imo and agent succession discussion w nafa nov 2012

Succession PlansWhy you should have one!

Allen Duck w NAFA Nov 2012

Some Statistics• Over 50% of Financial Services business owners and

practitioners are over age 50. Average age is 56.• Less than 30% have a Continuity/Succession Plan.• Less than 15% have a meaningful Plan.

Starting out

Retire

Average Age 56

No of Clients$ Assets

Age 65

Age 35

Independent market.

All practice owners eventually give up control.Very few owners are prepared for the transition.

The unprepared face stress and financial loss.

So – to Set the Tone

There are too many of these and will be more

Too few of these.

Outcome is loss of value in practices, Orphan accounts and dilution of the independent channel. OR – a leveraging opportunity that could significantly benefit owners and the channel as a whole in the coming years.

Industry Problem

50/55 Yr Old Guys

50/55 Yr Old Girls

Likely Buyers

Likely Buyers

Why Now?

Most common “Important but Not Urgent” = Procrastination.

Planned – Prepared – Implemented.

Hit by a BUS.

Exit Strategies

Definitions of possible Events• Succession/Acquisition –

– You control the situation and the outcome.• Continuity

– Triggered by an event you have no control over– Does your business have a WILL?

• No WILL in business same as NO Will personally. Messy and painful.– Plan, Plan, Plan.

I don’t need a plan - Fallacy #1

• I am never going to Retire!

• Yes you are….. Prepare. • Prepare for a living exit and a sudden exit.

Continuity - Disaster recovery

• Share holder – Buy/Sell agreements• Cross purchase• Stock redemption• Personnel

– Key employees– Key suppliers

• Facilities– IT – Data back-up– Business interruption insurance

Succession. Review personal objectives

• Personal Vision• Written personal vision

– View from a point in the future – 3yr, 7 yr. ?– 100 words – use as a weekly reminder

• Spouse/significant other– Create separately– Compare over a bottle of wine– Defer purchase sailboat

Time [t]

Reve

nues

/Inc

ome/

valu

e

Continuity plan development

Execute succession

Succession plan development

Value Protection

Create Grow Mature

Effor

t v S

ituati

on

Owners effort

Time [t]

Execute Succession

Value Protection

I don’t need a plan - Fallacy #2

• Why bother - My Business has NO VALUE!– Clients data– Relationships– Revenue Streams– History of doing business– Growth of business relative to peers

• None of it is tangible but it is valuable…..• Data, data, data.• Cross selling opportunities, other products, services.• Just takes an energized and structured approach.

Decision Criteria and Options

• Family Succession– Can be problematic– High risk for all concerned, emotionally and financially

• Employee Succession - ESOP– Tax benefits– Regulated – complex management

• Unrelated Third Party– Investment– Strategic

Operations review

• Valuation -> Profit• Actions to improve profit - In time for the

changes to add value.– Operations analysis - 80/20– C corp to S corp

• A company’s performance should be measured relative to its peer group and “benchmarked” periodically.

• Review your role – become dispensable.

Firm V Founder

Revenue

Time

Valu

e = X

* Reven

ue/In

com

eFounder

Firm Sta

ble

Un

-sta

bleIs your firm “Institutionalized” ?

Advisors

Team – yours/thiers– Finance/Insurance– Legal– Tax/Estate planning– Exit specialist (Excuse the promotion!)– Attorney– Broker

So what is a Practice worth? • Forget revenue multiples.

– Want a $Billion business? – Sell $1 bills for 90c

• “Show me the Money” – its all about cash flow and….Risk.

• Risk – stable growing revenues have lower risk = higher multiple. DCF is the standard.

Risk

Multiple

• Takes a 5 year +1 projected model of cash flows and discounts them by a factor, or RISK quotient.

• Risk is measured and defined by assessment of risk free investment returns + cost of capital and other factors that would impede future income.

• Assume a business has ALL trails and a risk factor of 25% [this is close to a real factor]

• Its counterpart where all income is commissionable and has a greater risk of failing if the selling advisors[s] no longer want to sell or die. This business will have a far higher risk allocation and lower multiples.

DCF

Risk

Multiple

History is Everything

$1.0M Revenues

Company A

Company B

Reve

nue

$

Time

2 firms each doing a $1.0M in revenues are worth the same? Right?

Inc. Magazine 2010

100k

1M

10M

40M

100k 1M 10M 30M

Note: the general relation ship of Revenues to Value across multiple industries.

Establishing an Offering Package - VP

• What is for sale?• Confidentiality• Prospectus• Markets served/trends• Core competency/differentiation• Brand/IP• Earnings stream and future outlook

So what? Big deal! Who cares?

Why should I care?Two Reasons• Personal

– Clients– Family– Employees– Next Generation

• Best Interest of the Industry– Needs a channel that is vibrant and can relate to

Gen X and Y.– Keep the industry competitive

Why is this important?

Startingout

DIE

Average Age 56

No of Clients$ Assets

Age 65

Age 35

OrphanAcctsIndependent market.

Younger advisors cant make it and leave.

No Succession Mechanism

Interdependence

CarrierInstitutional IMO

Institutional orSmall Business Agents

Small Businesses

>50% w

ill retire in 10 years

Summary Succeeding [selling] a Business

• You need to:– Know what the market is doing around you.– Prepare in time to show a healthy organization– Have a clearly defined Value Proposition that can

be transferred to a new owner.– Develop a valuation around the VP and the level of

sustainable cash-flow the VP generates.– Leave your Ego at home.– Be Flexible.

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• Contact theresa@nafa.com or www.nafa.com

Thank You - Q and A

www.eighty20advisors.comallen@eighty20advisors.com Tel: 970-325-3820Cell: 970-412-6759

Consulting, Business Development, Practice Efficiency and Succession Plan preparation.www.eighty20advisors.com

Listing and Brokerage services for Buyers and Sellers of financial services practices. Platform for recruiters and applicants providing exposure and access to positions within growing firms.www.eighty20exchange.com