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Timing Is Everything for Succession and Valuation

Mike Langford
Oct 3, 2018

The Importance of Timing

When I was in graduate school at Boston University I had an investments professor named Dr. Zvi Bodie. One of the lessons he taught, one that has really stuck with me over the years, is on the nature of risk. He would often say that people tend to see risk in terms of the likelihood that a negative outcome might occur. But he argued “the timing and severity of the loss are much more important to consider.”

He would often frame the conversation in terms that mirror what many Americans experienced in the 2008 - 2009 financial crash. Almost everyone agrees that the financial crisis was a tail event or a so-called “black swan” event. However, for those who were long equities (with no downside protection) and those with leveraged, speculative real estate holdings the timing and severity of the realization of risk (however unlikely it was to occur) was catastrophic.

Just imagine if you were planning to retire in 2009 and had been looking back at the past 40 years of market history as a guide for what to expect for your worst-case scenario? You would have been right to think that the risk of a crushing market collapse in both equities and real estate markets that would wipe you out was extremely small.

But… unfortunately the markets, just like natural disasters, have no idea that tail events aren’t really supposed to actually happen.

Timing Is Everything for Succession and The Valuation of Financial Firms

If we apply the timing and severity concepts to the succession and valuation of a wealth management firm or an individual advisor’s business it is easy to see parallels with other markets.

We like to think that things are linear in business just like investors like to think markets will always go up. If your business is growing, of course it will continue to grow.

This explains why 90% of advisors said they expected their business to grow over the next decade in a recent survey conducted by Practical Perspectives. With a seemingly never ending bull market putting a lot of wind in the sails of most firms and individual advisors it should not surprise anyone that the outlook is so optimistic.

If business is just going to keep growing and getting better everyday for the next 10 years, you might think succession planning and valuation can wait. What’s the hurry right? Your business is going to be worth more next year and the year after that and the year after that.

But...is it?

What Happens When the Wind Shifts?

Not too long ago I wrote about the declining pricing environment for our industry and offered some strategic adjustments that you can make in your business to ensure it continues to thrive. In this article our focus is on the overall market value of the client assets that you manage and the health of the market for your business in the future.

What happens if the markets stop growing or retreats into a prolonged bear territory? How might that affect the valuation of your business? More importantly, what happens to your ability to find a succession partner should you want or need to exit the business?

We can almost hear Dr. Bodie talking about the timing and severity of the risk can’t we?

What Happens If You Experience Your Own Black Swan Event?

Macro market conditions affect just about everyone in the industry except for those who happened to be positioned well for the market turn. However, what about those events that happen on a micro level?

Terry Mullen, CEO and Founder of Truelytics shared a story on The Valuations Podcast (episode 1) about an advisor who died suddenly without a succession plan in place. Left with little guidance and the need for an urgent fire sale, his widow was forced to accept far less than market value for his business.

Most wealth management firms are small businesses. Even those with billions in AUM are relatively small when measured in headcount. The loss of a key member of the team or some other ill-timed negative event can significantly damage the value of the firm and hinder the viability of a succession or acquisition.

Succession Planning and Routine Valuation Assessments Can Reduce the Risk of Bad Timing


“If you fail to plan, you are planning to fail!” ~ Benjamin Franklin


Even if you are one of the 90% of advisors who believes that your business is going to continue to grow for the next decade or more and you have no plans to exit the business I think you would agree that it is wise to have an “In case of emergency” plan in place. While you may feel the risk of a catastrophic event for you, and/or your business, is minimal the fact is there is a chance it will happen. And if it does and you do not have a succession plan in place, the consequences will likely be dire.


Emergency Pull


The Good News About Succession Planning

It has never been easier to create a succession plan. The practice management team at Truelytics has years of experience walking firms and individual advisors through the process. While you may feel a bit apprehensive about getting started, professionals like Carla McCabe are there to help in simplifying the process.

Remember, your succession plan does not have to include a date certain for when you will transition or sell your business. What you are outlining is a high-level plan for what to do should an unforeseen event force the issue of transition or sale. Having the answers to basic questions like “Who should your spouse call if you die unexpectedly?” or “Which junior advisor(s) will take over which clients should a senior advisor suddenly leave the firm?” laid out in advance of their being needed will be invaluable to everyone involved.

Routine Valuation Assessments Hedge Risk

Imagine you had to sell your house within the next 30 days. Not just list it but actually close on a sale within 30 days. How much do you think you could get for it? Probably a lot less than it is actually worth.

Now imagine you know that you may want to sell your house in the next year or so. Might you be able to fetch a better price? Of course, with time you would have the ability to assess your home’s current value and make improvements that would increase the price considerably. You would also have time to evaluate brokers, staging for the sale, and the best time of year to list your house to ensure a speedy sale. More importantly, you would have time to allow more buyers to discover and evaluate your home.

One of the surest ways to avoid the financial risk of a fire sale of your business is to get in the habit of having a routine valuation assessment performed. When combined with a succession plan, a current valuation removes most of the downside risk of an unforeseen event that may cause the need for a sale or transition.

A potential acquirer or transition partner will have a much higher level of confidence in the business and will be willing to pay a higher price with better terms because he is able to validate its valuation. And if you have your valuation routinely updated on Truelytics the buyer will have an even higher level of confidence because he can see how your business compares to others of similar size and structure.

Essentially, by creating a succession plan and keeping an industry accepted valuation up to date you have done all of the pre-work necessary for a sale. It is like you are keeping your house continuously staged and in tip top shape just in case you decide to put it on the market and want to close quickly.

The Time to Prepare is Now

The financial crisis exploded on the world 10 years ago. The majority of Americans, including financial advisors and wealth management firms, were not prepared for the timing or the severity of the fallout. And while we cannot predict what will happen in the future we do know that at some point you will transition out of your business.

Whether your transition ends up being voluntary or involuntary you should have a plan in place for how you want it to proceed and what to do if things go wrong. Start preparing today by reaching out to Truelytics to establish your succession plan and have your valuation assessment established. Once you have these steps accomplished, they are easy to maintain and the peace of mind they’ll bring you will be priceless.

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