PRACTICE MANAGEMENT

Do You Have a Continuity Plan? You Should!

By FP Transitions

Independent financial practices are among the most economically valuable professional service models in the U.S. and the relationship between advisors and their clients is unique. One of the biggest challenges in safeguarding these practices is that many are built around the skill sets and personalities of individual advisors/owners, which leaves significant value—for the advisor’s estate and the clients who rely upon them—vulnerable to accidents, illnesses, and whatever else life may throw their way.

With this in mind, the single biggest threat to an independent practice with one owner or one primary advisor is the lack of a plan to protect the clients’ and owner’s cash flow and value in the event of his or her sudden death or disability (temporary or permanent). Clients expect their advisor’s business plans to be as buttoned-up as the financial plans they prepare for others, which includes having a comprehensive continuity plan to protect their interests.

What Exactly is a Continuity Plan? 

A continuity plan takes the form of a written agreement between two or more advisors and is designed to assure a seamless transfer of control and responsibility in the event of a sudden departure from a book, practice, or business of any of its owners, young or old. These triggering events do not always constitute an emergency but are prompted by something relatively sudden—something we hope doesn’t happen. There are many kinds of continuity plans and agreements and choosing the best approach tends to revolve around the number of owners in the book, practice, or business; the type of operational structure (sole proprietorship or entity); and what you are attempting to protect against. 

Buy-Sell Agreements

Though there are many options, the most secure continuity plans include a buy-sell agreement. These agreements lay out the conditions under which the agreement is triggered and the deal terms for the resulting transaction. For businesses or firms set up as an entity with two or more shareholders, the choice of continuity partner is fairly clear; a fellow owner or owners will be the best choice. The provisions of the buy-sell agreement will be included in the shareholders’ agreement or operating agreement and aim to avoid conflict and confusion by keeping ownership and control in the hands of those individuals who will be responsible for managing the operations of the business. For single-owner businesses, a standalone buy-sell agreement is typically drafted between the owner of the firm and the owner(s) of a firm with a similar approach to client service and experience. These standalone buy-sell agreements include the same provisions as the versions drafted between shareholders and aim to provide a smooth and worry-free transition for clients in the event their advisor is no longer able to work with them.

Best Practices 

As you put together your own continuity plan and supporting agreement, here are the best practices to consider:

  1. Put your plan in writing. Create a concise, clearly written continuity agreement that works under adverse circumstances and without your ongoing involvement. 
  2. Review and update your agreement. Read through it every year and make adjustments as necessary as your business evolves and grows in value. 
  3. Use an industry-specific valuation for market value in a contemplated transition to a third-party buyer or external continuity partner, or an equity-based valuation for equity ownership interests as is common with internal continuity partners or fellow shareholders. For situations like death or disability, it is important to quickly and accurately determine value. Be sure the valuation opinion comes from a credible third party with the database and accreditation to support the result. 
  4. Carefully and clearly define the term “disability” in your continuity agreement. Many practice and business owners allow boilerplate language to define when an owner is disabled and must be forced to sell. The reality is most disability cases are not caused by something sudden or catastrophic. They are more often caused by things like a health issue that starts and stops unpredictably over time, or by the medical condition of an advisor’s spouse or child that significantly alters their involvement and effectiveness on the job. Study the definition in your agreement carefully and make sure it fits the circumstances of your profession, your practice, and your life. 
  5. If you are a partner in a multi-owner business, make sure your continuity agreement addresses what happens in the event of the involuntary departure of any one of the partners or shareholders—which could cause any one of the partners or shareholders to be a buyer or a seller. An owner who is asked to leave as a result of a difference in goals and objectives may be viewed very differently than a person who leaves because of performance issues or, even worse, significant regulatory violations. Draft these considerations as early as possible, while everyone is getting along and these issues are largely theoretical. 
  6. If you are a partner in a multi-owner business, be mindful when two or more senior owners are of similar age. An internal buy-out arrangement can easily require as many as seven to 10 years (or more) in terms of amortization from start to finish. This can make the process impractical for a single remaining owner in their 60s.

Protecting the best interests of clients, employees, and your estate is paramount for any financial planner. For more information on continuity planning, including types of continuity agreements, options for funding agreements, determining value, and more, please feel free to attend FP Transitions’ presentation, “Continuity, More Than a Requirement,” at the NAPFA Fall Conference in Nashville. 

FP Transitions is a full-service consulting firm specializing in providing valuations, succession planning, M&A, and business insights to independent financial services firms. 

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