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Setting Up A Practice Continuity Plan -- A Beneficiary For Your Business

Sean KernanComment

I interviewed one of my business partners about why we think a business continuity plan is so important.  That is, make sure if something happens to you, your clients are taken care of and your spouse/family gets the most value for what you've built.


Sean: I'm talking to one of my partners, Brandon Day. We're talking about the importance of having a contingency plan for your practice. Please tell us a little bit about what we've been focusing on with our advisors in our network in terms of contingency planning and why we need think that's such a big deal. 

Brandon: Well, it's certainly been made aware to us that while some of our advisors may have a handshake deal of a contingency or succession plan, many of them don't have any kind of formal contract or agreement; which means that handshake deal can't be honored. Bottom line is, it means your family doesn't get anything financially if something happens to you. 

Sean: What happens to your clients? If something happens to me and I don't have a plan in place, my family gets nothing and the clients get... what? 

Brandon: If you don't have a plan in place, they will receive a letter in the mail saying, "Your advisor is no longer with us. You have 90 days to get on the website and find somebody else." The firm will NOT assign the accounts to someone else. 

Sean: So, it sounds like a lose-lose situation. 

Brandon: Yes, it's putting both your loved ones and your clients in a very precarious position. 

Where To Start
Sean: From our experience we've found many advisors have a hard time knowing where to start. What would you say is a good place to start for someone that doesn't know where to begin? 

Brandon: You want to start looking at who has the bandwidth and time to actually take on your clients, properly service them and keep the clients on the books. So, then therefore there would be a stream of income to pay your spouse or loved ones. Once you've identified the advisor or team of advisors that are going to be most suitable, the process is very, very simple. It is a few signatures on a template. All parties agree to the formula and terms of the deal. The agreement is sent to the succession planning department to make sure that they have a copy on file, or else it might not be legally binding. Once all parties have a signed copy, you are protected. The advisor can void the agreement at any time. So, you're not at whim of whom you've spoken to about a succession plan. You're still in control and can change the plan whenever you want. 

Sean: Pretty good. When or why would someone want to change an existing plan? 

Brandon: Oftentimes, we've seen where an advisor has a partner who is a similar age, or maybe even older. The most logical succession plan was that partner. However, at a certain point, that partner is looking at retirement as well. Their bandwidth is declining, too. So, they are really not a legitimate succession plan the way they once might have been. Or, as you get to know some other options, you might find that a team of advisors or group might be best able to properly service your book, as opposed to an individual advisor. 

Sean: Right. It's certainly better to have something in place rather than nothing. I think a great scenario is two advisors who have a mutual trust and understand each other's way of thinking and how they do business. And, just as importantly, trust that if something happens to you, the other party will be willing and able to pay your family as the agreement is spelled out (or better). You want to be able to trust that. That's far better than having nothing. 

Brandon: Absolutely. 

Setting Up a Plan
Sean: But at some level, you want to think through it a bit more as you go on down the road; you want to maximize the retention of clients and probable longevity of the relationships. You mentioned the paperwork, but isn't it kind of a headache to have to sort through all that? What would you say is involved in the agreements that we've helped people set up? How much time does it take? 

Brandon: It's simply just walking through how a pass-through agreement works, or a buy-out agreement works and when multiples are involved and how the formula is going to work. We've actually created our own agreement that gives a fairly straightforward, very simple example on the addendum of how that will work. But other than a few minutes, making sure that both parties completely understand the mechanics, it's literally two or three signatures. Then we, normally, on behalf of that advisor, forward the agreement to the proper department, and follow up until they confirm that the appropriate approvals and signatures have been completed at the corporate level as well. Upon completion, we provide completed copies to all parties involved. Essentially we do all the legwork. 

Sean: So, it's really not that difficult. The hard part is choosing the right person. 

Brandon: Correct. The paperwork is about a five minute process, at most. 

Types of Succession Plans
Sean: Excellent. Can you touch on a little bit of the difference between this types of succession plan; that is, a contingency in case something sudden happens? Compared to a formalized buy-out, in terms of what that means for who you select? And also, what that might mean when it comes to valuations, at least generally speaking? 

Brandon: Sure. Typically, what you're first talking about now is solely a contingency plan and that is a "What if something happens to me unexpectedly?" situation. Essentially, it's more like having a beneficiary designation properly taken care of. 

Sean: Great analogy. 

Brandon: So, if you have a life insurance policy without a beneficiary, then it won't do you much good. 

Sean: Right. 

Brandon: So, if you don't have a contingency plan to pass on your book, then it's not going to help anybody when you're gone. Usually the multiples for these types of scenarios are on the lower end of the threshold; anywhere from one to one and a half, (but sometimes as high as two times) revenue, depending on if the nature of the revenue is recurring or not.

