GHtAthGeorge Hartman, Author, EXIT is NOT a Four Letter …c.ymcdn.com/sites/€¦ ·...

G H t A thGeorge Hartman, Author, EXIT is NOT a Four

Letter Word

Are We “Succeeding at Succession”?

• Advisor demographics same as general population

• Senior advisors aging faster than advisor populationthan advisor population

• Half of advisors have no transition plantransition plan

• Critical issue for:• AdvisorsAdvisors• Clients• Firms• Industry

5 ©Market Logics Inc. 2016 – All rights reserved

Clients are better prepared than advisors!

Clients Advisors

No Plan (12%) No Plan (52%)

Thinking(21%)

Thinking (25%)

Informal Plan (23%)

Informal (13%)

Written Plan (44%)

Written (10%)

©Market Logics Inc. 2016 – All rights reserved6

How did we get here?


From Survival to Succession

Succession LegacySuccession Legacy

Sustainability Business

Success Practice

IntentionSurvival


Why Plan Your Exit?

• Lifetime building your businessLifetime building your business• Likely most valuable asset• Expect sale to fund retirementExpect sale to fund retirement• Want control over exit• Want someone to care for clients• Want someone to care for clients• Succession will be your legacy


Why Advisors Don’t Plan Their Succession

“Terrible too’s”Terrible too s• “Too much fun”• “Too important”

• “Too difficult”• “Too busy”

“Too soon”• Too soon”• “Too attached”• “Too much client/staff negativity”• “Too much potential conflict”• “To do what?”

T th• Too many myths


Selling or Buying a Practice - Facts vs. Fiction


Fact or Fiction? – Lots of sellers

“Given the aging of advisors, g g ,there will be lots of practices to buy in the next 10 years.”

Fiction:While there may be many advisors wishing to sell mostadvisors wishing to sell, most practices aren’t worth buying

Test:Test:Would you buy just any practice?

Fact or Fiction? – Lots of buyers

“With few good practices for g psale, there’ll be lots of buyers for my practice in next 10 years.”

Fiction:While there may be lots of advisors looking to buy practices you won’tlooking to buy practices, you won t want to sell to many of them

Test:Test:Would you sell to just anybody?

Fact or Fiction? – Price is predictable

“Practices always sell for ‘X ytimes last 12 months’ revenue’ or ‘X% times AUM, etc…”Fiction:Practices sell for whatever the seller & buyer agree they areseller & buyer agree they are worthTest:Is there anything about your practice that would make it worth more or less than others?more or less than others?

Fact or Fiction? - Succession = Quit

“Succession means the end of my career.”

Fiction:

This is a drawing of a dinosaur.

Succession is a process…not an event

T tTest: Most advisors “transition” unless forced to exitIt is also my 2 weeks’

notice


Fact or Fiction? - Succession = Exit

“Succession plan & exit strategy p gymean the same thing”Fiction:• Succession plan = What happens to the

business after founder is gone• Exit strategy = What happens to the t st ategy at appe s to t e

founder after business is goneTest:I h t’ d f th b l d fIs what’s good for the buyer always good for the seller (or vice versa)?


Fact or Fiction? – Lots of time

“2–3 years enough time to plan.”y g p

Fiction:Much of what you need to do can ytake 5+ yearsTest: H l ill i kHow long will it take you to:• Become saleable?• Become scalable?• Maximize value of business?• Find & integrate right successor?• Reassure clients so they stay?• Reassure clients so they stay?


Your Succession Plan


Steps to Your Succession Plan

Prepare Prepare Determine pFinancially

epa eEmotionally Exit Date

Select Best Exit Plan

Choose Your Successor

Write Your Plan t aSuccesso

Implement Review & Refine


My Financial Capability


Step # 1 – Are you financially prepared?

• What is the reality of myWhat is the reality of my future financial needs?

• What financial assets do IWhat financial assets do I have outside the business?

• What is my practice worth?• What is my practice worth?

• What guarantees do I need?

• Can I get along without “perks”?

What’s your ‘Number’?

1. Capital required at retirement2 Personal assets at retirement2. Personal assets at retirement3. Difference = Practice Target Value4. Obtain Practice Current Value5. Practice Target Value minus

Practice Current Value = Gap


Financial Freedom

Low Medium High• Little/no outside

investments • Some personal

assets to add to • Substantial

personal assets • Lifestyle depends

entirely on how practice is doing

sale proceeds• Practice more than

supports lifestyle

o/s business• Don’t need to sell

practice for p g• Business pays lots

personal expenses• Fully need business

pp y• Financial needs

not onerous• Sale will fund part

plifestyle

• Clients care is more important• Fully need business

to fund retirement• Sale will fund part

of retirementmore important than the money


My Emotional Enthusiasm


Step # 2 – Are you emotionally prepared?

• How much energy comes from my gy yrole as an advisor?

• Am I OK with someone else doing my job?

