Succession Planning

By: Alex Cook, founder and director of GCI

While preparing for the FPI conference, Alex Cook, founder and director of GCI, came across a realization, and that is that leaders of the financial planning industry need to worry about how our businesses are growing, but much more than just how the revenue is growing. We need to future-proof our businesses.

Over the man years, we’ve seen just about every succession business model there is let’s look at the most common ones and what the pros and cons are.

Option 1: 

Outright sale to another IFA at two times multiple of revenue paid in four tranches over 36 months. If we assume that the recurring revenue is R100k per month or R1.2m per year the total purchase price would be R2.4m with R600k being paid in month 0, 12, 24 and 36.

While the value of the business is determined, the value is low and the purchasing advisor will have limited capacity. This affects how much of the book is moved and hence reduces the amount paid in the final tranches. Also, the clients within the business are about to be at their most profitable from an ARR viewpoint and the valuation doesn’t take this into account. 

Option 2:

A portion of the business, usually around 25%, is bought at a very attractive multiple in exchange for 25% of the revenue… but NOT of the profits. 

For example, if the margin in the business was 50% to start, the purchaser buys 50% of the profits for 25% of the value.

There are benefits in terms of compliance that is usually taken care of and you have a ‘big brother’ but the cons far outweigh the pros in that:

• you are still responsible for your own expenses
• the balance of the equity becomes difficult to sell
• the margin in the business reduces
• advisors become tied to the business

Option 3:

An advisor joins a large firm and finds another advisor within the large firm who could integrate with the advisor’s client base and then get the large firm to finance a purchase and sell to the new advisor.

Though a capital valuation is determined, all admin is usually taken care of and the handover can be gradual, the valuation is low and the income replacement ratio is low with the purchase price usually paid over a long period. The purchaser has limited capacity and the long tail is usually forgotten about and left to be the seller’s problem which also destroys value for the final payments. To create quick value for the purchaser, churning becomes the order of the day and there is no value placed of future revenue to be unlocked from decades of clients reaching retirement. 

Option 4:

You would invite another advisor to join your firm. Often this advisor would either have a small client base or no client base at all. Over time, you would train this person up until such a time where you are happy to hand over all your clients.

While the ongoing revenue is great and can be indefinite, the benefits where revenue share is usually paid on existing business from clients rather than existing and new which places no value on future potential revenue from the clients. Also, often the purchasing advisor usually underestimates the cost of running the client base and over-promises on the share rate. 

So, the thing to note here is that none of the existing models are truly fit-for-purpose

With this in mind, Alex co-wrote the book From self-Employed to Business owner: The Financial Advisors Guide to Lifelong Income

Alex believes that a fit-for-purpose business model is one where you are able to earn revenue from your clients for both existing and new business for the rest of your life under the protection of a large independent advice house that has a full back office allowing more focused time with clients. A consistent client engagement process nationwide means that when you are ready to slow down you can comfortably do so by triaging clients to a number of advisors around the country at your own pace. 

Pushing profound innovation and paving the way for successful succession planning.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.