With the average age of a financial advisor already being over 50 and continuing to rise, the issue of succession planning is set to become an increasingly important factor for the intermediary industry over the next decade.
For advisors looking to retire or exit the industry, the sale or unwinding of a practice can be a lengthy and time consuming process. Firstly, one needs to consider whether the business is an asset or a liability. The reality is that, in many cases, it may well be a liability as a result of the owner’s failure to plan ahead.
A tool to ascertain whether your business may be a going concern is to ask yourself whether you would buy your own business. If your answer is no, then the right course of action may well be simply to transfer your clients rather than look to sell your client book or practice.
Even if you are ready and able to sell a business, there are certain considerations that need to be addressed such as unrealistic expectations about the sale, determining whether your clients’ affairs are in order and their willingness to accept other advisors in your business, as well the tax implications of a sale.
Many business sales tend to be lost as a result of poor financial records or because the buyer is forced to work from old information. Accounting and financial statements must be kept up-to-date and must be available readily and accurately. The secret is not to wait for your accountant or auditor, but to dictate processes.
When it comes to valuing a book, there is no set formula. Value models differ and any potential buyer will perform a due diligence check on your business to decide whether the practice should be bought at all, how much the business may realistically be worth and how to structure the acquisition. The purpose of due diligence is to assess the potential risks in a planned transaction to avoid any nasty or costly surprises. The buyer is actively looking for reasons not to invest in the business.
Advisors should be aware that in order to negotiate a sale of a business or a book, you must comply with both FAIS and FICA legislation. One of the key principles to bear in mind is that clients cannot be unduly prejudiced by the buying or selling of a practice or book.
Advisors who are selling will need to have regulatory returns and levies up to date, client files and compliance records in good order, key risk documentation recorded and all pending matters duly disclosed.
When selling a business, the FSB must also be informed in writing to lapse the license with the reason why and the effective date. The compliance officer must also provide the FSB with a letter of resignation and submit a handover compliance report. Clients must immediately be informed and steps put in place to ensure that outstanding business is completed promptly or transferred to another provider.
Of course, succession planning does not just concern retirement. The FSB also expects each provider to have a business continuation plan in place in the event of death, disability and retirement of key staff so that clients are not prejudiced in any manner.
When considering all these aspects it should be clear that succession planning should start at an early stage of any business. Just like the clients that intermediaries advise, it is essential that advisors engage the services of experts to assist and guide you through the process of due diligence and valuation of your business.
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