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Practice Management > Succession Planning

Business or Practice? The Critical Question RIAs Must Ask

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In recent years, thoughtful succession planning has become a top priority for many RIAs. This strategic step is not just about ensuring business continuity; it’s fundamentally about safeguarding clients’ interests, preserving the firm’s value and securing the advisor’s legacy.

But before an RIA begins to think about a succession plan, whether internal or external, the advisor needs to first carefully examine what form or structure the current financial enterprise possesses. Better put, it’s crucial to determine whether future owners perceive the RIA as a business or a practice.

Based on my experience working with independent RIAs, the reality is that the vast majority of them are practices, not businesses. And there is a big difference between the two. Addressing and understanding this question is paramount, as it will affect the valuation and the transition process.

The key delta between a business and a practice is that a business has the right people, in the right seats, doing the right things. Consider the fundamental tasks that any business must undertake: It must create an annual written strategic business plan, monitor key performance metrics, build a culture to attract and maintain exceptional talent, manage a team, adopt innovative thinking, engage skilled leaders, optimize efficient and repeatable processes and create rich client experiences.

And these are just some of the principled actions that a firm must perform to function as a credible business.

RIAs that genuinely function as businesses are dynamic and thriving. And that is what acquiring firms are looking for — the degree to which a firm operates as a business stands to have a sizeable impact on the valuation. This can have positive effects on internal succession plans as well.

Businesses tend to achieve higher valuations as they grow faster, operate more efficiently, scale themselves with well-designed processes and deliver more satisfying client experiences. So, when it comes time to monetize a lifetime of hard work, a business will always be of greater value than a financial practice. We are not impugning owners of financial practices, but there are clear advantages of operating a financial enterprise as a business.

For firms contemplating succession planning or exploring acquisition options, here are a few considerations to help them determine whether they operate as a business or a practice. We’ll also provide guidance on the steps required to prepare for a smooth transition.  

Start With an Appraisal

If a business is contemplating selling, the first step is to conduct an appraisal. This will also offer clues as to whether the entity in question is more of a business or a practice.

For example, let’s take processes. Does the firm have its process for billing and onboarding clients codified and documented? If the firm hires someone new, is it equipped to handle the business’ core functions? The answers can help a firm better understand where it sits on the spectrum and will have an impact on its evaluation.

Additionally, before proceeding with any sale, it’s essential to have a clear understanding of what the business in question is worth. This is advantageous as it can help pinpoint any challenges or gaps that need to be addressed before approaching the market.

Address Target Growth Areas

After a firm has identified its growth opportunities and potential weaknesses through the appraisal process, it should focus on addressing those issues and making improvements before proceeding with the sale.

The duration of this transformation, aimed at maximizing the firm’s value before a sale, will vary based on the appraisal’s findings. It may range from a matter of months to potentially a few years, depending on the circumstances.

This isn’t an instance where a firm can easily whip up a process manual, or “window-dress” the firm for a quick sale. Firms should forget the notion of crossing off checklist items or implementing small-scale fixes; this is about genuine transformation from practice to legitimate business.

Hiring a business consultant can be a smart move for firms aiming to meaningfully address infrastructure and strategy gaps, rather than making cosmetic changes devoid of substantive impact.

Understand What Acquirers Are Looking for

Once a firm feels certain is has evolved the practice into a business, it should cultivate a deep understanding of what acquiring firms are looking for. These firms are focused on finding strong teams, but it’s equally important that said teams are free from legal constraints that might prevent valuable talent from being onboarded. This includes considerations like non-compete and non-acceptance agreements.

Acquiring firms anticipate that the selling business is well-versed in its financials (emphasizing the significance of an appraisal). It’s crucial for leadership to be aware of the current value and how the business stacks up against industry peers. Executive leadership should also be capable of addressing specific questions like, “How many accounts did you acquire this year? What was the net growth? And what about net market activity?” A general statement like, “We grew by $300 million,” is insufficient when it comes to demonstrating a strong grasp of the finances.

Whether a firm plans to complete an internal or an external succession, transitioning from one practice to another without considering the next-generation advisor’s role undermines the successor’s potential and adversely affects the previous owner’s earnings from the sale. It’s important for firms considering selling to take the time to answer this question and, if necessary, evolve their practice to a business that can be seamlessly passed off to the next generation or the next owner.

By understanding a firm as it is today, the leadership team can feel empowered to identify what needs to happen between now and succession time to ensure it is a true business they are selling—beautifully positioned for growth, inside and out.

Craig Butler is chief growth officer at tru Independence, a national independent advisory platform for investment professionals.


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