I can’t help but think of the parallels in the perceived complexity of creating a Continuity Plan with the perceived complexity of creating an investment portfolio.
Anyone familiar with investing knows that complexity is not a requirement for success. You can pick any low number of low-cost funds and call it a day. However, there are those investment advisers who would have you believe otherwise — for the simple reason that their lunch money is at stake. The unfortunate truth is that you can likely make more money marketing your convoluted investing stratagem than you can advocating for low-cost investing. The same may be the case in the world of Succession, Exit & Continuity planning.
Said another way, you may not need to pay a succession planning firm $10,000 to craft a Continuity Plan. (Of course, you can always pay for the premium service if you want to.) But, a qualified attorney should be able to craft a template for you at a very reasonable cost. How can I be so sure of this? This is what we did with Define Financial.
A Continuity Plan Can Be Simple & Imperfect
Your firm’s Continuity Plan document/contract does not need to be complex. Including the cover page, our Continuity Plan contract was only eight pages long, half of which was boilerplate contract language. And another two pages were blank appendices!
Why do I bother emphasizing how simple creating a Continuity Plan can be? Because I know that a lot of practicing financial advisers have not put a Continuity Plan into place. (Ryan Kelly says that only ~20% of advisers have a succession plan in place.) Part of the reason advisers do not create a Continuity Plan could be because of the complexity that is assumed to be required, thus making the task too daunting to attempt.
That is not to say that our Continuity Plan at Define Financial is perfect. I’m sure there are ample flaws. And the Continuity Plan can always be improved. But to quote someone wise:
The enemy of good is great.
Simply, I’d rather have an imperfect Continuity Plan in place right now than to take forever to craft the perfect one — and thus be unprepared if something happens in the interim.
Financial Adviser Firm Continuity Plan Best Practices
With our Continuity Plan in place at Define Financial, I thought I’d share a few things that I learned while helping to create a Continuity Plan for my clients.
Buying a Book of Business vs. Buying a Whole Business
Depending upon who is doing the buying and who is doing the selling, you’ll need the language to reflect as much in your Continuity Plan. That means that if you are an investment advisor representative (IAR) working for a company (such as myself), you’ll want to have a Continuity Plan specific to your situation.
I mention this because the original contract template we used to create our Continuity Plan was drafted to reflect a junior level planner buying an entire company. For our particular circumstances, we needed the company to buy my book of business. Unlike myself buying the entire company, the company isn’t going to be buying any assets from the representative (myself). That is, my estate won’t have any computers or office furniture to sell to Define Financial in the event of my death or disability.
However, with the tables turned, the opposite may be the case in your Continuity Plan. Simply, the junior planner may be buying the entire company and all of its assets (computers, furniture, etc.) in a Continuity Plan.
Designated Decision-Maker for a Continuity Plan
The designated decision-maker in a Continuity Plan could be compared to an executor in a will. So, choose this person carefully. Normally in a Continuity Plan, the designated decision-maker is going to be your spouse. However, if for whatever reason that is not appropriate (e.g., if the person is single), that field for the designated decision-maker will have to be updated accordingly.
It might go without saying – but I’ll say it anyway – make sure to have a conversation with your designated decision-maker about this process. Prepare them for what they may need to do.
Length of Disability for a Continuity Plan
If a Continuity Plan executes when a death or disability occurs, you need to decide how long that disability must manifest before the provisions of the contract are executed. For our particular contract, we decided on 12 months. Is that the perfect amount? Probably not. But it’s a start.
Purchase and Payment Terms for a Continuity Plan
Companies in the business of selling succession, exit and continuity planning services would have you believe that you must have a business valuation. David Grau makes this point ad nauseam in his book. (But, a life insurance salesmen would also have you believe that your newborn needs a whole life insurance policy.) The problem is that for those exiting advisors unwilling to shell out several thousand dollars for the valuation service fee, the expense of a business valuation service can derail the Continuity Plan creation process.
To avoid this very pitfall at Define Financial, we settled on a very simple rule of thumb with respect to the purchase and payment terms. For my own personal Continuity Plan, we decided that 50% of gross quarterly revenue received by the seller based upon the advisory fees earned from each former client for a period of 16 quarters following the triggering event would be paid out to my spouse, my estate, etc. That’s a very simple way to do it. And more importantly, our Continuity Plan is done.
Is it perfect? Of course, we know the answer to that is “no.”
For me buying the company, we considered different payment terms than the reverse (i.e. the company buying my book). I opted to stretch out the payment terms. This is because I considered that pulling 50% of gross company revenue out of the business for four years was not sustainable given my familiarity with the company’s profitability. As such, I suggested a longer pay period.
This was not a consideration for the opposite scenario-if the business were to buy my clients in the event of my death or disability. This is because of the relative size of the purchase. That is, the business can afford to buy out my book relatively quickly because the cost of the book is small relative to the business’s prepurchase cash flow. However, the company’s book is much larger than my own book of business. Were I to buy the company, I would effectively be using the newly-acquired company’s revenue to pay out the exiting advisor.
You’ll notice that in both these arrangements that the terms are seller-financed (seller-estate-financed?). Such an arrangement really makes putting a Continuity Plan in place much, much easier. There are no life insurance policies to set up, etc.
Make Your Continuity Plan Today
Crafting a Continuity Plan is something that can be done quite easily. It does not require you to spend several thousand dollars on valuation and consulting services.
You can put a simple plan in place today. With that, you can feel confident when your clients ask you the most important question:
“What happens if something happens to you?”
You can tell them all about your Continuity Plan, building their trust in you.