Since the global financial crisis (GFC) struck international markets, many advisory practices have experienced declining revenues, been forced to delay or bring forward principal exit plans, succumbed to aggressive cost-cutting exercises or, in severe cases, even been forced to close shop.
Despite this, a number of practices have weathered the storm better than others with the help of formal, effective and regularly-updated succession plans.
Greater stability has not been achieved overnight, but where effective succession plans have been put in place, practices have been able to maximise options and opportunities, increase profitability and in cases where there was a transition in ownership, ensure operations have remained smooth for all parties.
Independent consultancy Business Health partner Ray Henderson says succession planning has always been an important issue, but acknowledges it has become a more widely-discussed topic since the GFC.
"More principals and dealer groups are realising in the current climate that an effective succession plan can make a noticeable difference to a firm's profitability, operations, and staff and client satisfaction levels," Henderson says.
"It's not just about planning for the principal's exit date; it's about ensuring that finances are in order, that the business is not dependent on one person and that staff and clients also know the direction the business is heading in."
He says since the GFC more principals are holding off on retirement and delaying selling their practices to improve business performance and the sale price.
"There is also a greater tendency to consider options whereby principals can provide equity to key staff and promote a successor from within the business," he says.
Economic times such as these make people think more about the present and the future.
"When times are tough, vendors need to be particularly savvy," Henderson says.
"There are additional bargain hunters in the market right now. There are also buyers that are holding off due to decreased revenues as well as aggressive acquirers that are being more particular with the purchases they make."
Henderson says unorganised businesses may as well be in no-man's-land.
"When markets are good and everyone's looking to buy, succession planning might not seem so important for a principal, but when times are tough every aspect of a business is under the microscope," he says.
"A business that has an effective succession plan is not only more attractive to a potential buyer, it gives the principal more control over the future and legacy of their practice."
Broker firm Kenyon Prendeville director Alan Kenyon agrees that since the GFC, more principals have been prepared to invest time in succession planning and in identifying the right successor.
"Revenues have been hit substantially and business owners are now reviewing all options so that they can maximise opportunities," Kenyon says.
"The GFC has shown many businesses that they are too principal dependent and that they are ill-prepared should something unexpected happen again."
Ipac head of business partnering John Saint says the GFC has prompted principals to open their eyes and acknowledge that an effective succession plan can help a business and its stakeholders to avoid unnecessary stresses.
"We've seen a lot of changes in the industry over the last couple of years and things are only going to become more complex, particularly with the various inquiries currently underway," Saint says.
"Anyone who hasn't managed to work out what they're doing needs to think about it fast because having a strong partner or successor alongside you in these difficult times is important." He says the most ironic thing the GFC has highlighted is that advisory practices plan ahead for clients but seldom do for themselves.
Henderson agrees it is a strange phenomenon, particularly when Business Health statistics reveal there are numerous benefits to succession planning.
"A business that has an effective succession plan - by which I mean it is written down and regularly reviewed, includes an identified successor and funding options, as well as contingencies as to what will happen in the case of disablement, retirement or resignation - can earn a principal three times the profit as those without one," he says.
Business Health statistics, which include data from more than 1000 Australian advisory practices, reveal that practices without succession plans in place earn an average profit per principal of $123,000, while those with an effective plan earn $447,000.
"Despite the figures, around 70 per cent of Australian advisory practices do not have a succession plan in place and of the 30 per cent that do, only 5 per cent have an effective one," Henderson says.
Succession planning is a lengthy process but a worthwhile one for businesses.
"The principal and staff are happier because they have greater certainty and clarity as to what will happen to the business," Henderson says.
Similarly, client surveys conducted by Business Health show clients feel more comforted by a practice with a succession plan as it is a sign of longevity and that the business is not dependent on one person.
Henderson says the key considerations for a principal should be how they want to get out, when they want to get out, how they want to do it and what their options are should other circumstances come into play.
"Principals need to consider whether they plan to sell immediately or whether they wish to relinquish responsibilities over time," he says.
Potential buyers typically include family members, employees, external buyers who want clients but not business assets, external buyers who want clients as well as assets, or shareholders through a stock exchange listing, he says.
"The main thing is if the principal wants to hand over the reigns to a successor rather than sell immediately that there is a proper assessment of the candidate with consideration for some outside consultation," he says.
"Choosing the wrong person can have disastrous consequences.
"You need to establish a criteria and assess candidates against that criteria because often they can appear great when in fact they're not."
Kenyon Prendeville also believes that regardless of whether a principal is considering an internal or external successor they should consult an external party for the interview process.
"You need someone that is unbiased to sit down and assess whether there is chemistry and whether the candidate will fit the culture of the business," Kenyon says.
"You want to know what their aspirations are, whether they want to one day own 100 per cent of the business or just a stake in it."
He says while succession planning can provide opportunities, it is not an easy process.
"Difficulties with succession include that a principal may select an internal candidate to buy equity when the person does not have the funding or perhaps they lack the aspiration to run the business. The successor might end up with 10 per cent equity and a loan of a couple of hundred thousand dollars when all they wanted was recognition for their work and loyalty," he says.
