Are You Setting Your Successor Up for Failure?

In our world of Financial Advice, succession planning isn’t just a nice-to-have; it’s essential. Yet, over the past few weeks, as news reports are beginning to hint at an upcoming rebound in M&A activity among RIAs, I’ve been struck by a recurring theme. Many advisors are eager to sell or at least merge but aren’t positioned to ensure a smooth transition—or to get a fair value for their practice.

At Diversified, we’ve navigated the waters of merging with and acquiring practices and are up to 6 offices in 5 states (and over $2 billion in AUM as of this writing). We’ve seen the good, the bad, and the downright challenging. While market conditions—such as fluctuating interest rates and the aging advisor demographic—may play a role in the potential uptick of activity, many of the hurdles come down to poor preparation.

So, how can you avoid becoming part of this statistic?

Common Mistakes in Succession Planning

1. Overestimating Practice Valuation
   With a strong run in equity markets, many founders have inflated expectations of their firm’s value. While internal successors may show interest, the price tag often becomes a stumbling block. A valuation needs to reflect not just past performance but the sustainability of future growth. Are the internal successors capable of running a larger and more viable firm?  Are they ready to take over the reins and grow in the same manner as the founders? Can they even get financing?
2. Lack of Operational Readiness
   Internal transitions often falter because key systems, workflows, and growth strategies are absent. If you haven’t modernized your technology or built scalable processes, you’re setting your successor up to play catch-up; a costly and avoidable mistake.  Is a merger with a larger firm with updated systems a better option?
3. No Focus on Future Leadership
   Many advisors cling to their roles too long without empowering a successor to take the reins gradually. Leadership isn’t learned overnight, and your successor needs time, mentorship, and resources to succeed.
4. Outdated Growth Strategies
   Your successor isn’t just inheriting your clients; they’re inheriting your growth plan. If that plan feels stale or irrelevant in today’s competitive market, they’ll struggle to keep the momentum going.

Positioning Your Practice for Success

Whether you’re preparing for an external sale or an internal succession, there are clear steps you can take to make the process seamless—and lucrative.

1. Reassess Your Valuation
   Get an unbiased third-party valuation of your practice. This not only provides clarity but ensures your expectations align with market realities.
2. Invest in Technology
   A tech-forward firm is more attractive to buyers and successors alike. Leverage and embrace tools that streamline operations, improve client experiences and support scalability.
3. Develop a Succession Timeline
   Start early. Transitioning ownership and leadership takes years, not months. Work with your successor (internal or external) on a phased approach to ensure they’re ready to lead when the time comes.
4. Focus on Client Retention
   Buyers want assurance that clients will stick around after a transition. Build strong relationships, streamline communication, and ensure continuity through personalized service and consistent touchpoints.
5. Think Beyond the Numbers
   Your practice isn’t just about assets under management. Build a culture, a team, and a growth story that extends beyond you. Buyers and successors are looking for a legacy they can build on—not just a portfolio they can manage.

A Final Thought

Succession planning is more than a business decision; it’s about protecting your clients, your team, and the legacy you’ve worked so hard to build. Done right, it ensures not only your financial reward but the continued success of the practice you’ve poured your energy into.

So, ask yourself: Are you setting your successor up for failure—or greatness?

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