A common question for advisors is, “When should I start planning my eventual transition from the business?”
The best answer is, “Manage the business as if it will be run forever, but always be prepared to sell it at any time to the most qualified buyer for the highest price.”
This answer combines the advantage of early planning with the reality of life—unexpected events, known as the “Big D’s” (death, disability, divorce, disaffection, disagreement, disinterest, etc.), can occur at any time. The outcome will be significantly better if a plan is in place to handle these contingencies.
A long runway to retirement is recommended, as it provides more options and increases the chances of achieving the desired outcome. The following breakdown offers guidance on timing, based on strategies that might be pursued:
10 Years (or More) #
With a full decade to plan and implement, a strategy of inspiration can be developed. This period allows sufficient time to shape the business to maximize its value and ensure a lasting legacy. It’s essential to distinguish between a “succession plan” and an “exit strategy.” While often used interchangeably, these terms represent different perspectives. A succession plan concerns “what happens to the business after the founder is gone,” while an exit strategy concerns “what happens to the founder after the business is gone.”
In this time frame, the following questions should be considered:
- What should the legacy look like? How will people perceive the business after the founder’s departure?
- When will it feel right, both emotionally and financially, to exit the business?
- What will the exit look like? Will it occur on a specific date, or will it be a gradual transition?
- How will time be spent post-transition?
- How can the business be positioned for continued growth under a successor?
- What financial return is necessary to fund retirement goals?
- Who can be groomed, coached, and mentored to take over the business?
3 - 5 Years #
A 3 to 5-year plan is a strategy of perspiration, as achieving the best results within this timeframe will require significant effort. While three to five years may seem sufficient, there is much to be done to prepare a practice for transition. Some key considerations include:
- How can the business be made more saleable? Processes and systems may need adaptation for broader appeal. To the extent that the business can be made adaptable to potential buyers, it will become more attractive.
- Is the business scalable? Demonstrating that the business can continue growing under new management can make it more appealing to buyers.
- Finding and integrating the right successor: Consider what skills and experience a successor should have, where to find them, and the type of transition deal to pursue. Introducing them to clients is also critical to ensure client retention.
1 – 2 Years #
In a timeframe of 1 to 2 years, a strategy of desperation is often necessary. With limited time, advisors will find themselves rushing to complete essential transition tasks.
If a successor has not been identified, there may be a frantic search to find one. Finding a suitable successor can be challenging, as there may be many buyers who do not align with the advisor’s vision for how clients, staff, and the business should be treated.
Desperate sellers tend to attract opportunistic buyers, often resulting in a lower sale price. Furthermore, client retention may be impacted by insufficient time for clients to adjust to a successor, potentially affecting the final payout due to ‘claw-back’ clauses in the purchase agreement.
Less than 1 Year #
Hoping for a successful transition with less than a year of preparation is a high-risk endeavor. In this situation, outcomes are likely to be less favorable, with limited control over the exit process.
Ultimately, all business owners will leave their business one day, whether voluntarily or otherwise.
The key question is: Will the exit be planned and controlled, or will fate and circumstance dictate the outcome?
Conclusion #
Transitioning a business is a journey that ideally starts early, allowing advisors to shape their exit on their own terms. Whether planning begins a decade in advance or within a tight timeframe, the key is to approach the process with clear goals and flexibility.
Proactively preparing for succession not only maximizes the business's value but also secures its legacy and continuity. By addressing each phase thoughtfully—from a long-term vision to last-minute arrangements—advisors can build a resilient plan that supports both their personal and financial goals. Ultimately, successful business transitions happen when advisors stay adaptable and committed to managing their exit just as diligently as they built their practice.
