Unlocking the full potential of your RIA practice sale requires strategic planning and foresight. Discover the best approaches to ensure a smooth and profitable transition.
Most advisors have a succession plan that involves a short agreement with another firm. While this may seem straightforward, it comes with several potential pitfalls. One significant issue is that the successor firm often does not know your clients personally. This lack of familiarity can be detrimental if you pass away suddenly, as your spouse and children may not receive the full value of the firm.
In such scenarios, the successor will need to rapidly reach out to your client list, introduce themselves, and request their business. Although many clients may trust your judgment and be open to working with the new advisor, a considerable number are likely to interview other wealth managers. This situation can lead to substantial client attrition, which could significantly reduce the value your family receives from the practice.
Client relationships are the cornerstone of any RIA practice. When a successor is unfamiliar with your clients, there is a risk of losing a significant portion of your client base. For example, if your practice is valued at $1 million and you lose a third of your clients, your family stands to lose approximately $1 million in potential income.
Building strong, long-term relationships with clients is crucial for maintaining the value of your practice. A successor unfamiliar with your clients will face an uphill battle in retaining them, which can lead to a diminished practice value and financial loss for your family.
Traditional succession plans often involve installment payments to your family over several years. While this may provide a steady income, it can also place your spouse and children in a difficult financial position, especially if you do not have a substantial nest egg.
Moreover, the funds received through these installment plans are likely to be taxed at ordinary income rates rather than capital gains rates. This higher taxation can further reduce the nest egg that your family receives, making it crucial to consider more tax-efficient strategies in your succession planning.
Is there a way to maintain your independence while ensuring a smooth and profitable transition for your family? We believe there is. By selling a small percentage of your firm—often around 10%—you can create a win-win situation.
This approach allows your clients to become familiar with the successor, ensuring continuity and trust. Additionally, your spouse and children will have a predetermined all-cash exit value, providing financial security. Joining a culture based on collaboration and a proven track record of growing practices can further enhance the value and stability of your RIA practice.
Selling a small percentage of your firm offers multiple benefits. It ensures that your clients are acquainted with the successor, which can lead to higher client retention and a more seamless transition. This familiarity can significantly reduce the risk of client attrition, preserving the value of your practice.
Furthermore, locking in a predetermined all-cash exit value provides financial security for your family. In our experience, joining a collaborative culture with a successful track record can result in substantial growth for your practice, often between 30% to 70% in the first year. This strategy not only safeguards your family's financial future but also positions your practice for continued success.