Why it’s never too soon for succession planning

In an advice business, succession planning often takes centrestage when the principal intends to step away.

But for Steve Prendeville, Forte Asset Solutions founder and director, the importance of a succession plan “cannot be understated”, regardless of a principal’s immediate intentions.

Mr Prendeville also pointed out that many businesses do not have the size to facilitate a succession but stressed the importance of having a plan in place.

“Succession diminishes key person risk and also locks in valued employees in a market that is starved of talent,” he said.

“The greatest inhibitor to succession is the ability of a potential successor to rise to the varied new roles required of being a business owner. Normally, the potential successor is younger with small kids and a big mortgage.

“The idea of succession is philosophically and ethically appealing; the application of succession is often very difficult.”

Earlier this year, a report released by Elixir Consulting also suggested that regardless of whether the principal of a business is intending to exit, resilient firms are characterised by having an active succession plan in progress.

Namely, the report set out that effective succession should ensure that business owners are able to extract capital value from their entrepreneurship and efforts.

“Most advice principals seek a greater return than purely financial; however, they enjoy a sense of satisfaction and fulfilment when they see their legacy in good hands,” Elixir Consulting said.

“The most successful succession plans are those where the transaction is done with a firm focus on what is best for the clients and the staff of the business.”

Mr Prendeville added, however, that this process can span several years, with the ideal timeframe being five years. Importantly, he warned that the more time it takes, the more risk factors there are.

Swapping succession for selling

For principals exiting a business, Mr Prendeville said a full sale is the most popular path “by a significant margin”.

“It is very important that any business is ‘investor-ready’. This means that there is active management reporting in place,” Mr Prendeville explained.

He clarified that being investor-ready involves having active management reporting in place, which showcases client numbers, marketing activity, upfront and ongoing fees, monthly cashflow data, FUM growth, as well as data on past, current and pending compliance, including any complaints.

“Having an idea of cash flow and business growth is critical for every day decision making and life has a way of turning plans upside down, so if you have the opportunity to finance, buy or sell, you can act immediately.”

According to Mr Prendeville, typically when retirement is envisaged, the business starts to slow down in line with the principal’s energy levels. As such, he said the best time to sell is when a business is showing growth.

“Principals need to be continually growing the business and enhancing efficiencies. Create a business people want to buy,” he advised.

“Understand what market valuations are. Talk to people who have experienced a sale, buyers and sellers, so you can learn how to best facilitate a sale and mistakes to avoid. Also understand how long it takes to sell and how long you will need to be active in the business during transition. Understand what data a buyer will want.

“The most successful sellers are ones who have clear visions of what they are going to do post-retirement, so they are not scared of the end but look forward to the new and exciting start of the next phase of their lives.”

The importance of growth also comes into play whether a principal intends to exit the business altogether or continue at reduced hours, Mr Prendeville added.

“Many sales we are facilitating currently are principals seeking to continue working post-transition but on reduced hours and be liberated from being CEO, HR, CIO, CFO roles, and just simply be an adviser and look after clients.

“Sell to the right party [who] you can be confident will look after the welfare of clients and staff,” he concluded.