9 Pitfalls of Internal Succession Planning—and How to Avoid Them

By Brooklyn H. Brock

Even the best-laid plans go awry. During my experience as an exit coach to advisors, I have noticed common errors during an internal succession. Engaging in open communication with a potential successor from within the organization, building trust during the transition, and sticking to an ideal timeline are all important aspects, but each has its own possible pitfalls. For owners, here are nine potential mistakes that can undermine a succession plan; learn how to avoid them.

Choosing a Successor

1. Passing over a Successor Who Doesn’t Check Every Box
Finding an internal successor whose heart is in the right place is one of the only essentials for a successful internal succession. Everything else can be addressed through training or outsourcing. For successors lacking required hard skills, like financial planning experience or tax knowledge, identify a specific number of plans or a tax course to complete. Other successors may lack soft skills like time management, delegation, or closing new clients. If those are issues, establishing standards for the team in those areas can benefit the successor, as well as the firm’s operations. Closing new clients can be learned through sales training or can be strategically outsourced. Don’t let the complexities of developing a successor’s hard or soft skills prevent selecting a successor who fits well with the culture of the firm and clients.

2. Keeping the Succession Plan a Secret from a Potential Successor
Many founders like to keep their cards close to their chests, but this can cause an internal succession plan to fail prematurely. The founder should set the tone of the succession planning conversations by sharing ideas and expectations with the potential successor at the start and as the plan evolves. Knowing that they’re a potential successor also gives the employee the opportunity to prepare. This knowledge may also boost their motivation at work.

Training a Successor

3. Skipping Formal Performance Reviews with Your Successor
Formal performance reviews of all team members are crucial before, during, and after the transition of ownership. The smaller the advisory firm, the more difficult it is to build an intentional career path and have healthy, regular performance reviews. You can use performance reviews to discuss development and guide the successor into becoming an owner. Regular performance reviews will help your successor track their progress, as well as retain talent and ensure a positive future for the firm.  

4. Neglecting to Share Business Information with the Successor
Founders, particularly solo advisors, aren’t used to sharing proprietary information. Nevertheless, the process of developing a successor into an owner relies on openness. The successor must have access to the same information as the founder. Start small and set expectations around which documents and conversations need to remain private. 

Negotiating with the Successor

5. Viewing the Successor as an Adversary in Negotiations
Failure to respect and listen to successors is one of the main reasons internal successions fail. When sellers believe they hold all the power, they negotiate against their successor to get everything they can from the transaction. I’ve seen in my coaching that it’s healthy for both the seller and successor to describe what success looks like to them. At the same time, for an internal succession to work, both parties need to focus more on the success of the transition rather than just getting what they want. It’s a delicate yet achievable balance. 

6. Neglecting to Get a Timely Valuation
Annual valuations are necessary throughout the succession process. Understanding the range of value helps establish reasonable expectations around the sale price and provides an objective value to assign to the business for financial planning. The buyer needs the value of the business to project if their family will be financially stable while paying off the business loan. The seller needs the value of the business to project if they are on track to achieve their retirement lifestyle after the appropriate taxes are assessed upon sale. After the sale, annual valuations help the buyer calculate the rate of return on purchasing the business and analyze the look-back provisions that may affect payments to the seller.

Providing for Yourself and Your Family

7. Ignoring the Personal Financial Plan
Hiring an objective financial advisor for your own personal retirement plan is a great option to provide accountability to your timeline and design a lifestyle worth retiring to. Meetings with the financial advisor can also provide a safe space for a seller’s life partner (if relevant) to prepare for the seller’s retirement. The seller’s life partner must help select an advisor they are comfortable working with if the seller passes away. Without values-based financial planning, founders can boomerang back to work, which kills the succession plan. Identifying unique values and passions outside of the business can help the seller look forward to the next season of life. 

Completing the Transition

8. Failing to Endorse the Successor to Clients, Vendors, and Staff
A major concern is that clients could lose confidence in the firm and leave. Thankfully, that rarely happens, but respecting emotions and motivations increases the likelihood that an ownership transfer will go well. The solution is to transfer clients’ trust to the successor. Sellers do this by endorsing their successor’s professional and educational background. Transitioning relationships also extends to vendors and staff. Be sure to endorse the successor to the team and centers of influence, both in public and private.

9. Retaining Control of Business Operations and Business Decisions
Internal succession plans often fail because they can require difficult work, some of which is psychological. Founders must be ready to relinquish control and hand over the business they started. Solo advisors must prepare to work as part of a team. A founder may need to hone skills like training new hires, leading by example, and delegating. Other parts of the work involve preparing the business to transition. That means establishing checklists and workflows for basic operations. Successors often have a pulse on current market trends and a vision for the company’s direction. Working with an exit coach can help the seller respect new leadership and support changes that are put in motion.

A Good Plan Makes the Difference

A strategic, well-executed succession plan can make the difference between a firm that becomes a dynasty or one that closes shop within a few years. I operate on the basis that it’s not about numbers on a ledger or how much profit can be made. It’s about the lives of the people involved—their needs, their talents, and their dreams.

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Brooklyn Brock, CFP^®, CEPA^®, ChFC^®, CKA^®, is a third-generation financial advisor and founder of Ellevate Advisors LLC, which specializes in financial planning and exit coaching for financial advisors. Contact her to talk about starting a succession plan for your firm.

image credit: istock.com/baona