Do what you say: Everyone who has been in this profession five or more years has an asset they should protect for the benefit of their family. Is continued value guaranteed for your business when you leave?

Say you were approached by someone who said, "I will work with all of your clients and pay you half of the commissions while you were disabled or if you died." You would consider that a good idea, right? But you clearly want to make sure they are the right person.

A great way to ensure this is to look in your book of businesses for:

- A number of clients you have not called in two years
- Those you have not called in three or more years

Why not find a young agent in your area whose personality and work ethic you respect? Offer them the opportunity to call on these clients to see whether they make some new commissions that you would not be earning for yourself.

If this is successful, think about whether you want to form an ongoing relationship where they work with referrals and clients you choose not to. If this relationship continues to grow, it’s a strong sign this person could be a good successor for your business.

The need for successors is necessary for someone who is 30 or 40 years old, as well as 55, 60 or 65. This is what we talk to our clients about: death or a serious disability preventing them from working. You don’t want to negotiate with someone when you are totally disabled or for your family to negotiate after your death.

There are so many people involved in doing a buyout, and you shouldn’t plan to handle everything on your own. That could mean attorneys, accountants and tax experts. It also could mean operations like FP Transitions (who assists with matching businesses for purchase/sale and related legal work) or Succession Link (who also helps bring together businesses who are selling and those looking to buy).

Services like this are particularly useful if you want to buy a practice but don’t know anyone who is selling, and they may be able to help you do the valuation, negotiate price and draft documents for each party to sign off on.

When considering an outside expert to utilize, look at how many transactions they’ve worked on and the value of them. What’s in their database in terms of buyers and sellers? And remember to still talk to your accountant and other advisors as needed to understand tax consequences and other aspects of the transfer.

You might also consider securing outside expertise from someone to help keep your books (System Six is one of several companies that can help) or a third-party asset manager to help design your portfolios, standardized to the advice you give. The more your processes are standardized, the better and easier your transition will be when you decide to exit the business or sell your practice.

Which experts do you need?

- Attorney specializing in business and estate plan
- Accountant
- Valuation expert
- Banker
- Business coach/consultant
- Industrial psychologist
- Business broker

How to find experts

- Referrals from MDRT members
- Ask centers of influence
- Professional associations

Questions to ask prospective experts

- How many transitions have you successfully completed?
- What is your area of expertise?
- What professional associations do you belong to?
- Can you provide references?

The buyer may want "expense" buyout instead of "capital" buyout. The buyer may wish to negotiate a deferred compensation package for the seller (deductible to the buyer and ordinary income to the seller), as it allows future cash flows to fund the purchase in a tax–efficient manner. The seller trades capital gains for ordinary income, but how much difference is there in the effective tax?

Internal buyers may have little or no capital. Thus, a "minority discount" may be required for the first phase of the buyout. This phase may find the seller moving 30 percent of the business to the buyer at a 40 percent discount. The buyer can come up with 20 percent of the discounted price and must bank or owner finance the difference. The annual profit distribution, however, will be based on 30 percent of the company's value. The ideal plan would find the profit adequate to repay the bank or the seller within a five-year period. If the buyer has proven he can help operate the business profitably during this five-year period, he is likely now going to be bankable for the last 70 percent. The last 70 percent goes at non-discounted value. In many cases, the additional work the minority owners perform (because they now come to work as an owner and not as an employee) increases the business value.

If the seller owns the real estate, another method of financing is to increase the lease from the buyer to the seller. This is also deductible to the buyer, but it adds the benefit of not being subject to the Federal Insurance Contributions Act (FICA) for the seller.

A well–executed plan will make all the difference to ultimately satisfying all parties involved. Once things have gotten to this stage, stay with the program and see things through. This stage is really where the rubber meets the road and where the transition comes to fruition.

What do you tell your clients when you have sold your business? Should you tell them, "I'm out of here," or are you better off spending a year or two helping the buyer build a relationship? This is less a problem in the internal sale than it is the external sale.

Managing the transition

Understanding and executing all aspects of the agreed–upon plan is crucial. If there were any rough spots in the negotiations, ignore them and fulfill the agreed-upon plan.

Communicating with staff

Staff members are important stakeholders in this transition. In addition to transitioning clients, you are transitioning your employees. If they are staying on, they are critical to the success of the transition. Keep them appropriately informed and let them know their role in the transition.

Managing clients through the transition

Make the client be part of the process by informing them in writing of the process that will take place and how it will occur. This can be accomplished via mail, or video or client appreciation seminar–type events.

Let the client know a transition is in process by sending a letter explaining what is happening and why it is happening.

Schedule a meeting with any client to meet the new advisor along with the current advisor.

Add additional services that did not exist with the old advisor relationship, such as newsletters, website alerts, etc.

Let the clients know you are building the succession plan. They have probably already thought about what happens to them if something happens to the advisor, anyway. Having the plan will bring them relief. They want to know who is going to take care of them if the advisor dies, becomes disabled or retires. Advisors spend so much of their career protecting the client’s family from the events occurring within the family, only to never provide that same safety net for the client if they were to suffer the fate themself — leaving the client in the cold.

Finding someone you trust to take care of your clients can be such a difficult process that it often keeps producers from creating their succession plan. According to respondents to a 2007 survey by LIMRA International and Moss Adams called "New Game, New Rules, New Reality," the most important factor in planning for a successful transition is identifying the right successor.

Whether you select a family member, an employee or partner from your business, or an outside buyer, psychological testing can help provide a thorough understanding of who is the best fit for your practice.

