What’s your firm worth, without you?

Empty office 2

by George Ray

Over the last few years there have been numerous practice management articles on the subject of succession planning. And, as you may know, few advisers have done much about it. In sessions that I’ve conducted, I’ve asked advisers ‘How many of you have a succession plan?’ Typically, fewer than half of the advisers in the room will raise their hands. Even more telling, when I’ve asked those who actually have a written plan to keep their hands raised, most of the hands go down.  And, when asked to keep their hands up if their written succession plan includes a funding mechanism in place to actually complete the sale or transfer of the business, usually there are no hands left.

Why do so few advisers have a succession plan? Here are some of the most common answers I’ve heard:

  • Too busy building the business currently to deal with it
  • It’s too far into the future to think about now
  • Not sure what the business is worth, or will be worth
  • Haven’t found the right candidate to take over

The first two answers are really just excuses. Succession should always be an objective for a business owner no matter how busy you are or how far into the future it will be before you retire.  We don’t let our clients wait until the last few years before retirement to start planning, so why should we?

In an article in Investment Advisor Magazine’s January 2014 issue titled “Untangling Ownership”, Charles Farrell and Fred Taylor of Northstar Investment Advisors of Denver, CO understand the real issues.  “In order to build any kind of enterprise value, to be worthy of receiving some sort of buyout when you retire, you have to build a business not a practice”, says Farrell, CEO for Northstar.

And this is the issue. Most independent advisers, build a practice that is unique to them.  They market themselves and their own money management philosophy.  Advisers desire to show clients that they are unique in order to attract new business. But this ‘uniqueness’ can backfire on you because when you leave, your business is no longer about you. So, what’s left for your clients after you told them that you are the pied piper?

Farrell goes on to tell us that “Saying you have a practice that’s unique to you, the clients are tied to you, the philosophy’s tied to you; there’s really no way for anyone to buy you out because there’s no way to tell how many of those clients will stay, what sort of revenue you’ll generate, not a year or two out, but really 10 years out”. Why would another adviser want your mice? They must be retrained to follow him. How long will that take? What will it cost him? And, how much effort will be needed?

This is why many succession plans have to include a transition element as well.  The outgoing adviser has to remain on board for a period of time so that he can introduce his mice to the new adviser’s tune. (The transition is also usually necessary because no funding mechanism was put in place early on, so the adviser must accept a note for a portion of the purchase, which doesn’t give him all the cash that he needs to walk away cleanly and fulfill his own retirement plans.)

How do you avoid some of the challenges to succession planning? Unfortunately, it may not be possible for some advisers.  Charles Farrell mentions that many advisers who start their own firms are Type A personalities. “They don’t like to listen to other people. They don’t play well in groups.”  Many independent advisers leave wire houses or larger practices because they want to strike out on their own.  They want to avoid ‘managing people’ and dealing with all of the issues (i.e., hassles) that go along with working (or managing, or owning) a large firm. But, it’s the avoidance of dealing with those very issues that will also prevent you from turning your practice into an ongoing business that will have value after you leave.

If you want your business to have value, you need to build value throughout the life of your business by recruiting associates who will eventually become partners.  You’ll need a program to transfer ownership to those partners to provide incentive for them to remain with the firm (‘their’ firm). You’ll also need to change your thinking when it comes to making the business all about you, Mr. Type A, by creating an offering (including processes, communications, etc.) that will make clients loyal to the firm – rather than just you.

This is no easy task, and cannot be accomplished in the few years before you’re ready to retire. Just like we tell our clients, the sooner you begin, the more likely you’ll be to accomplish your objectives. I reccomend that you read this excellent article at thinkadvisor.com for more insights from a group of advisers who have been successful in creating a business that will be able to transfer value to its advisers when they are ready to depart, while retaining value for their clients who stay on.

So, what’s your firm worth, without you?  Well, that’s really up to you — but not just you.

Recovering from a Disaster

Storm cloudsby George Ray

We’ve seen the news reports, the interviews, the photos.  But it’s still hard to comprehend the devastation that took place from Typhoon Haiyan.  Few of us will ever experience this type of disaster on the scale that occurred there.

We feel for the people.  Our hearts are heavy. We send our prayers and make donations of money, food, water, and other essentials to try to help the people of the Philippines. It will take a long time for life there to return to normal – if it ever can.

And although it’s the people that are most important, as a business consultant, I can’t help but think about the thousands upon thousands of small businesses that have had their operations disrupted by the storm — because a disruption of a business hurts many people. Employees may not be paid, or may even lose their jobs.  Vendors and suppliers may lose their customer. Clients of the business may no longer receive the goods and services that were important to them. And, of course, everything that the business owner may have been building for themselves and their families could potentially be lost — maybe forever.

