What happens to your business if you become incapacitated? This is an essential question for independent financial planning firm owners to think about. Illness, accidents and family emergencies can happen at any time, and not having a continuity plan can put your business, clients and team at risk.

Without a continuity plan, your practice could be sold to another advisor at some multiple of revenue that does not reflect the full value of the firm. In addition, regulations prohibit the payment of securities compensation to unlicensed individuals without a formal agreement, so your family may not receive any monetary value for your business.

You can avoid this situation by creating and implementing a continuity plan. With a continuity plan in place, you can protect your business and your clients and ensure that your business will continue to run smoothly in the event of unforeseen circumstances.

A business continuity agreement is not a planned sale. Instead, it is an agreement to protect what you have built and achieve a reasonable price for the asset. It spells out the events that will trigger the agreement’s activation and the terms of the sale and, most importantly, allows the business continuity partner to step in and take over operations immediately.

If you do not have an agreement and are not sure where to start, the North American Securities Administrators Association (NASAA) has adopted a model rule regarding succession and continuity planning that provides some guidance on how to structure and what needs to be included in a continuity plan.

Key Considerations for Putting a Continuity Plan

  1. Determine the most important qualities you are looking for in a business partner. Cultural fit is crucial. Find a partner who shares your culture, investing philosophy and behaviors. Once you have determined cultural alignment, finding a business continuity partner with the resources in place to take on your clients, keep your staff and pay your beneficiaries is critical. Other considerations include location, fee schedule or market niche. Once you have a clear idea of what you are looking for, you can narrow your options and find the best partner for your business.
  2. Find that person or firm once you have determined what you are looking for. The ideal scenario is to identify another advisor in your firm. However, many advisors who have started their businesses are the only advisor in their firm. If you’re a part of a financial network with the support of an outsourced provider, you have a great resource to tap into. Selecting someone from an existing network will also increase the likelihood of a smooth transition if/when the time comes, as they will already be somewhat familiar with your business.
  3. Bring in external resources to help with the actual continuity plan and agreement. This could include an advisor planning expert, an attorney and an insurance broker. These professionals can provide valuable insight and knowledge to ensure your continuity plan is thorough and complete. Additionally, they can help identify any potential loopholes or areas of concern you may not have thought of.
  4. Have your firm valued. You need to know what it is worth now and what it might be worth in the future to determine how much to insure. There are a few different ways to value a firm, but one of the most common is using a revenue or earnings multiple. This method considers the company’s growth rate, profitability and risk. Remember that most business continuity agreements will never be executed, as they only take effect in the event of a sudden death or disability. Consequently, the valuation of your firm in a continuity agreement will generally be less than if you were valuing the business as part of a succession strategy.
  5. Work with an estate planner to structure the transfer of your firm. This will affect how any value from the firm transfers to your family. Estate planning is a complex process, and a variety of factors need to be considered to ensure that your family is taken care of in the event of your death or incapacitation. By working with a qualified estate planner, you can ensure that your continuity plan encompasses all of these factors and provides for your family in the best way possible.

Continuity vs. Succession Planning

As many financial advisors near retirement, succession planning has become one of the most talked about topics in the financial services industry. However, according to the Investment Planning Counsel, only 11% of financial advisors have a formal succession plan, even though more than two-thirds of advisors are preparing to retire. It is important to note that business continuity plans and succession plans are not interchangeable. A business continuity plan is straightforward and takes effect when a triggering event happens. A succession plan is generally more complex, comprehensive and strategic and often takes years to complete. It is important to have both a business continuity and a succession plan since the opportunity to fully implement your succession plan may be missed if an unexpected life event occurs.

We can help ensure that advisors have a plan for business continuity and succession. To learn more about how we can help you protect your life’s work, contact us at team@waalliance.com.

We help advisors establish and grow successful wealth management practices. To learn more about how we can help you amplify your life’s work, contact us at team@waalliance.com. You can follow us on Twitter@theWAAlliance and on LinkedIn.

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