Broker Check

How Financial Advisors Should Approach Succession Planning

February 09, 2023


Do you want to have an internal succession plan or external succession plan?

Determining who will be your successor is truly the first step to your succession plan. If your first choice is for your current executive team to take over the firm, determine the following questions:

  • Will all new owners own the business equally?
  • Will the owners be able to afford the business?
  • Are there skill sets missing in the new ownership structure?
  • What will your involvement look like after you step away?
  • Will any staff leave due to your selection of successor(s)?
  • Will current clients stay with the new owners?

Some individuals may wish to sell to a third party to avoid some of the challenges an internal succession can cause. Additionally, a large question in the market today is, “should I consider selling to an external buyer to secure a higher value?” In my experience, for many firms, current valuation multiples are likely the highest they have seen in the past 15 years. This is driving many firms to consider a third party as opposed to an internal sale. Ultimately, you are in control of your legacy and the direction you would like to take with your business.

Knowing your desired succession will allow you to focus not only on ensuring your team is ready for the transition, but you’re in a position to know how to best plan for that transition from a tax and legal perspective. Once this decision and step is complete, and you have the “buy in” of the future owners, you will be able to move on to the next stage of succession, which is determining your business value. Your value is largely based on the consistency of income and retention of clients for the firm. The leading variable to consistency of revenue is your key staff members. If you successfully identify and plan for a smooth transition to your chosen internal team, your value will likely be less at risk as consistency will remain if your key staff stays with the firm.

How involved will you want to be in the business after stepping away?

When deciding to transition away from your firm, what will you choose to do is walk away fully from the business or remain on to some capacity for a period of time. In general, internal sales tend to have owners staying active with the business for three or more years, while external sales tend to be one year or less. This can vary based on personal factors regarding your firm, but staying active with the business during a transition ultimately helps to ensure consistency for the clients with your firm. For many firms, this additional phaseout period allows you to receive a slightly higher value for your business as you are continuing to contribute to the success of the firm.

What is the Timeline?

Succession planning is not something you cover overnight or by the stroke of a pen. Grooming a successor, finding the proper buyer and many more steps all take time. A proper succession plan is normally years in the making. The sooner you start to plan for your succession, the better. Not only does proper planning prepare the next owner for success, but it also allows you to plan to plan for the best tax and legal strategy to sell your business. For most business owners, the ideal timeline to start planning to leave your business is at least one year in advance. This allows for the tax and legal process to be fully maximized and for your successor to be made aware of the needs of the business through different events over the course of the year. If you rush your exit, you are likely to receive a reduced value for your business as well as a less favorable tax bill for the sale of your firm.


Valuation and ultimately your after-tax “walk away number” may sway your succession plans. Valuation of financial firms has certainly grown in complexity due to the mix of products and services offered by many firms today. A proper valuation will address the following items and more to determine your value:

  • Breakdown of business (% of fee-based business (and average fee) vs. commission),
  • Products/services sold (Planning, RIA, life, annuity, RP, P&C, etc. and % each make up),
  • Average rate of return for fee-based portion of the business,
  • Client mix (age distribution/concentration),
  • Carrier currently selling through (any restrictions to book of business-some carriers will own the actual client),
  • Relationships/exclusive agreements for the business (and length of those relationships).

Valuation is not a fixed methodology but rather a focus on the going concern of the business given current market conditions. Any firm looking to sell should seek a professional valuation firm engaged in the valuation of financial advisory firms as opposed to general valuation services.


Never assume that what worked well for you when you bought your practice or what your peers do is what is best for you and your firm when crafting a succession plan. Tax law, legal strategies and other factors change regularly which can impact the strategy you may have in mind for your succession. When planning to leave your business, engage a team that works together for your success with all parties aware of your plans and strategy to transition your business. A trap many businesses owners fall into is letting one voice be the loudest when it comes to your transition. If your accountant is suggesting your sell with “X” strategy, check with your attorney, your bankers, and your carrier partners to ensure the proposed strategy does not interfere with other ongoing business activities.

An area that should be of focus is how to maximize your walk away number when selling your firm. Many owners fail to consider the tax ramifications of selling a financial firm until it is too late. For most firms there will be significant capital gains at the time of a sale, as most of the business will be intangible value with little to no basis in the firm. Various sales structures should be discussed and considered prior to a sale, some of which are:

  • Should I sell via an installment sale to spread taxation over a period of years?
  • Can I 1031 exchange my property interest to defer taxation on the sale of my real estate?
  • Do Qualified Opportunity Funds fit my financial objectives to defer my capital gain taxes?
  • How do I leverage my qualified plan to reduce my income taxation prior to a sale?

These and many other questions should be discussed with your planning team so you are fully aware of the options you have available to you.


Your business is truly one of the largest legacies you’ll leave behind. As an owner, the success of your business and the continued legacy is fully dependent on your ability to ensure your core leadership team and clients are comfortable with the transition. One way to ensure this is communication of your succession plans. Allow your clients and core team to ask challenging questions, raise concerns, make suggestions and allow for open communication during this period of transition. This can allow all parties to feel heard and generally they might be more likely to remain with the firm given the trust you have instilled in their opinions.


Professional firms including financial firms consist of clients that have found comfort with a relationship with the professional as opposed to the team. You go to see X doctor for a medical need—not just any doctor. This is similar to the relationship you and your team has built with the clients with your firm. If you are not present with the firm, what is the likelihood they would remain? To address this concern, consider multiple levels of communication. This includes in-person introductions to the new owners, phone calls with the current and new owner to clients, email and written communication, as well as any SEC or governing body requirements announcing the transition. These steps help to ensure that clients feel cared for and know who to turn to with their pressing questions.


While the core team will likely know of the succession plans you have in place, it is also critical that all staff members know of the upcoming changes to the firm. A best practice many firms utilize is a succession plan process discussion. This includes an initial meeting to inform the staff of the plans for the transition of ownership. From there, follow up meetings will be in place to cover organizational leadership changes, career development opportunities, benefit changes and more. Having this over a period of time allow staff members to voice questions and concerns that may not have been addressed in the overall succession plan. Remember, the key to the success of your firm going forward is the people that drive the firms value.


Article written and provided by Nationwide