George Hartman,
G
H t
Author,
A th
EXIT is NOT a Four
Letter Word
©Market Logics Inc. 2016 – All rights reserved
©Market Logics Inc. 2016 – All rights reserved
©Market Logics Inc. 2016 – All rights reserved
Are We “Succeeding at Succession”?
• Advisor demographics same
as general population
• Senior advisors aging faster
than advisor population
• Half of advisors have no
transition plan
• Critical issue for:
• Advisors
• Clients
• Firms
• Industry
5
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Clients are better prepared than advisors!
Clients
Advisors
No Plan
(12%)
No Plan (52%)
Thinking
(21%)
Thinking (25%)
Informal Plan
(23%)
Informal
(13%)
Written Plan
(44%)
Written
(10%)
6
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How did we get here?
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From Survival to Succession
Succession
Sustainability
Success
Survival
Legacy
Business
Practice
Intention
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Why Plan Your Exit?
• Lifetime building your business
• Likely most valuable asset
• Expect sale to fund retirement
• Want control over exit
• Want someone to care for clients
• Succession will be your legacy
9
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Why Advisors Don’t Plan Their Succession
“Terrible
Terrible too’s”
too s
• “Too much fun”
• “Too important”
• “Too difficult”
• “Too busy”
• “Too
Too soon”
• “Too attached”
• “Too much client/staff negativity”
• “Too much potential conflict”
• “To do what?”
• Too
T many myths
th
10
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Selling or Buying a Practice - Facts vs. Fiction
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Fact or Fiction? – Lots of sellers
“Given the aging
g g of advisors,,
there will be lots of practices
to buy in the next 10 years.”
Fiction:
While there may be many
advisors wishing to sell,
sell most
practices aren’t worth buying
Test:
Would you buy just any practice?
Fact or Fiction? – Lots of buyers
“With few g
good practices
p
for
sale, there’ll be lots of buyers for
my practice in next 10 years.”
Fiction:
While there may be lots of advisors
looking to buy practices
practices, you won’t
won t
want to sell to many of them
Test:
Would you sell to just anybody?
Fact or Fiction? – Price is predictable
“Practices always
y sell for ‘X
times last 12 months’ revenue’
or ‘X% times AUM, etc…”
Fiction:
Practices sell for whatever the
seller & buyer agree they are
worth
Test:
Is there anything about your
practice that would make it worth
more or less than others?
Fact or Fiction? - Succession = Quit
This is a drawing of a
dinosaur.
It is also my 2 weeks’
notice
“Succession means the
end of my career.”
Fiction:
Succession is a process
…not an event
Test:
T
t
Most advisors “transition”
unless forced to exit
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Fact or Fiction? - Succession = Exit
“Succession p
plan & exit strategy
gy
mean the same thing”
Fiction:
• Succession plan = What happens to the
business after founder is gone
• Exitt strategy
st ategy = What
at happens
appe s to tthe
e
founder after business is gone
Test:
IIs what’s
h t’ good
d ffor th
the b
buyer always
l
good
d ffor
the seller (or vice versa)?
16
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Fact or Fiction? – Lots of time
“2–3 y
years enough
g time to p
plan.”
Fiction:
Much of what yyou need to do can
take 5+ years
Test:
H
How
l
long
will
ill iit take
k you to:
•
•
•
•
•
Become saleable?
Become scalable?
Maximize value of business?
Find & integrate right successor?
Reassure clients so they stay?
17
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Your Succession Plan
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Steps to Your Succession Plan
Prepare
p
Financially
Prepare
epa e
Emotionally
Determine
Exit Date
Write Your
Plan
Choose Your
Successor
Successo
Select Best
a
Exitt Plan
Implement
Review &
Refine
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My Financial Capability
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Step # 1 – Are you financially prepared?
• What is the reality of my
future financial needs?
• What financial assets do I
have outside the business?
• What is my practice worth?
• What guarantees do I need?
• Can I get along without
“perks”?
What’s your ‘Number’?
1. Capital required at retirement
2 Personal assets at retirement
2.
3. Difference = Practice Target Value
4. Obtain Practice Current Value
5. Practice Target Value minus
Practice Current Value = Gap
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Financial Freedom
Low
•
•
•
•
Little/no outside
investments
Lifestyle depends
entirely on how
practice is doing
p
g
Business pays lots
personal expenses
Fully need business
to fund retirement
Medium
•
•
•
•
Some personal
assets to add to
sale proceeds
Practice more than
supports
pp
lifestyle
y
Financial needs
not onerous
Sale will fund part
of retirement
High
•
•
•
Substantial
personal assets
o/s business
Don’t need to sell
practice for
p
lifestyle
Clients care is
more important
than the money
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My Emotional Enthusiasm
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Step # 2 – Are you emotionally prepared?
• How much energy
gy comes from my
y
role as an advisor?
• Am I OK with someone else doing
my job?
• Will I miss the “action”?
• Will I miss the people?
• Will I miss the public profile?
• What will I “retire to”?
