As a financial advisor, you’ve probably talked to many business owners. Some of them are probably your clients. No doubt you’ve asked them about their succession plans. If they didn’t have one, you probably told them they should.
When you stop and think about it, you’re probably a lot like many business owners. Many of them have built their businesses around selling their knowledge and personal services (e.g., attorneys, accountants, dentists, doctors, chiropractors, manufacturers’ representatives, etc.). Like them, you sell your knowledge and personal expertise. You know how much time, energy and hard work it takes to build a profitable practice.
If through the years you have also built a profitable business, then:
• Have you taken your own advice?
• Do you have your own succession plan?
• If you do, are you taking maximum advantage of it?
A number of recent surveys report that many financial advisors don’t have succession plans in place for their own businesses. In fact, many suggest that the lack of business succession planning by financial advisors is alarmingly common.
While implementing a succession plan isn’t easy, failing to do so may have negative consequences. There are at least three reasons financial advisors should have a succession plan.
Reason 1: Preserving Your Business’ Value. This is the standard reason for having a buy/sell plan, the one you talk about with your business clients and prospects. Like them, the day will come when you will leave your business; it’s inevitable. It’s not a question of if you’re going to leave, rather, it’s a question of when.
Accidents don’t always happen to someone else; sometimes they happen to you. If you don’t leave because of retirement, disability, burnout, boredom or other circumstances, you will leave when you die. Because you are human, your eventual departure is certain.
Because of this certainty, you must decide if it is worth spending some time and money to retain some of your business’ value for your retirement or for your family. If this doesn’t matter to you, then do nothing. Don’t have an agreement to sell it when you retire or die. Instead, just close the doors and walk away.
A funny thing about our industry is that there’s often another good advisor close by. When you’re no longer in business, your customers can probably find someone to take your place.
If, instead, you want to retain or pass on some of your business’ value, you need to plan for it. You need to find a buyer and negotiate reasonable terms. A smooth transition to a new owner(s) is important when you need to convert your service business into cash.
Reason 2: Retaining Client Service Opportunities. Smart clients select their financial advisors carefully. Smart advisors know that they owe it to their clients to build strong service relationships with them, delivering successful results. For many years they will continue to evaluate you.
Consider how many policyholders simply buy a financial product and forget about the transaction beyond premium payments—and their advisors are okay with that. However, as a conscientious advisor, your clients are more likely to continue to evaluate you and the benefits of working with you—and may be concerned about the future of your working relationship.
Some of your clients may be concerned about the future of the relationship. Even happy clients may ask themselves: “What will happen to me if something happens to him/her?” As much as they value you, they want to be sure they won’t be at risk if you die, retire or become disabled.
If they haven’t asked you this question directly, they still may be thinking it. It may be wise for you to bring it up. To address their concerns and to fend off possible overtures from other advisors, you may need to show they will be okay if something happens to you. Talking with them about your succession plan shows you are concerned about protecting their interests. This discussion could strengthen their bond with you and it will certainly provide a chance for you to make sure they understand how important they are to you—beyond a premium payment!
Of course, showing them that you have a plan is only the first step. Your clients need to be comfortable with your succession plan. Even the best plan may not retain clients if they don’t know who your successor(s) will be or they aren’t comfortable with them. To retain clients, you have to introduce your successor(s) and allow them to demonstrate their own skills and expertise. This can be difficult.
Many clients love you and want to work with only you. The relationship transition needs to be tested and completed before you leave the business. The value of your business depends in large part on your ability to transition your clients to your successor(s). The simple fact is that although your clients weren’t consulted, they do get to “vote” on your plan. If they don’t like it, they will vote with their feet and leave.
Reason 3: Generating New Sales. So far we’ve been talking about defense—using a succession plan to protect the value of your business. Let’s transition to offense and see how your plan may help increase your business’ value. You can use your plan as a marketing tool that shares your knowledge and experience. As such, it can help you make new sales. Not many financial advisors take advantage of this opportunity, but it is sitting there, waiting to be used.
Put yourself in your clients’ position. Succession planning can be intimidating because it’s something outside the scope of their normal business activities; they don’t do it very often. Their tax and legal advisors may talk to them in language that is complex and terms that are hard to understand. Making sense of the legalese in a buy/sell agreement can be challenging. You are a layman, like them. Your experience may help you explain things in a way that might be easier to understand.
One key to being comfortable with buy/sell agreements is to understand how they are usually structured. Although these agreements often run from five to 25 pages, they are often organized to address several specific issues. Boiling agreements down to these issues makes them much simpler to understand and navigate. The most important issues often include:
1. Who is the buyer(s) and seller?
2. What property is being purchased?
3. What events will trigger the buyer’s obligation to buy and the seller’s duty to sell?
4. How will the value of the business be determined, and how much will the buyer pay?
5. When, where and how will the buyer make the payments?
6. What happens if the buyer or seller doesn’t keep their promises?
These six components represent the skeleton of many buy/sell agreements. The agreement consists of the details that address these issues. Many attorneys don’t take the time to simplify the agreement and explain how it works. Your experience can help you explain it to clients in a different way.
In general, there are two things to consider in evaluating a buy/sell agreement. First is to determine what its terms actually mean. Buy/sell agreements establish the parties, the price, the triggers, and the terms and payments. Once these terms are understood, it’s important to consider what’s not in the agreement. What isn’t in an agreement can be extremely important.
