Succession plans really matter : A retirement plan is different to a business continuity plan

A series on succession planning, business continuity and retirement planning. Part 3

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Succession Planning for retirement

Parts 1 and 2 of our series showed that people mean two different things when they talk about succession plans: business continuity and retirement planning. In the final part of our series, we look at retirement planning.

Your retirement plan is how you plan to exit your business. This sounds straightforward, except that retirement means different things to different people. It is about realising the equity in your practice. You need to choose between selling the business completely or leaving a legacy where the clients continue to feel your DNA long after you’ve left. There is no right or wrong choice here. You are the only person who can decide what is right for you.

While there are several possible scenarios, I’m going to limit this article to three options to help you decide what is right for you.

Option A: selling your practice

This option is appealing to people who don’t have time to transition their practice to their successor. It is popular with advisors who want to start something new, as well as those who suffer from ill health. There is no magic in determining the value of your practice. Regardless of the specific valuation methodology, it always comes down to your recurring income. Many advisors are disappointed when they discover that their life-long clients have no value to a successor because there is no ongoing revenue.

To maximise your selling price, you need to increase your ongoing revenue by stopping upfront commission or fees and moving to an as-and-when commission or ongoing fees and increasing the longevity of your clients by focusing on their product holding (compulsory vs discretionary investments) and their relationships with you and your staff. You will need to actively manage this in the years leading up to your retirement.

In this scenario, it is typical to earn a multiple of around twice your annual recurring revenue. Where someone offers you more than this, it is likely that they are going to churn the clients to their in-house products. You need to consider whether this will be in your clients’ best interests.

Option B: transitioning your practice to a successor

The key difference between this option and selling your practice is that the successor joins you for a few years so that client relationships can be transferred effectively. The result is that the clients are stickier and that means that you should expect your practice to be valued on a multiple of around three times annual recurring revenue. Once again, you need to ask questions if someone is offering you substantially more than this amount.

Option C: leaving a legacy

As a financial planner, your clients are buying a customer experience that is based on your skill and the sense of comfort that they provide. If you want your legacy to continue, you need to bring the successor into your business long before you leave so that they can be absorbed into the culture you’ve created.

Practically, there are several ways for you to exit while leaving a legacy and the best option is often dictated by circumstance. I suggest that you consider a timeline that looks something like this:

  • While you are still working at full capacity, you identify a successor and bring them into your business.
  • They spend a few years learning about your customer experience, advice philosophy and solution preferences, and building relationships with your clients and staff.
  • As you approach retirement you inform both your clients and staff that your successor will start taking over the business, but that you will still be around for some time (you may want to start handing over some of your clients at this stage).
  • Your successor takes over the day-to-day management of the business, while you take on the role of figurehead.
  • For several years, you remain in the practice but you reduce your hours as you hand over your remaining clients.
  • At some point, you step away from the business entirely.

In terms of realising equity, you have the option of selling the practice, although you would expect a valuation multiple of at least three times annual recurring revenue because your clients are much more likely to remain in the practice. However, a better option for both you and your successor is that you do not do a valuation and instead earn a percentage of all future revenue as an annuity. Two popular models are 30% for the remainder of your life or 25% for the remainder of your life plus six years thereafter to your spouse.

Your retirement plan is your plan to realise one of your biggest assets. Remember that you can change your preference as your life changes. A solid strategy is to meet with a practice manager and/or valuer every five years from age 40 to value your practice and discuss what you should be doing to enhance the value. And then spend the next five years making those changes.


Photo of Guy Holwill
Guy Holwill, Chief Executive Officer, Fairbairn Consult

Guy Holwill is the Chief Executive of Fairbairn Consult. He is a qualified Civil Engineer and Chartered Account and has worked in financial services for more than two decades. Guy is passionate about creating business models that thrive in the changing worlds of regulation and customer experience.


Disclaimer: Fairbairn Consult is a firm of Registered Financial Advisers. We are a licensed FSP and a member of the Old Mutual Group.