I’ve spoken to many advisers who have experienced disasters – from fires and floods to Katrina and Sandy. Some have disaster recovery plans, and have shared how their plan was helpful to the continuing operation and eventual recovery of their business, but many advisers were either poorly prepared or unprepared. How about your business?

As a practice management consultant, I’ve hosted sessions for advisers on disaster recovery, and thought it timely to share a few ideas here. There is so much that can be done to lessen the effects of a disaster on your business. There isn’t room here to discuss everything, but here are some ideas to get you thinking, and hopefully motivated, to create your own plan.

If your business is going to continue to operate smoothly – maybe even able to operate at all – you need a written plan.  Think about this — every large city, and even most small towns, have disaster plans in place to minimize the effects of disasters like tornadoes, hurricanes, floods, and earthquakes on their citizens.  And, most large businesses have backup plans so that they will have office space and access to computer hardware and files for employees should something happen to cause a disruption in their day-to-day business activities.  You must have a plan as well.  And, it should be stored in several places, so that you can get to it even if you can’t get to your office

Don’t try to do it all by yourself.  There are plenty of resources available online to get you started.  Do a Google search for ‘disaster recovery’.  In the top of the results you’ll find a great site by FEMA, the Federal Emergency Management Agency.  They know a thing or two about disasters.  There are also lots of sites that offer help to small businesses.  Network with other advisers.  Talk to other small business owners in your area. Brainstorm with your employees. Contact your broker/dealer and your vendors (fund companies, software vendors, etc.) to ask how best to work with them in case of a disaster – that could occur on your end, or theirs.

Your employee, client and vendor contact information should be readily available (i.e., a copy should be stored offsite) in case you can’t get to your (or no longer have an) office. (Before storing client information offsite, talk with your broker/dealer and compliance department so that you follow privacy regulations and any internal rules regarding client information.) Do you have multiple ways to contact your employees — through different communications channels? Do you have their personal email addresses, cell phone numbers, even their social networks?  Do you know their family members or close friends, and could you contact your employees through them if necessary? What about your vendors and suppliers?  And, of course, your clients?

By the way, expect employee absences. A disaster may have an effect on your employees.  If key personnel can’t get to the office because they are dealing with the impact of the disaster on their own property or families, you must have redundancy in your operations.  How will responsibilities be delegated to various staff members during a disaster? Cross training employees can allow your business to continue operating smoothly when an employee is sick or on vacation, but it becomes even more important during times of disaster.

I find that few advisers have a written operations manual or appreciate its importance, but having a written manual will help you and your remaining staff to continue to service clients when staff members who normally perform certain tasks aren’t available.  How do you get into the software to initiate a distribution for a client when only Jane has the password — because she’s the one who usually does the distributions?

It may have taken you years to build the infrastructure of your practice, so inventory your systems and have schematics of your infrastructure. How will you recreate your business, if it becomes necessary? Do you have the ‘blueprints’ to put your business back together? How would you go about it?  What would you need? How would you access it?  Where would you start?  What would it cost?

One of the most effective suggestions that I can make to help you recover more quickly from a disaster is to choose an ‘owner’ to direct the recovery. If you are fortunate to have an employee who has strong organizational skills, who is a leader, and is very responsible, then make that person the owner of your recovery.  Having someone in your firm that you can rely upon to take charge of the administrative aspects and details of the recovery can free you to work on big picture strategic initiatives, and give you more time to talk with your clients.

Large cities and town conduct disaster drills to test and refine their plans.  You should also. Conduct a drill with your employees to walk through your plan, the possible scenarios that could occur, and how you will handle them. After the drill, ask your staff questions such as ‘how did this impact our business?’, ‘how did this impact what you do?’, ‘what can we do to accelerate the recovery and get back to normal?’

Throughout your discussions, don’t forget the most important component of your disaster recovery process – your clients.  It’s very important to clearly communicate what’s taken place and keep your clients informed of your progress. An effective recovery plan should allow you to operate in a ‘business as usual’ mode, but, if it’s necessary to make changes in your operations in order to accommodate the conditions, do your best to limit inconveniences to your clients.  Most clients will understand that it may take longer to process requests after a disaster has occurred, but will likely want to know that their assets and investments are ‘safe’.  And, they may want to be reassured that any private information is also secure.

Having a well-constructed, written disaster recovery plan that has been thoroughly prepared and effectively communicated to everyone who may be involved in the recovery of your business may help you to continue to operate during a challenging time, and get ‘back to business’ much sooner.