One issue that may not be addressed in an agreement can be critical: Where will the buyer get the money to complete the purchase? Some agreements simply assume the buyer will have the money or will be able to get it. This can be a dangerous assumption.
Some agreements require the buyers to purchase life insurance on the seller. Life insurance can be an excellent funding tool when the purchase is triggered by the seller’s death. But many buy/sell agreements are triggered while the seller is alive. When this happens, there won’t be any death benefits to fund the purchase. Policy cash values may help pay the purchase price, but death benefits will only be available when an insured seller dies. It may not be possible for buyers to keep their promises when there is no plan for those promises to be backed up with money. This gives you an opportunity to explain how you’ve addressed the problem of funding the purchase price in your personal succession plan.
A Good Succession Plan Is Much
More Than A Buy/Sell Agreement
Buy/sell agreements establish the terms for the transfer of an ownership interest, but a workable succession plan requires more. An effective plan considers other components critical to the future of the business and binds them together. In addition to the buy/sell agreement, a good succession plan provides for:
• Emergency funds to provide flexibility in the event of unexpected developments.
• Funding/financing to make sure the promises in the agreement can be kept.
• Continued loyalty from the key employees necessary to keep the business profitable.
• Support of spouses and other family members.
Sharing how your succession plan addresses these issues may put you in a position to sell a variety of financial products. Money needs to be available to fund the purchase and meet unexpected events that may arise. In addition, valuable non-owner employees need to have incentives to remain with the business and to continue to give their best efforts. Thus, life insurance sales opportunities include:
1. Death benefits and cash values to help purchase a departing owner’s ownership interest.
2. Death benefits for “estate equalization” when there is a family business and some children are not going to share in the future ownership.
3. Key person insurance to pay for new expenses and lost profits resulting from a key employee’s death.
4. Policies to fund non-qualified key employee incentive and retention plans (key employees can be important in retaining clients after an owner dies, retires or leaves).
Why Your Plan Can Be A Useful Marketing Tool
The potential ability to leverage your own succession plan and your experience into new sales should make you anxious to have your own succession plan. Many financial advisors haven’t taken advantage of the opportunity to use their own plans to strengthen client relationships and produce more business. If you are willing to share the thinking you used in negotiating your own succession plan, you could potentially benefit in these ways:
1. Change the Sales Discussion to a Conversation Between Equals. Talking about your own business and your own plan positions you to talk to other business owners as a peer. You are sharing information with them as a fellow business owner, not as a salesperson. You have a lot in common with them. Like them, you sell your knowledge and experience. Like them, you have to find good customers and convince them to use your services and pay for them. Even though the services you sell are different, your succession problems are similar to theirs. You are equals sitting on the same side of the table.
2. Increase Your Credibility. When you share your own succession planning strategy, you aren’t talking in the abstract. Clients and prospects often wonder if you use the same products and strategies you are recommending to them. It’s powerful when you can honestly say, “I did the same thing for myself and my business.” Your credibility increases when you can show them you eat your own cooking!
3. Position Yourself as a Resource with Valuable Knowledge. When you have your own succession plan, you have accumulated some valuable resources. You may have sample documents or know experienced attorneys, CPAs or business valuation consultants who have expertise in succession planning. Sharing your resources may speed up the planning process and may make things easier and less expensive for them. In addition, experience may help them avoid making some mistakes. Consider using some of the questions in the exhibit to help your clients see some potential problems which may merit their attention.
Twenty Important Succession Planning Questions
Listed below are specific questions that may help you in talking with business owners about their business succession plans. If you’ve addressed these questions in your own succession plan, you’ll have an opportunity to share your personal perspective.
1. What triggering events does your agreement cover?
2. What happens if an owner is disabled for a long period and can’t work?
3. Will the purchase be mandatory or optional? If optional, who has the option?
4. Could the purchase result in a change in voting control?
5. Will the buyers get an increase in their cost basis for tax purposes?
6. Does the agreement favor either the seller or the buyers?
7. What’s the procedure for determining the value and price to be paid for an owner’s interest?
8. How often will the purchase price be reviewed and/or updated?
9. Are the key employees locked in with non-compete agreements? Do they support the plan?
10. What incentives do key employees have to work hard after the change in ownership takes place?
11. Does the agreement have any provisions concerning an owner’s divorce?
12. Are the interests of the owners’ spouses accounted for (community property or pre-nuptial agreement)?
13. Does the agreement prevent you from transferring your interest to your spouse or children?
14. From where will the money to complete the purchase come?
15. Will the purchase price be paid immediately or will it be paid in installments over several years?
16. Will the buyers be giving the seller personal guarantees of payment?
17. Will the buyers indemnify the seller if something goes wrong?
18. Will inflation decrease the spending power of the installment payments? How much?
19. What happens if a buyer defaults?
20. What happens if a buyer dies before all his/her payments have been made?
Conclusion
Completing your own plan is tantamount to taking a personal course on business succession planning. But it’s a more meaningful course because it’s a plan for your business. In addition to protecting your own business, having your own succession plan positions you to talk about this planning in a unique way. You’ll be able to give clients better, more practical advice. You’ll likely retain clients longer and you’ll likely make more sales. You’ll also be in a position to use your plan as a marketing tool that could help increase your business’ value. Implementing your own succession plan won’t be easy, but you receive multiple benefits when it’s completed. Promise yourself that you’ll update or finalize a plan for your business in 2013.
These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor. The ING Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws may change and the strategies suggested may not be suitable for everyone. Clients should seek advice from their tax and legal advisors regarding their individual situation.