25
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Emotional Enthusiasm
Low
•
•
•
•
Totally defined by
my business
Business couldn’t
run without me
Couldn’t live without
“perks” & recognition
No idea what to do
next
Medium
•
•
•
•
Life extends
beyond practice
Like more time for
other interests
Good team to
support business
Content with
accomplishments
& fun have had
High
•
•
•
•
Can’t wait to get
out of business!
Have another
passion like to
pursue
p
Very proud of what
have accomplished
Like to coach or
mentor someone
©Market Logics Inc. 2016 – All rights reserved
Em
motional
Financial/Emotional Readiness Matrix
High Emotion
+
Low Financial
High Emotion
+
High
g Financial
Low Emotion
+
Low Financial
Low Emotion
+
High Financial
Financial
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Step #3 – Set your target date
Think about:
– “Earliest possible” date
• Financially prepared
• Plan
Pl completed
l d
• Successor in place
– “Latest
Latest acceptable
acceptable” date
• Emotionally prepared
• Health, hobbies, family, etc.
• Marketability
28
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Em
motional
Financial/Emotional Exit Option Matrix
Sell to highest
bidder
Any option
Work to
maximize value
Exit over time
Financial
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Exit options
1. Do nothing
2. Carryy on
3. Partial exit
4. Internal transfer
5. External sale
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Comparing Options
Option
Advantages
Disadvantages
1 Do nothing
1.
• No succession p
plan required
q
• Will not realize full value
2. Carry on
• No succession plan required
• Timing is uncertain
• May actually be most profitable, • Clients question how
in some situations
l
long
th
they will
ill b
be served
d
3 Partial exit
3.
• Keeps “hand in the game”
• Focus on high value clients
• Difficult for successor
• Some clients offended
• Rips value from practice
3 Internal
3.
transfer
• Easiest to arrange
g
• Least disruptive to clients
• Financing may be available
• Limits candidates
• May not get full value
• Personal dynamics
4. External
sale
• Most likely to realize maximum
value
• Disruptive to clients
• Contract may prohibit
Practice Valuation
N1
V=
32
∑
CFn
n=0
(1+r)n
©Market Logics Inc. 2015 – All rights
reserved
Practice Valuation Calculation
Value = Discretionary Cash Flow ÷ Capitalization Rate
Discretionary Cash Flow
= Revenue - (Direct + O/H Expenses)
Capitalization Rate
= Discount Rate – Growth Rate
Discount Rate
= Market Risk + Specific Practice Risk
Growth Rate
= Expected revenue growth
Translation:
The value of a financial advisory practice is the present
value of its projected profitability for years to come
©Market Logics Inc. 2016 – All rights reserved
Beware “Rules of Thumb”
•
Many “rules-of-thumb”
• 3-5 x EBITDA
• 1-2 x trailing 12-month revenue
• 2
2-3
3 x recurring revenue
• 1-2% of AUM
•
Presumes all practices are equal — they are not!
• Each is living entity with multiple nuances that affect its value
•
“Stories
Stories on the street”
street e.g.
e g “Joe
Joe sold his practice for ‘$xx’
$xx , therefore,
therefore
mine is worth ‘$xxx’”, distort value
©Market Logics Inc. 2016 – All rights reserved
Principles of Practice Valuation
1. Future profitability is the only thing that determines current value
practice can earn g
going
g forward – not what it did in p
past
• Value is what p
2. Cash flow is king!
• Best gauge of future profitability is discretionary cash flow
3 Risk/Reward Trade-off
3.
• Greater certainty around future cash flow = higher valuations
4. Science + Art
• Objective
Obj ti assessmentt off quantitative
tit ti measures
• Subjective consideration of qualitative aspects
• “Approximately right is better than precisely wrong“
5. Value is in the eye of the beholder
• Final price should be driven by motivations of buyer & seller
©Market Logics Inc. 2016 – All rights reserved
Fact or Fiction? – Always think “value”
“Always think about how to maximize
value of your practice – even if you have
no plan to sell.”
Fact:
R your business
Run
b i
to last
l
f
forever,
while
hil
maximizing value, so it can be sold at any
time, for the highest price, to the most
qualified
lifi d b
buyer
Test:
When will death, disability,
y divorce,
disagreement, disillusionment, etc. occur?
36
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Your Business Growth Curve
Growth
Maturity
Start up
Start-up
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Re-invention Zone
What got you here…
What
got you here
… won’t get you there
Start
Here!
Not
Here!
Succession Planning Zone
Exit/Transition
Maturity
Start
Here!
Start up
Start-up
Who’s the Boss?
• Truth: You will leave your
y
business one day
• Will it be voluntarily or otherwise?
• Will you be in control of your exit?
• Will fate & circumstance dictate
what happens to the business
you have spent your life building?
©Market Logics Inc. 2015 – All rights reserved
Summary
 This is yyour life’s work
– it’s your legacy!
 It
It’ss worth doing right
 Don’t let fate decide
 Never too soon to start
 Rewards are great!
g
©Market Logics Inc. 2015 – All rights reserved
Q&A
George Hartman
CEO, Market Logics Inc.
[email protected]
416-489-4848
www.marketlogics.ca