This lower end is because it is not an organized, formal buyout; where the retiring advisor could introduce the new team to his or her clients. It could be multiple meetings together with top clients, to make sure they're comfortable with the process and what's happening. In this scenario where somebody has tragedy strike them, there's inevitably going to be some attrition in some clients to leave, no matter who is taking over the business.

Because of the suddenness of the transition versus a formal buyout-at which point, you're really talking about a retirement plan. Now you're talking about a true, organized, exit strategy. In this scenario, it's going to be more organized; therefore, there should be far less attrition. Therefore, the multiples should be better because there is less risk to the buyer. 

Sean: Good point. It really is amazing, given the nature of the business we're in, that whole "cobbler's kids have no shoes" situation. 

Brandon: We do estate planning for our clients all the time. And then, most of us don't have a good estate plan. 

Sean: Yes. Many of us went independent, at least partially, because we had a business that had value. In either case, it's kind of critical to have this in place. That's one reason we've been so big on it. You're seeing that in the media and regulators as well, right? Is our firm specifically talking about it? 

Brandon: Yes.  The firm is definitely talking to others and we'll be seeing some emphasis. There is a real push to make advisors aware of this, and to make sure that we're not leaving our clients completely up in the air by not having a succession plan in place. 

Sean:  We require the advisors that are within our network to have us as the continuity plan, right? That's kind of a mandate, isn't it? 

Brandon: No way. You can choose whoever you want to be your succession. However, we do have lots of our advisors that do choose us. They like the idea of passing their practice on to a team. They understand that we have a tremendous amount of capacity; we have several staff. We definitely have the ability to truly service and not be reactive, but be proactive with the clients. 

Sean: Right. In fact, we even have a couple of folks outside the group that have taken us up on that offer to be their backup plan. Correct? 

Brandon: That is correct. We have been sought out by some advisors who are on their own, with little supervision; but realize that they needed a plan. They really wanted to make sure that their plan would be carried out and decided that we were the most logical choice. 

Sean: I know some advisors, at least one or two I've talked to, have the idea that "I want to make sure that whoever I have as my beneficiary," so to speak; "whoever I make the beneficiary, I want to be their beneficiary, as well." So, basically, if something happens to one of us; one of us, benefits. I understand that logic, but I also think, at least, the way I look at this personally, the most critical factor is not "Am I going to benefit if this other person dies?" The PRIMARY questions I ask myself is: "If something happens to ME, is my family going to be taken care of? Are my clients going to get the attention, care and planning that I would hope they would get if I weren't there to provide it?" So, that's big, big difference in how you about selecting a "beneficiary" for your business. 

Brandon: Absolutely. 

Sean: Are there any other considerations or reasons somebody that's not part of 360 Wealth Management should talk to us? Or any benefits to working with us, or at least giving us a call to talk. 

Brandon: I can't think of any reason why somebody wouldn't want to consider a partnership like ours with its resources and continuity. The average age of the three partners is a plus (early 40s) as it projects that we have many years left in this business. We make pretty ideal candidates for a proper succession plan. 

Sean: True. If an advisor, for whatever reason, wants to have more of a solo as their contingency partner, we certainly know plenty of advisors that would be happy to chat with them as well. We can make connections. In the past, it's a big part of what created the network-the connectivity that it creates. Just like LPL as a whole, but obviously, we can do that at a smaller scale. A little bit more intimate than 14,000 folks. 

Brandon: Absolutely. An advisor who is part of the network of which you are a part, you both have your own businesses. But it's an excellent point that some advisors prefer that one-on-one scenario. 

Sean: Right. Sometimes it takes a while. I find I enjoy that quite a bit and you do, as well. But sometimes, that's a time commitment that not everyone wants to make. So, that's where we're happy to be available to make sure it gets done. And as we tell people, "Hey, you can change this anytime..." 

Brandon: Yep. 

Sean: "We'll be the stopgap." It never matters and no one leaves us unexpectedly. But unfortunately, it happens every day to somebody, somewhere. Any other final thoughts? I think this has been a good background for someone that hasn't taken action. I think that's the main thing I would want to get across: do something, get SOMETHING in place. You owe it to your family and your clients. 

Brandon: Something is definitely better than nothing, but you probably want to put a little thought into it. One last final point is that I've found that letting clients know that I do have a contingency plan. 

Sean: Great point. 

Brandon: "If something happens to you, what happens to my money?" They like knowing that I have had the forethought to get something done and show that I'm being responsible to make sure their assets and planning gets taken care of. So, it could arguably be used as another added bullet point when talking to a prospect or client. 

Sean: Yes-broadcast it. In fact, I think all the succession planning gurus mention that; get that out there and let your clients know you're thinking of them. Obviously, you're protecting your family, but you're also thinking about their future, if anything happens to you. 

Good deal. Alright, well thanks for the time Brandon. I think this will be a benefit to advisors out there.