Succession to take the form of stage selling

The evolution of succession planning procedures is likely to see a move away from the practice of selling entire businesses in a one-off transaction to a stage by stage sell down over a longer period of time, according to an industry expert on the subject.

MLC succession and acquisition services manager Bob Neill believes the change will be driven by the growing emphasis on equity in financial planning practices as a means of attracting and retaining quality staff to grow the businesses into the future, funding acquisitions and ensuring the legacy of the business will continue for the good of its clients.

“When we start looking at that sort of model, and we see that model evolve, it means there are going to be far more staged sell down approaches to succession planning,” Neill predicted.

“So we’re going to see people selling pieces of equity to different people with different values at different times,” he added.

Neill said the transition to staged selling off of practices will lead to a raft of additional issues practice owners will have to address.

“It brings a lot of challenges, like what methodology valuation is going to be utilised for the initial bid and future tranches, how much should be transferred at various stages and when control should be passed over,” he said.

As businesses move toward recognising the importance of equity and begin to have their values assessed based on equity rather than assets, Neill thinks two critical issues will need to be tackled by practice principals.

“When people start thinking about admitting equity partners or equity participants or investors, they’ve got to have a whole raft of documentation that dictates how they’re going to interact with each other,” he said.

“It’s also imperative that these businesses distinguish between the participants who are good employees, and therefore can continue to do that, and those that are going to drive equity and, therefore, what sort of management structure should favour their participation and what sort of role they should play,” Neill added.

He said all of these potential developments emphasised the fact that succession planning is a long-term strategy.