The 6 Steps Of Succession Planning (Part 1)
Strategic Issues

The 6 Steps Of Succession Planning (Part 1)

March 17, 2014

by Tony Vidler

Unless you plan to work to the grave all practice owners need to be thinking “succession” at some point – preferably as early as possible.

Succession planning is simply about working out how to exit the business at your preferred time, in your preferred way, and hopefully at your preferred price.

Doing that successfully is quite a journey, and will involve significant thought and planning, and detailed execution.  There are 6 distinct phases to an ideal business succession plan, and this article covers the first three in some detail.

The 6 steps of a full succession plan are:

1.  Establish the Owners Objectives

2. Understanding Where The Value Is

3.  Building & Maintaining Practice Value

4.  Creating the Sale

5.  Completing the Sale

6.  Personal Planning & Legacy Issues

Establishing the Owners Objectives

At the very beginning of any succession planning you have to answer the essential questions of “what, when, who and how” as they establish the framework of what is trying to be achieved.

  • What is it you are going to be selling?  Is it just assets (such as a client base), or a “going concern” that includes potential liabilities, is it partial ownership of an entity or structure that caries limitations for incoming owners?
  • When do you want to sell it (ideally)?  Is the timing driven by your needs and personal plans, or others?  Have you considered how much impact timing can have upon price?  If timing can have a large impact upon valuation (e.g. if selling a multiple of trail commission on a funds under management book where value can move with market performance and confidence) are you able to prepare the business for rapid sale at a time of premium values?
  • Who are you most likely to sell it to? Who would it be most attractive to….an internal successor or an external party? Do you have, or are you building, the type of business which is more attractive to somebody looking to build upon their own sweat equity and create their own income stream for the future, or are you building something which carries potential synergies and leverage for external investors?  Are those systems and key IP you might be building of interest only to investors from within the same industry, or are you thinking of a turnkey operation that opens up the possibility of being appealing to external investors that are not looking to work in the business itself?
  • How…at this stage is really “how much makes it worthwhile?”  What is the price range that makes a future sale worth doing – for you.  How much are you wanting, needing, or hoping to get from it that can become a key driver of the investment you will make in positioning the business for optimal succession value, and also trigger the succession process?

Understanding Where The Value Is

One of the key questions at the outset was understanding what it is you are selling – a business, an interest in a business, just an asset sale?  It follows that once you have worked out what it is you are selling you need to understand what components add or create value within that.  Considerations will include:

  • balance sheet, P&L’s and other standard financial measures and reporting.  In particular, what areas contribute the greatest value from an investors perspective?  What areas might be open to serious negotiation given widely different interpretation (e.g. goodwill, intellectual property values, brand value)?
  • current value, and valuation methodology.  Apart from what the business is worth now, is this value tested in a range of methodologies such as discounted cash-flow analysis, EBIT, future maintainable earnings x industry multiples, any comparable sales data?
  • business structure, and any limitations this may introduce (such as minority shareholders, shareholder agreements, preferred agency arrangements, etc) or additional opportunities it may create (strategic alliances, preferential access arrangements, absolute control or incoming owner, etc).  The governing documents of the business (constitutions, resolutions, licensing restrictions or authorizations) can add to, or detract from, the value of the business depending on whether they create certainty and control for investors, or whether they introduce restrictions and limitations.
  • governance of the business.  Is there a robust decision making framework with a strategic focus and a level of external thinking and/or skills that are adding value to the business?

Building and Maintaining Practice Value

Having established a clear picture of what it is you are hoping to achieve, and how others would consider where value might lie within the business, it becomes somewhat easier to then focus upon the areas that can add the most to practice value, and therefore enhance the return from your succession planning.  These might include:

For pure “asset sales”:

  • persistency levels
  • commission, trail, contracted fee agreement growth rates
  • client demographics and regional breakdowns
  • policy or investment types, and mix of types. if there are multiple lines of business, does each carry the same valuation multiple?
  • quality measures (e.g. client satisfaction surveys; book attrition rate, client complaints history)
  • taxation impact (e.g selling with or without GST or sales taxes – can that make a difference?)

For entire “entity sales”:

  • marketing and prospecting systems that are replicable and repeatable
  • quality staff & management, and supporting policies and procedures
  • financial controls and management information systems
  • business plans and budgets
  • positive and growing cash flows
  • client data management systems
  • shareholder and stakeholder communications and relationships

The first three steps of succession planning are arguably the most difficult, in that they are focussed on understanding the objectives, the levers that drive value, and then building a strategy (or plan) around how to achieve the optimal value.

And that is only half of the battle!

In the next post I will work through the other 3 steps that are needed to create a complete succession plan for professional practices.

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