"In the case the potential successor does want equity but doesn't have the funds, they and the principal might have to look at a combination of vendor terms or put up part of the business as a security for the successor to acquire funds." This type of equity arrangement could take place over three to five years whereas a trade sale could take just three to six months, he says.
"I'm not advocating a trade sale is the solution in all cases, but it's important to realise that effective succession planning is no quick fix," he says.
There are advantages and disadvantages to both internal and external successors.
"An internal successor knows clients and staff and how the business works, and has presumably helped the business get to where it is today," Kenyon says.
"Despite this though, we've had more success placing external candidates.
"This is probably because we can typically locate an external person who is qualified, experienced, over 40, has skills and qualities that complement the business and its stakeholders, and in some but not all cases has some financial capacity to fund the succession."
Commonwealth Bank of Australia's (CBA) financial planning banking team offers financial planning banking services to 17 of Australia's largest dealer groups.
For those that don't have the financial backing, CBA provides a unique financing solution to its dealer groups, enabling them to lend against their practice rather than their home or other personal assets.
"They can do this to assist with succession plans, mergers and acquisitions, and staff and retention strategies," CBA financial planning banking market development executive Ian Anderson says.
The group's latest initiative to help dealer groups and practices with succession is its private broker network (PBN).
"We introduced the PBN due to growing demand from dealer groups and their practices for expert succession and acquisition support," Anderson says.
The PBN brings together four industry specialists, including CBA financial planning banking, which assists in the area of financing, and independent specialist provider for the planning industry Encore Group, which assists with consulting, information preparation, valuations and due diligence.
Mills Oakley Lawyers provides legal support in terms of deal structures and tax planning, while the fourth industry specialist, Practice Exchange, looks over things from a business broking perspective, and assists with things such as listing and negotiations.
"The PBN specialists help to ensure it is a more successful, cost-effective, low-risk and timely transaction," Anderson says.
CBA-accredited dealer groups that use the PBN also have their own web portal that provides information on acquisition, merger and joint venture opportunities, potential successors and secure practice finance, with a public domain area scheduled to go live this month.
"The public domain will enable practices outside CBA's 17 accredited dealer groups to view and upload information, with CBA-aligned dealer groups having the option to make their information public to external dealer groups or selected CBA-aligned dealer groups if they choose to," Anderson says.
ING-owned dealer group Financial Services Partners and CBA-owned Financial Wisdom were the first licensees to join the PBN in August this year.
Anderson says many CBA-accredited businesses have been concentrating on succession planning in the current environment because they recognise the all-round benefits.
Independent dealer group Matrix Planning Solutions says almost 50 per cent of its network now has effective succession plans in place.
"Forty per cent of the succession plans we've taken part in have involved family successors, 30 per cent have involved internal successors and 30 per cent external successors," Matrix executive director Atit Rungta says. To assist with principals' succession goals at all the various stages of planning, various types of support are available to Matrix firms.
"We have a general manager for practice development as well as people at the executive level, including myself, who will work with practices on their succession strategies," Rungta says.
"Because Matrix is a smaller dealer group of about 40 practices, it enables the executive team to have more involvement with individual practices' development, which helps to maintain the Matrix culture.
"We even work with practice owners to ensure the successor is introduced to clients and that it is a smooth transition for all parties involved."
Matrix also provides assistance through funding options.
Funding can be sought externally through one of the banks Matrix has been accredited by, which means crosschecking is not as rigorous as it is for those firms that operate under non-accredited dealer groups, or they can apply for funding internally, Rungta says.
"We help the current and future principal to negotiate a price and then if they need funding they can purchase a stake in the practice, with the option to purchase further stakes at a discounted price down the track," he says.
The reason for this is the successor will presumably contribute to growing the business in the meantime.
Rungta says the support and assistance each practice requires is always different because the needs of every practice are different.
"Advisers know that succession planning can often be a three to five-year process and that a lot of emotion can be involved," he says.
"Whether the principal has chosen a family, internal or external successor or perhaps approached us to see if we know a good internal or external candidate, the biggest challenge is identifying the most appropriate person."
At Matrix the ideal candidate is a good holistic and ethical adviser with entrepreneurial skills and experience, someone who aspires to be a practice owner, who fits the business culture and is up to about 45 years old.
"All of our succession deals have gone well but that is because we've taken the time to select successors very carefully," Rungta says.
Axa-owned ipac comprises different divisions, including advice businesses ipac Financial Planning and Tynan Mackenzie Financial Planning, and ipac Business Partnering.
Saint says the specific aim of the ipac business partnering division is to partner with financial planning businesses that are currently with or that will join the ipac group and which have a specific need for succession support.
"Basically we work with principals that don't have an exit plan and help them to maximise opportunities as well as value in the business before they eventually exit," he says.
"If a principal wants to leave today we can buy them out and roll them under our division or alternatively move them under ipac Financial Planning or Tynan Mackenzie Financial Planning.
