1. Create a clear vision. An initial challenge advisors face when developing a plan is actually understanding where to start. There must be a willingness to look closely at personal and professional goals, and an ability to look impartially at the value of their firm.
Rather than asking what a successful succession plan looks like, a better question for founding principals to ask themselves is: What does a successful transition look like—for me? Getting to that answer requires personal reflection and careful consideration. Setting personal, professional and firm-related goals will help create a clear vision for the advisor and the firm, as well as an improved peace of mind for employees and clients.
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2. Determine valuation. There are many approaches to determining a firm's value. But cash flow is the common denominator used to establish fair value. Unlike assets under management or revenue, cash flow is the best indicator of RIA profitability and overall operating efficiency. Prospective buyers want to see dependable and predictable flows, both current and future.
Quality of cash flow matters, too. Buyers typically pay a multiple (or measure of equity or firm value relative to revenue or earnings that it generates) based on the quality of cash flow and its growth rate. RIAs will fetch top dollar for such things as a stable client base; revenues that are overwhelmingly from a recurring, fee-based business; a track record of growth and strong margins; and a core group of professionals who are committed and incentivized to operate the firm as the founders reduce their responsibilities and ownership stake.
Many firm owners want to retain a degree of control in a transition, which can also impact valuations. It's worth considering bringing in a valuation specialist or transaction intermediary to review the mix of goals, revenue streams, expense structure, legal structure, finances, clients and other available information.