to ensuring that staff are covered by appropriate agreements. When it comes to succession planning, these need to be addressed well in advance. Importantly, such are the complexities of the planning industry and relevant legislation, this is legal advice that most suburban law firms will not be as familiar with.

Engage With Staff

Principals should ask themselves the question, “How successful would I have been without the help of my staff?” Typically after setting up as a sole practitioner the business has grown over the years with additional advisers and staff joining. Key staff will have also built strong relationships with your clients, and clients will appreciate and value this. Hence the need to ensure that staff feature in your succession plans. Ensuring that they are secured by appropriate agreements, and also having suitable incentives (including equity), will be essential for any succession planning. This leads into another key aspect of planning a suitable exit strategy, namely “Principal Dependency”. All too often this issue is not addressed until it is too late. When the exit plans involve an external party who is buying the business, it is critical that the current principal is able to step out of the business in time, with minimal impact to existing clients and staff. Principals need to be prepared to delegate to other advisers and staff. For some this is not easy to do, but failure to do so could well influence the smooth transition of the business.

Tax Implications

With any exit strategy, there will need to be appropriate tax advice provided. Typically this, along with legal advice, takes time to be prepared. Again, having built the practice over many years, and paid taxes along the way, it is only reasonable to ensure that with any ultimate sale, that all tax consequences are properly addressed. Ian Nicholls, Consultant, Insight Taxation, has assisted small businesses with their tax issues and advice as to their preferred business structure. Again, it is best to get this right at the outset of setting up a business thus avoiding potentially costly changes down the track. If principals have not addressed this adequately prior to considering their exit, they could well be surprised by the implications, particularly as it relates to the final sale proceeds.

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. 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, that provides benefits to all parties- principal, staff and clients. Principals need to be in control of their destiny, and not dictated to by factors outside their control. By having an exit strategy 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.