"Our first hurdle is identifying whether there is an internal successor who can take over, whether someone from outside the business needs to be sourced, or whether we can merge the firm with another advice business within the ipac group."
What makes the ipac Business Partnering offer different is that through its Axa-supported equity partnering program it will inevitably purchase a 100 per cent stake in the businesses it deals with.
"It's almost like an insurance policy," Saint says. Ipac Business Partnering may buy an initial stake in a firm or purchase it in full at a later date, but either way it will assist the principal in running, growing and maximising opportunities until they exit.
"Practices have access to ipac succession workshops and our Run and Grow programs, which provide practice management, marketing and business development assistance," Saint says.
"Our main goal is to corporatise the structure of these firms so that they are not dependent on one principal or adviser."
Ipac Business Partnering has completed about 35 succession solution transactions since it established its equity program in 2002, he says.
These practices have since been rolled into existing businesses within the division or across to Tynan Mackenzie Financial Planning or ipac Financial Planning.
"Currently ipac Business Partnering is working with 15 firms through its equity partnering program," Saint says.
"Much like clients who come to see advisers, the earlier an adviser starts planning the better off they will be and the more opportunities they will have in the long term."
DKN Financial Group comprises about 110 practices under its Lonsdale dealer group and also services about 250 self-licensed DKN-aligned practices.
DKN acquisition and succession executive director Rachael Dunne says succession planning is increasingly being seen as a way to engage and retain key staff though equity deals.
"More principals who are looking to relinquish some of their responsibilities and exit the business are considering internal successors, however, we have still seen a greater tendency to lean towards external candidates," Dunne says.
"Either way, principals need enough time to think and plan for what they want. They need someone that is going to continue to drive the business forward and that has as much passion, quality and commitment for the business as they do."
She says funding can often be a hurdle, which is where DKN can step in.
"We offer advice and can make equity investments in businesses as well," she says.
"These investments are fluid so we can easily reduce shareholdings over time so that equity or further equity can be taken up by people within the business."
DKN has also recently developed a new module for its practice management program, Catalyst, delivered via the group's business managers.
"The new module, which will be fully rolled out in early 2010 along with an online component, will be offered to all DKN-aligned firms," Dunne says.
"Up until now DKN has been offering parts of the succession module on an ad-hoc basis either when a business manager has identified a need for it or a practice has approached DKN.
"Due to demand for more succession support we created the new module."
It focuses on practitioners' succession goals from a business and personal aspect and lists what they need to do to maximise the value of their business, she says.
"The online component of the module will also enable practitioners to do things at their own pace, such as questionnaires, case studies and checklists. Plus they will be able to attend forums where they can discuss succession issues at various stages of planning with their peers," she says. It is extremely important practices can access succession support via their dealer group, she says.
"Succession is a complex and emotional cycle so the more programs, guidance and support that can be provided by a dealer group the more chance a practice will have at a successful succession outcome," she says.
AMP-owned dealer group Hillross sees succession planning as a vital part of its growth strategy and sustainability, Hillross managing director John McMurdo says.
"We've got more than 100 practices and succession is a discussion we have with all of them, not just the ones considering their exit in the short term," McMurdo says.
"A good succession plan can increase the number of viable options a practice has, maximise opportunities and significantly increase the value of a business."
He says succession planning is something that should be done as early as possible to reap the most benefits.
"It's not about a principal coming to us and saying 'hey we want to retire, let's talk about succession, oh and by the way I'll be out of here in four weeks'. Succession planning really needs to start the day the business does," he says.
To support practices with succession, Hillross has invested in formal strategies and programs and provides equity funding as well as debt funding with the help of AMP.
"We have a state management team that provides strategic consulting to each of our practices and an adviser network team that will assist with specialist knowledge on things such as succession planning," McMurdo says.
Late last year, Hillross also introduced a formal merger and acquisition program, which has helped raise the profile of practices and find successors or buyers that match the business culture.
"When the principal hasn't identified a successor, opportunities have arisen through the merger and acquisition program from within and outside the group," McMurdo says.
Hillross, however, has seen more staged transitions in ownership due to its involvement in its practices' succession strategies over some time.
"Because we start succession discussions with our practices earlier on, we're often able to find younger planners or prospective partners that fit the business and can move into the principal role over time," McMurdo says.
"It might be over a three to five-year period before the principal exits, however, it makes the transition for current and future stakeholders much smoother."
Hillross, in part, credits its younger workforce to its effective succession planning, he says.
"The average age of a practice principal is around mid to late 50s, but Hillross is bucking that trend with an average principal age of 40," he says.
"The main priority, however, is that you choose the right successor.
"There needs to be a good cultural fit between successor, the business and its client base, and an alignment between the goals of the business and aspirations of the new owner.
"Hillross really sees succession planning as a great opportunity for principals who want to retire and crystalise their years of hard work and from a dealer's perspective grow and become a more sustainable operation."
While numerous industry professionals admit the implementation of a succession plan can be an onerous task, no one denies if done effectively, it can increase options and opportunities, maximise the value of a business and improve its financial performance regardless of market conditions.
