(2 December, 2004) Planning to succeed

Succession planning has the distinct honour of being one of the most widely discussed topics in the financial planning profession, while being the activity which occurs the least.

Consultants Wes McMaster and Alan Kenyon are just two experts who agree that the topic is usually the subject of many academic discussions. And that is where it usually ends.

Kenyon, of Kenyon Predeville, says there are “a handful of internal succession plans in Australia”.

The reason it remains elusive is that under the typical model an adviser is hired who over time builds up both the business and their own client relationships. In response to this the owners feel the need to give equity in the practice to keep the adviser loyal.

“The owner usually values the equity higher than the planner, who will likely never have the funds to buy the business fully, which means the succession is never really going to happen,” Kenyon says.

McMaster, adjunct professor of financial planning at RMIT and an industry consultant, says to make a succession work, advisers should approach it in the same way they approach a sale.

“The steps taken to prepare the business are similar to those in the event of preparing to sell. The practice must be profitable and efficient. It must also be prepared for a change in culture which comes with any change in ownership,” McMaster says.

One of the single largest cultural issues is the change in governance that comes with a change in ownership.

This is particularly important when the business moves from a single owner to more than one stakeholder under the traditional succession plan model.

“Failing to tackle governance issues is a critical mistake often made as people focus mainly on the shareholder agreement. Governance covers areas such as salary, staffing and remuneration, which may have been decided solely by the owner but are now subject to the decisions of more than one person. In that situation each party needs to have formal, arms-length positions agreed and in place before a stake is passed over,” McMaster says.

“The other core issue is to agree on the value of the practice and how that value is to be decided, which provides protection for all parties.”

Money Values managing director Robert Bain says if advisers plan to pass on their business through a succession, it is important to build that into their business model from the outset.

“Find someone early on in the process and cover the issue at the recruitment phase. This creates the potential for the successor to identify client types while working with them but also ensures they see the priorities and attitudes of the clients,” Bain says.

“The other benefits from this will be an industrialised process that does not sit in the head of the principal, so clients can be confident in the practice and not just the senior adviser which translates to a higher value at the time of transfer.”