Successful Succession Planning – Building Your Legacy and Keeping It

August 26, 2014

by Alan Rosenfield

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Meet John and Jean Dokes, the owners of ABC Investments. The couple has devoted 25 years to building a successful registered investment advisor (RIA) firm with 200 clients, growing its assets by 15% annually. They have decided to retire and sell their firm, but they are about to get a rude awakening and learn a valuable lesson:  An RIA without a succession plan is an owner who will watch much of his or her firm’s value disappear.

While John and Jean are not real people and ABC Investments is not a real RIA, their predicament is all too real and happens to too many RIA owners.

John and Jean’s predicament

John and Jean have no children in the business, and they make all of the decisions. They develop financial and investment strategies and handle the marketing and trading. While the firm has a sales assistant who helps clients over the phone with simple requests, the Dokes handle all investment-related discussions with clients.

The company generates $1 million in revenues, and after all expenses, it is left with $500,000 each year, making this a very successful small business with very high margins (the industry average is about 40%).

Unfortunately, John is now 90 and feeling strains on his health. Jean takes care of him at home, but at age 80, she’s finding this to be a bigger job than she’d expected. Meanwhile, neither has much energy to run the business.

The Dokes decide the best thing for themselves and their clients is to sell the company. There are many potential buyers – ABC Investments is well-known and respected in town. An RIA typically will sell for 5-7-times EBITDA, and given the firm’s growth rate and high margins, the Dokes feel that 7x is very reasonable (7 x $500,000 =$3.5 million). And because they worry about how the next owner will manage the business as well as the Dokes have, John and Jean want 50% of the sale price up front.

But any new owner is going to be very concerned about retaining clients, maintaining staff and attaining continued growth.   First, the potential buyer recognizes that the Dokes were the sales team and without Jean and John, there are no sales. Second, without their client relationships, many clients could leave in the next 12 months, making a 50% up-front payment very risky. At best, the Dokes are likely to get closer to $2.5 million paid out over three or four years – far less than John and Jean had hoped.

As disheartening as this story sounds, in reality it happens frequently.  Now that you recognize the problem, the question is, what do you do about it? You need a succession plan. But what does that mean, and how can you get one?

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