Building Your Transition Policy Statement

by Sam Hull, CFP^®, ACC

As they used to say in children's books, here's a cautionary tale:

Tom was well into discussions with Sally, the senior vice president of State Bank & Trust, about selling his company, Hometown Financial Advisers, to the bank. All the numbers and financial terms and conditions seemed great to Tom, and he was anticipating closing the deal and moving on with his new life in retirement. However, one day at lunch with Sally, Tom mentioned a call he had earlier that day with Mrs. Jones, one of his "Top 10" clients, saying he and his right-hand planner, Lisa, had developed a long and close relationship with Mrs. Jones. He said to Sally that he was sure the bank would help Lisa in honoring their close relationship once the deal was completed.

Tom was stunned when Sally told him the bank was thinking about reassigning all of Hometown's clients to their own group of registered reps and would probably be terminating Lisa and the rest of the Hometown staff. 

Tom felt his heart sink; he instinctively knew that the deal was dead. He realized he had not talked seriously with Sally about his core values. If he went ahead with the sale of his company, it now appeared that the people and relationships that really mattered to him might be in jeopardy. Wouldn't it have been better for everyone if he and Sally had crafted a transition policy statement as the foundation of their negotiations before they got so deep into the deal?

Establish the Rules of Engagement

What is a transition policy statement? We've found it is one of the most critical elements in a business transition-perhaps more important to a successful transition than legal documents, tax planning or the business valuation. Unfortunately, the non-quantifiable aspects of how to plan for managing what you will do when a big change happens are hard to grasp; thinking about dealing with emotions almost seems to be an anathema to some financial advisers. A well-thought-out transition policy statement will establish the rules of engagement for you and your opposite party in the transaction.

A transition policy statement will:

• Define the core values that must be preserved by both sides while in the turmoil of negotiations and change
• Provide an early warning system when trouble may be ahead
• Be the guardrail that keeps you from veering off the intentional roadway when you hit rocky emotional patches
• Keep you from wrecking what may well be the largest single financial transaction in your life

We know that a transition policy statement-or what we often call a shared intentions statement, or SIS-can be the linchpin in maintaining honest communications and understanding between the parties involved in an ownership transition. The transition policy statement functions in the same manner during the business ownership transition process as does an investment policy statement in the asset management process, as safe withdrawal policy guidelines do in managing portfolio withdrawal rates, or as policy based financial planning does in the financial planning process.

In the July 2006 Journal of Financial Planning article, "Policy-Based Financial Planning Provides Touchstone in a Turbulent World," David Yeske, CFP^®, and Elissa Buie, CFP^®, summarize the value of financial planning policy statements: "Ideal policy statements will be broad enough to encompass new or unexpected events, yet specific enough to minimize doubt as to what action to take in response to changing events."

In the article, Yeske and Buie give an example of clients who want to provide their children with at least a basic college education, but don't want to jeopardize their own retirement savings program. This might be their corresponding education funding policy: We will fund the cost of a public college education for our children. This will take priority over saving for our own retirement. The additional cost of a private education will be funded only after our retirement savings targets have been met.

The article defined how to create and use policy statements in the financial planning process with clients. I have adapted that to building a transition policy statement that two parties can use during an ownership sale and purchase. Each party-the seller and the buyer-has to do their own work and create a core values statement that applies to them or the company they are representing. Only then can they create a mutually agreeable set of policy guidelines that will provide the ground rules for their conduct during the ownership transition process.

The four steps involved in crafting and maintaining a transition policy statement are:

• 1. Identify subjects and areas that are meaningful to you.
• 2. Craft your core values statement-short, concise policy statements that capture your individual goals and core values.
• 3. Use what-if scenario planning to test how you think you would behave if those policies were tested or broken.
• 4. Periodically update policies to reflect major changes in circumstances or goals.

Transition Policy Statement in Action

How should Tom have applied these steps to his transition process? 

First he should have identified the subjects and areas important to him that would be affected by what happened in the transition. For Tom, his personal integrity is based on satisfactory outcomes in the following areas:

• How his clients are treated during the transition process
• How his key employees are treated during the transition process
• Safeguarding his professional and personal reputation
• Attaining retirement income security (Hometown was his largest single financial asset)
• Setting a deadline for concluding the deal that fits in with his personal and family plans

Thus, Tom's core values statement looks like this:

• Hometown's clients are our most precious resource. Nothing that occurs during this transition will threaten our fiduciary relationship with our clients.
• Our key employees have given Hometown their dedicated excellence and loyalty for years. Nothing that I do during this transition will threaten the future of our key employees.
• The reputation of Hometown in this community cannot be harmed or threatened in any way during this transition.
• It is critical that my spouse and I be free to start our new life by the summer of 2012; I will be free of all obligations to Hometown by January 2012.

When Tom and Sally sat down for the first serious discussion in their attempt to negotiate the State Bank & Trust acquisition of Hometown Financial Advisers, the first thing that should have happened was a comparison of each party's core values statements. That comparison might have looked like this:

There is an obvious mismatch in how the parties feel about Tom's core values. If Tom had looked at where he stood and asked Sally how the bank viewed these same issues, it would have become clear that there were deep differences and risks to Tom in almost everything important to him.

Tom had no assurances that his clients would be taken care of in the manner that they expected or even by the Hometown people they had grown to trust. The bank wanted Tom to stay on as an employee for longer than he wanted-an almost impossible situation for a successful entrepreneur like Tom. And there was a good chance his loyal employees could be thrown to the wolves.

Suddenly the buyout numbers were not so compelling to Tom. Honoring his personal integrity and being true to his core values were much more important. And that's what he told Sally when he said he was no longer interested in her offer. Tom knew that there were other buyers for Hometown whose core values would be a better fit with his own.

Within six months he had reached an agreement to sell Hometown to Reliant Planning Corp., which had offices in the next city and whose core values statement almost mirrored Tom's. Tom and the president of Reliant developed a transition policy statement that stated their mutual intention to honor the core values statements upon which they both agreed. It looked like this:

And that's how a transition policy statement works!

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 sam@whitewatertransitions.com .