• Will I miss the “action”?• Will I miss the people?• Will I miss the public profile?• What will I “retire to”?


Emotional Enthusiasm

Low Medium High• Totally defined by

my business• Life extends

beyond practice• Can’t wait to get

out of business!• Business couldn’t

run without me• Couldn’t live without

• Like more time for other interests

• Good team to

• Have another passion like to pursue

“perks” & recognition• No idea what to do

next

support business• Content with

accomplishments

p• Very proud of what

have accomplished• Like to coach ornext accomplishments

& fun have had• Like to coach or

mentor someone


Financial/Emotional Readiness Matrix

High Emotion +

High Financial

High Emotion +

Low Financial g

mot

iona

l

Low Emotion +

Low Financial

Low Emotion +

High Financial

Em

Low Financial High Financial


Financial

Step #3 – Set your target date

Think about:– “Earliest possible” date

• Financially preparedPl l d• Plan completed

• Successor in place

– “Latest acceptable” date– Latest acceptable date• Emotionally prepared• Health, hobbies, family, etc. • Marketability


Financial/Emotional Exit Option Matrix

Any optionSell to highest

bidder

mot

iona

l

Work to maximize value Exit over time

Em


Financial

Exit options

1. Do nothing

2. Carry ony

3. Partial exit

4. Internal transfer

5. External sale


Comparing Options

Option Advantages Disadvantages

1 Do nothing • No succession plan required • Will not realize full value 1. Do nothing p q

2. Carry on• No succession plan required• May actually be most profitable,

in some situations

• Timing is uncertain• Clients question how

l th ill b din some situations long they will be served

3 Partial exit • Keeps “hand in the game” • Difficult for successor• Some clients offended3. Partial exit • Focus on high value clients Some clients offended• Rips value from practice

3 Internal • Easiest to arrange • Limits candidates 3. Internaltransfer

g• Least disruptive to clients• Financing may be available

• May not get full value• Personal dynamics

4. External sale

• Most likely to realize maximum value

• Disruptive to clients• Contract may prohibit

Practice Valuation

N1

V = ∑ CFn∑ n

(1+r)nn = 0


32

Practice Valuation Calculation

Value = Discretionary Cash Flow ÷ Capitalization Rate

Discretionary Cash Flow = Revenue - (Direct + O/H Expenses)Capitalization Rate = Discount Rate Growth RateCapitalization Rate = Discount Rate – Growth RateDiscount Rate = Market Risk + Specific Practice RiskGrowth Rate = Expected revenue growth

Translation: The value of a financial advisory practice is the present value of its projected profitability for years to comevalue of its projected profitability for years to come


Beware “Rules of Thumb”

• Many “rules-of-thumb”• 3-5 x EBITDA• 1-2 x trailing 12-month revenue• 2-3 x recurring revenue2 3 x recurring revenue• 1-2% of AUM

• Presumes all practices are equal — they are not!

• Each is living entity with multiple nuances that affect its value

• “Stories on the street” e g “Joe sold his practice for ‘$xx’ therefore• Stories on the street e.g. Joe sold his practice for $xx , therefore, mine is worth ‘$xxx’”, distort value


Principles of Practice Valuation

1. Future profitability is the only thing that determines current value• Value is what practice can earn going forward – not what it did in pastp g g p

2. Cash flow is king!• Best gauge of future profitability is discretionary cash flow

3 Risk/Reward Trade-off3. Risk/Reward Trade-off• Greater certainty around future cash flow = higher valuations

4. Science + ArtObj ti t f tit ti• Objective assessment of quantitative measures

• Subjective consideration of qualitative aspects• “Approximately right is better than precisely wrong“

5. Value is in the eye of the beholder• Final price should be driven by motivations of buyer & seller


Fact or Fiction? – Always think “value”

“Always think about how to maximize value of your practice even if you havevalue of your practice – even if you have no plan to sell.”Fact:R b i l f hilRun your business to last forever, while maximizing value, so it can be sold at any time, for the highest price, to the most

lifi d bqualified buyerTest:When will death, disability, divorce, ydisagreement, disillusionment, etc. occur?


Your Business Growth Curve

Growth

Maturity

Start-upStart up


Re-invention Zone

What got you hereWhat got you here…… won’t get you there

Start Not Here! Here!

Succession Planning Zone

Exit/Transition

Maturity

Start Here!

Maturity

Start upStart-up

Who’s the Boss?

• Truth: You will leave your ybusiness one day

• Will it be voluntarily or otherwise?• Will you be in control of your exit?• Will fate & circumstance dictate

what happens to the business you have spent your life building?


Summary

This is your life’s work y– it’s your legacy!

It’s worth doing right It s worth doing right Don’t let fate decide Never too soon to start Rewards are great!g


Q & AQ & AGeorge Hartman

CEO, Market Logics [email protected]

416-489-4848www.marketlogics.ca

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