Consultants who specialize in this sort of testing may utilize surveys that take 10 minutes or six hours, but the goal is the same: to recognize personality characteristics relevant to running a business, working with clients and staff, and many more elements that may not otherwise be well defined in your own vetting process.

This is because emotional intelligence and interpersonal dynamics can be difficult to assess in an interview setting, and even family members may have drastically different approaches when it comes to risk or other considerations involved in decision-making for the business. Psychological testing can help individuals better understand themselves and colleagues better understand each other, leading to a business transition in which everyone is on the same page about strengths, challenges, expectations and otherwise.

A common type of internal sale is to sell the practice to a family member. This allows an advisor to transfer the value of the practice to a younger generation within the family. If done properly, it can provide an income for the next generation.

The advisor usually agrees on a lower price for the practice, as there are other personal estate planning considerations with this type of sale. The difficulty with this type of sale is the chosen family member might not be the best choice based on competency and/or on the ability to pay the appropriate price for the practice. In addition, this type of sale encounters the age-old question: If I sell this practice to one of my children, what do I do for the other members of my family?

In an internal sale, an advisor sells the practice to another advisor within the same business structure. This method should provide the smoothest transition to the client because they can continue working with the same firm.

From the firm's perspective, this is one of the most beneficial ways to transfer, as they do not lose the client revenue. Thus, it is in the best interest of the firm to help an advisor plan for this type of succession.

This method is commonly used with a junior advisor who can be groomed to purchase the business. Another benefit to the firm is the development of the next generation, ultimately increasing the firm's value, while making it easier for the remaining advisors to transfer their clients at retirement.

As the name implies, an advisor sells their practice to an advisor outside their company, either at an individual level or a firm level. In this case, the advisor has not only accumulated personal retirement savings, but will profit from the underlying value of the sale. Furthermore, in this scenario the new advisor will take control of the client relationships. This way, the client is not left to find another advisor. The downside to an external sale is the amount of time and effort involved in seeking a suitable candidate with similar core values. In this type of transaction, a great deal of due diligence is required on the part of the buyer to ensure they know what they are buying. Carefully consider the following areas when deciding on an external buyer:

Similar clients
How do your clients compare with that of the buyer/seller in terms of income level, investable wealth, family dynamics, geography and age? These are just some of the considerations to make when determining if your clientele would blend smoothly.

Methodology/culture
When merging or selling your business, you want to make sure that the other practice does business in a similar manner, both to protect the clients’ interests and your own. If you are a warm, family-oriented organization, is the purchasing practice the same, or does it have a less intimate, more corporate feel to it? Will anything change in terms of the frequency of communication and where/how it takes place? Are there drastic differences in terms of marketing or HR policies? Will the practice still have an entrepreneurial mindset after the deal is completed? Are there any major differences in your belief system or values, or in the benefits for staff members? Don’t assume that discrepancies will be sorted out after the purchase is completed.

This of course matters for office culture as well to maintain employee satisfaction and an even transition of performance under new ownership. Unhappy employees will lead to unhappy clients as well, so be sure to communicate with staff and clarify expectations/changes at all stages. Consider methodology how you do things and culture how it feels. Cultural fit is one of the most important components of a sale.

Courting period
The time required to establish and finalize this relationship will vary, of course. But experienced advisors say that somewhere between eight and 18 months should be expected. Think of this like a relationship and the time it takes to get to know a person before committing for the long-term. Visit corporate offices, talk with leaders and staff members and discuss current and future strategies. Retention, growth and valuation are all relevant as well. In many cases this process may take years, not months.

Due diligence
There is seemingly no limit to the amount of information a purchaser may want to find out about you and your practice before committing to buying, and being prepared is essential. Similarly, there is an abundance of information you could acquire about the advisor looking to buy your practice. This will include vital questions regarding corporate structure of the business, the crucial items of financial information, the value of assets and how the business is run. This will encapsulate everything from contracts to intellectual property to staffing plans to pensions, regulatory issues, data protection and much more.

Depending on where you are located, you may have to ensure that you and your buyer/seller work under the same broker-dealer. Regardless, due diligence is ensuring you have gathered all of the necessary information, including elements found above in “Similar clients” and “Methodology/culture.” Something else to consider: Are decisions being made by people close to cashing out? If so, they may be making deals that benefit them personally but not the practice as a whole.

Take the time to make sure that your business will continue at a high level and consider what you want your role to be if you will be staying on in the organization post-acquisition. Any complications with any of the aforementioned details may extend the time it takes to complete the transition.

Confidentiality
Involve your attorneys to draft non-disclosure agreements to maintain confidentiality during the courting period and process of structuring and executing the deal.

Planning for business continuity isn’t all about business. It’s also a way of keeping faith with an important aspect of MDRT membership: the Whole Person concept.

• Relationships: Protect clients and family with a plan to make sure that they are taken care of if we die, become disabled or decide to retire
• Health: Create a plan that removes the stress associated with worrying about the future
• Education: Learn by teaching and mentoring a protégé, partner or child who can continue your business into the next generation
• Career: Take responsibility for insuring the long-term promises made to clients will be fulfilled
• Service: For the future security of your clients, your family and your profession, create a dedicated strategy to care for their needs, no matter what happens to you
• Financial: Assure the most effective rate of return on your life’s work by ensuring its continuation through proper planning
• Spiritual: Create peace of mind for the important people in your life by establishing a plan that keeps the gifts of service, security and capabilities going long after you are gone