Whether you are a veteran, rookie or somewhere in between, it pays to take time to think about equity and succession management — and develop a strategy to address challenges associated with this important issue.
The insurance-based financial services environment has changed dramatically. It is alarming the extent to which our profession is aging without a clear sense of who’s going to fill our leaders’ shoes. I am optimistic, however, by new thinking that may make the younger generation more interested in joining our industry and building a business.
To be sure, they aren’t coming into this field during easy times. Access to an existing market is critical to the new financial representative’s success. With more information available on the Internet, a ban on cold calling, a decrease in the effectiveness of direct mail, financial turmoil, Ponzi schemes breaking down trust in the system, failed corporations and increased complexity in product offerings and compliance — gaining a client base is more difficult today.
So, in this environment, how will equity and succession planning, primarily thought of as an “exit strategy,” help to re-invigorate the industry — and how does one approach it and its challenges? I’ve been thinking about this for a while, had the opportunity to “live” it when I sold my practice — and now have overseen the development of a platform to address equity and succession planning for my distribution company.
Challenge #1: Getting over old thinking that equity and succession management is something done at the very end of a career.
New Thinking: A book of business has value; plan your business strategy early with the end goal in mind.
The entrepreneurial mindset of the younger generation has spurred a different view of what it means to be a financial representative. They consider themselves business owners, not employees, with practices that have value and can be bought or sold. In fact, there is a rapidly growing market for practices.
Buying a practice provides an opportunity to gain additional market access, creating greater revenue opportunities. You can grow exponentially, and, by working to make your practice more attractive over time, will likely increase the market value in the eventual sale.
Transitioning a practice cannot be done quickly. The more time between starting a plan and selling, the more you make it seamless for clients and improve the value of your practice. Many reps start roughly five years in advance. This will work, but I’d highly recommend starting earlier — say 10 years, if you can. That way you can take a good measure of your practice, have the ability to implement changes to truly make it more valuable, and — perhaps most important — have time to evaluate and even groom potential successors.
Challenge #2: Not knowing what your practice is worth.
New Thinking: Knowing what your practice is worth allows you to plan for the future and set goals to increase its value. Find out by getting a baseline valuation from an experienced third party.
Some may think they have a good handle on their practice and can assess the value on their own. You can, but you may sell yourself short — and miss out on important, objective information that can increase the value of your business.
One of the biggest roadblocks for insurance practices, or mixed practices with some insurance business, has been the lack of an accepted methodology for valuation of a book of insurance business. Those in the investment and wealth management businesses have had established methods, but the nature of an insurance practice did not lend itself to a simple formula for calculation. Given the new interest in buying and selling practices, work has finally been done in this area to develop a rigorous formula. It’s not simple, but we determined that the emphasis of valuation can be placed on the depth of client relationships and the future revenue they may generate.
Valuation formulas are proprietary and complex, but we’ve developed a forecast model of future revenue that can be generated by applying predictive metrics to each client group, based on current client demographics and product mix, with a variety of factors — all pointing at increasing service levels for the client.
Challenge #3: Not understanding how to plan for succession for the short and long term.
New Thinking: Developing both short- and long-term plans is not only good for your practice — it’s important for your clients.
Don’t let the complexity of an equity event or succession strategy keep you from developing high-level plans for short-term continuity and the long-term transition early in your career. In the short term, a continuity plan protects a business’s value should something unexpected keep you from running your business, while a long-term succession plan helps explore the future sale of your practice — whether or not it is for retirement.
A continuity plan establishes ground rules for succession, outlining roles and responsibilities through contractual agreements. It also details what needs to be accomplished in the event of death, disability, or unplanned departure from the business. Unlike long-term succession planning, continuity planning often is a temporary solution.
A formalized succession plan details everything about transitioning your practice to the next generation of financial professionals. By establishing a plan well in advance, you groom the next generation through training and mentoring, allowing time for clients to become comfortable with the successor. Clients will know they will be taken care of should something happen.
Challenge #4: Not considering business-building as part of equity and succession planning.
New Thinking: In the current environment, with new financial and management tools, practice acquisition is a more frequent way of growing exponentially.
Look at your business with an eye toward improvement regardless of your thoughts on equity and succession. Continually improving your business and client relationships with an eye towards the future could ultimately increase the value of the practice and the overall effectiveness of the transition to the next generation.
Client relationships — as long they can be transferred — are a key to business value, so the first steps in improving a practice is to target this area. I believe using an automated Client Relationship Management (CRM) system is critical. These systems are vital in helping a successor understand and better serve your clients. CRMs help you segment clients and know where they are in their financial life cycles, making your business more assessable and transferable.
Growing your practice leads to a higher value. There are a number of ways to do this — adding clients through referrals and prospecting, adding staff who bring in new clients — or buying practices.
One good way to acquire a practice is through the continuity-planning process. You would act as the “continuity partner” for a number of practices and, upon succession, acquire these practices without competing on the open market. The intent is not to purchase the practice at the passing of the owner, but get your foot in the door by being the guardian. By establishing relationships with the client base far in advance of the transfer of clients and assets, you’ll have an opportunity to cultivate relationships and trust with the client base, ensuring a higher rate of retention.
Recent studies show that practices using a collaborative selling approach — or team approach — have been most successful. According to the Forces of Change study, (LIMRA, 2009) multi-advisor practices with an underlying support staff in which each representative brings a different discipline or skill set to the practice are two to three times more successful.
Challenge #5: Not knowing what’s involved to pull off a seamless transition.
New Thinking: It’s important to make the transition as seamless as possible — get expert help with contracts and financing and spend time finding the right successor.
The No. 1 obstacle in selling a practice is that the buyer wants the practice for less. It really helps to have an objective third party help with all the documentation and sorting out particulars. The nature of some distribution contracts makes buying and selling somewhat complex. It’s well worth having a resource with expertise in the industry.
Finding the right successor is critical to preserving client relationships — and you want your clients to feel well served by you. Having gone through the process and transitioning a successor into the business — which has successfully grown post-transfer, I feel it went well and can offer a few suggestions.
To strengthen my practice, I looked for someone who brought a new skill set to the practice. Actually, surrounding yourself with a team of people who have skills that fill gaps in the practice improves the business overall. For example, if you’re lacking technical skills, seek someone with them; if the business is more insurance-oriented, look for someone in wealth management; or, if you come from a sales and marketing background, you may want someone more analytical.
Obviously a different skill set is not the only criteria. The successor needs to be compatible with you and your clients. There are now several industry resources for “testing” compatibility — which are a good start.
But really, time is the best determinant of whether you’ve found the right successor. I planned for succession well in advance; my successor and I worked together for seven years before I transitioned into my new role. By then, we had developed an excellent working relationship, strengthened the practice with our combined skills and those of the people we hired. I feel it’s partially a testament to our preparation that he’s taken the firm to new heights, and positioned himself as a leader within the community his firm serves.
5 reasons to buy another practice
• To build scale and improve efficiencies and margins
• To grow the practice faster than through traditional organic means
• To gain access to a new market
• To expand expertise through acquisition of complimentary products or services
• To become a dominant provider of products or services to a target market
Brian Heapps, CLU, ChFC, is executive vice president of sales and business development for John Hancock Financial Network. He joined the home office after running (and transitioning) a top-producing firm and recently launched an equity and succession program for JHFN. He can be reached at bheapps@jhancock.com.