By Sam Hull, CFP®, ACC
When you sell your financial advisory business, you need a plan to make sure your clients trust the new owner of your business as much as they trust you. Here's the story of how one planner did it.
Kathy started her financial planning business more than 20 years ago. She loves what she does, but at age 60, she is ready to transition out of the business. In preparation for the sale of her business, Kathy had an independent consultant evaluate her company and learned the sale is expected to bring her about $1.2 million.
Kathy is working on a business value improvement program (see "Boost the Value of Your Business" in the January/February 2010 issue of Practice Management Solutions), and is now concerned with finding a way to reduce the risk associated with the core asset that is driving that $1.2 million valuation-her clients and the future stream of revenue they are forecast to generate. One way of effectively reducing that risk lies in creating a client trust transfer plan.
What is a client trust transfer plan (CTTP)? The mind map below shows the elements the plan comprises that can protect the value of this critical asset. The CTTP outlines steps and timing for an action plan that the seller, and at some future time the buyer, can establish and monitor pre-and post sale. The objective is to make sure that the trusting relationships that clients have with Kathy can be successfully transferred to the new owner.
Since Kathy does not have an internal successor and is not planning to bring one in through a merger or acquisition, she is facing a tough job. It is always easier to introduce a familiar, current associate into a client relationship than to introduce a new face and sell his or her qualifications and experience. However, even in an internal succession transition, it is important that both the seller and the incoming new owner-let's call her Carol in this example-recognize that a client trust transfer plan will be essential to a successful ownership transition program. The goal should be to have Kathy's clients tell her, "I know I will be in good hands with Carol since you picked her, and I feel now that I know her almost as well as I know you."
Four basic elements should be addressed when designing a client trust transfer plan:
- Client Analysis. Who are the high-value clients in terms of revenue generation, both now and in the future? Which of these have the highest cost/benefit ratios?
- Timeline. What is the transition schedule and what needs to be done? When?
- Tools. Considering your current style of client relationship management, build an action plan of "touches"-meetings, contacts and events for each client-whereby the focus of the relationship will be gradually redirected away from the seller and toward the new owner or someone else in the firm.
- Techniques. Considering the outcome of the first step, the client analysis, what broader techniques can be used to loosen each client's reliance on the departing owner and shift it elsewhere, in the firm or outsourced?
While we can't describe Kathy's entire CTTP here, let's look at each component of the plan and see what she did.
For her client analysis step, Kathy pulled data from her QuickBooks accounting program and Junxure CRM and analyzed each of her client relationships, ranking them in terms of annual financial planning and wealth management revenues, family relationship revenues (since many of her clients had referred relatives and children) and third-party referrals. She was trying to determine their footprint in her revenue stream. She then ranked clients by quintiles. She was not surprised that the top 40 percent produced more than 80 percent of her current revenue stream, and she knew that this group would deserve special attention in the CTTP.
Next, she compared each client footprint to the qualitative aspects of her ideal client profile and assigned them to broad categories of "exceeds my standards," "good fit" or "needs work." One factor in this review was the duration of their client relationship, since it has been shown to be a key factor in the development of trust. This is sometimes a double-edged sword however, since transferring strong allegiance with Kathy to another person would, in some cases, take exceptional attention.
She reviewed the client list with her key staff and they came up with an assessment of the complexity and amount of attention that each client relationship had needed in the recent past, as well as an estimate of what would be required during the transition period.
Next, since Kathy was smart enough to have kept track of all planner and staff time by client for several years, she was able to develop a profitability figure for each client relationship by comparing her annual direct costs to the gross revenue, ranking them by quintiles.
Lastly, Kathy and her staff spent time brainstorming about the future incremental potential revenue and referrals that might be generated from the client base. Future pension plan rollovers, anticipated inheritances, trust distributions and other asset sources were reviewed and added to the analysis.
The client analysis step gave Kathy a foundation on which to build her CTTP over the four-year timeline for her transition. She had identified which client relationships were most critical from a revenue and profitability standpoint. She identified relationships that would probably require extra attention. She set up a transition timeline with annual, quarterly and a rolling three-month action plan that detailed, by client, what activities were planned and who was responsible. We call these activities "transition tools," and they are the grease that will ease the sliding of the focus of trust from Kathy to other people-the staff and the future owner.
Kathy has many transition tools to help her accomplish her CTTP. Another way to think of these tools are as client touches-the numerous ways she can give a written, spoken or silent message to each client. For instance, during the first year of the CTTP, she planned to increase the references she made in her monthly newsletters to her personal activities and hobbies. The intention is to strengthen the impression that she has a rich and compelling private life outside of the business, so that in the future, when she does let them know that she is in discussions with a potential partner, it will be easier for clients to understand because they already know what she is moving toward in her life.
Another tool Kathy will focus on in the third and forth years of her CTTP will be an increased schedule of personal client meetings, phone calls and e-mails, beyond the semi-annual plan review meeting she now has with each client. The twist is that she will be introducing other people into the mix of the client relationship and thus refocusing the client. For instance, the office administrator will gradually take over many of the account administrative tasks and the junior CFP® financial planner will pick up many of the portfolio rebalancing discussions and investment questions.
Additional tools include activities such as client meetings, newsletter articles, e-mail references, phone calls, press releases, client appreciation events, holiday gifts and postcards from Kathy. Kathy is an avid scuba diver, and vacation postcards from Belize to her clients definitely send a message!
Finally, Kathy can use broader practice management brushstrokes to gradually shift the focus of her clients away from her as the critical element in the client relationship. We call these the "transition techniques," and they involve the three r's: re-focusing, re-directing and re-assigning the linkages of the relationship the client has with Kathy. For example, with certain clients, an increased emphasis on a more holistic or life planning viewpoint of the purpose of the relationship can re-focus the relationship toward a broader base, and the act of re-focusing itself can loosen the bonds to Kathy.
In the same manner, re-directing the client's focus from direct personal contact with Kathy toward a Web-based interface with quarterly client reports, portfolio reports or administrative paperwork located in a password-protected room in the company "cloud" is a great technique, whether in a transition or just as a normal business practice.
These are only a few examples of how a client trust transfer plan can work. While your plan may be different, creating and closely monitoring your client trust transfer plan will increase your chances of a successful ownership transition and reduce the risk of erosion of your primary asset. It's another example of how good planning can pay big rewards in your ownership transition.
Sam Hull, CFP®, ACC, is the co-founder of Whitewater Transitions LLC, a coaching and consulting firm helping financial advisers navigate ownership transition issues. Contact him at firstname.lastname@example.org .