Succession or cessation: The choice is yours

Too many advisors decide to wait too long before exiting their practice.

By Donald White

Successful financial professionals spend their entire careers aiding their clients’ needs, expanding their client base and strengthening their industry knowledge. Although advisors inform clients on the intricacies of retirement and business continuity, they infrequently advise themselves in these two key areas.

For many advisors, creating and executing a succession plan for their own business is the exception, not the rule. Consequently, advisors may execute a cessation plan, where their business just ceases to exist in the future, rather than a succession plan, where their business continues under the stewardship of a handpicked successor. Crafting and executing a tailored plan for exiting the business is the key to maximizing the value of a practice and ensuring clients are in great hands after the founder exits.

The Goldilocks Syndrome

Almost everyone is familiar with the story of Goldilocks — the young girl who had three choices as she searched to find which meal, chair and bed was just right for her. Finding just the right time to exit a business is nigh unto impossible. I would argue a founder, unlike Goldilocks, has only two choices when it comes to succession planning — too early or too late. Attempting to be just right is what I call the “Goldilocks Syndrome.”

Even those who have established their succession tend to spend an inordinate amount of time trying to make sure they’re turning over their business at just the right time. However, in doing so, they often miss the right time because they hold on too long — only to watch their client base dwindle and the value of their business diminish.

When I sold our firm to hand-picked successors in 2020, the firm had just finished its best year ever and was poised to do even better in the upcoming years. Some might contend, since the firm’s revenue has increased every year since my exit, that I exited too early. However, I assert this “too early” exit was just right because in the end it was a win-win-win. I won because the value of the firm had not begun to diminish; the successors won because they were strongly positioned to take the firm to new heights. But the biggest winners were the firm’s clients, whose future financial advice was secure in the hands of a professional team with a vested interest in their needs and goals.

The most important part of executing a succession plan is to never make a decision based upon fear. Fear is the antithesis of trust — it instigates bad decisions and very often prevents people from deciding at all. When it is coupled with the Goldilocks Syndrome, too many people revert to exiting too late, which is, by definition, a lose-lose-lose proposition.

Growing beyond the founder

One of the biggest reasons advisors don’t execute cessation plans is because their business is overly dependent on them. Every advisor has had clients they believe are completely reliant on them alone. Although that loyalty is a great aspect of building a trusting client relationship, it can become a hindrance when it comes to selling the practice.

When clients are totally dependent on the founder, they may easily consider going elsewhere because they view the decision to leave or to stay as starting from scratch. Every departing client diminishes the firm’s value and makes it harder for the founder to leave, resulting in a cessation plan. However, when a client’s relationship is with the firm, the likelihood of a client remaining after the founder exits grows exponentially. Most people want to know that their interest is always top of mind. A proper succession plan relieves the angst of many clients, making that transition smoother for them and you. Succession can be a difficult, long-winded process, especially if the proper preparations are not made to ensure the firm is set to run smoothly after the founder’s departure. Although it’s important to have a plan in place, it often can seem easier to continue handling business yourself, instead of passing the baton. Most advisors have been in the profession for the better part of their adult lives, if not their entire adult lives, leading to the trap of working with clients until they physically cannot do it any longer. By setting up the business to continue reaching new heights after the founder’s departure, the next stage of life can be more fulfilling than being actively engaged in the business.

Donald White, AEP, CLU, ChFC, the founder of Treasure Coast Financial Services, Inc., is a 33-year MDRT member. He is a speaker and the author of three books, including his award-winning book on succession planning, Always End with the Beginning in Mind. He may be contacted at donald.white@innfeedback.com.