Build business value through succession planning

By Andrew Rickard | March 18 2007 07:13PM

“The writing’s on the wall,” says Bob Labrecque, director of succession planning at Manulife Financial. Unless the industry is able bring a lot of new people into the business, he foresees a day when sellers could outnumber buyers. That is why he is encouraging advisors to think about how they will manage succession sooner rather than later.

Few people would put their homes on the market before making repairs and putting on a coat of fresh paint, and advisors need to make similar preparations in their businesses so that they can stand out from the crowd. “Five to ten years from now, it could be a very different market that they’re trying to sell into,” he says. “Obviously you’re going to see some downward pressure on value.”

“Don’t take it lightly,” he warns. He recommends advisors take the time to write a thorough transition plan – one that details everyone’s roles and responsibilities, explains the different segments of the client base, and how communications will be handled during the transition from one owner to another. For example, when, where and how will the new advisor be introduced to clients? “The more time advisors spend planning, the more success they’ll have,” he says.


Besides the subjects mentioned by Mr. Labrecque above, there are two other areas a business plan should address, namely conservation and commissions. What can be done to minimize run-offs, and how will the post-acquisition book generate new business? Advisors are specifically asked to answer both of these questions in Manulife’s business acquisition loan guide.

Manulife Bank has made business acquisition loans available since 1999. Under the program, advisors who have Manulife contracts can obtain loans of $100,000 to $1,000,000 at a floating rate of prime plus two per cent, amortized over a maximum of seven years. Maximum financing is set at 75%, but may be increased to 100% if all of the advisor’s book were to consist of Manulife products. Prepayments can be made without penalty.

In order to qualify for the loan, advisors typically need to provide their corporate statements for the three most recent years, as well as a financial forecast showing expected revenue, expenses and cash flow for the next three years. Mr. Labrecque says he acts as a gatekeeper for the program, making certain that advisors qualify, after which the matter is between the advisor and the lender. He says that one of the advantages of working with Manulife Bank is that it “understands our industry” and takes the value of renewal commissions into account when evaluating a loan – something he says he’s heard some traditional banks may be reluctant to do.

Seeking approval

Besides getting approval on a loan from a bank or another lender, advisors may also have to worry about clearing the transfer of business with the product provider. Neil Skelding, president and CEO of RBC Insurance, says that insurers are bound to become involved when a book of business moves from one agent to another.

In the past, when buyers and sellers tended to be career agents with the same firm, the transfer of business from a retiring agent to another person in the same branch may have been a fairly straightforward process. But with the growth in the independent distribution channel, Mr. Skelding says things are a bit more complicated. “Since we pay commissions and trailers, we’re a party, and have to look at where it’s going to. Some agents we would not want to deal with,” he says.

If there were compliance or regulatory issues lurking inside a book of business, that could slow or even prevent the transfer. There have not, however, been any cases to date where RBC has felt a need to step in.


There’s no perfectly scientific formula to use when determining how much to charge for a book of business, according to Byren Innes, senior vice-president and director at NewLink Group. He considers several criteria when valuing a financial services firm, including ongoing renewals or trailer fees (generally multiplied by two to three times), the discounted cash flow and hurdle rate (typically between 12% and 15%), and earnings.

“Then the art comes into it,” he says. What is the maturity of the business? Are the expenses high or low? Do most of the earnings come from first year commissions, or is the owner living off of his or her service fees? If two firms each have three employees performing a total of five functions, is it possible to either reduce expenses by cutting staff, or increase revenue by bulking up in a particular area? Then there are things like retention trends and technological compatibility to consider.

A businesses valuator can help buyers and sellers quantify these factors, and Mr. Labrecque says that Manulife is trying to compile a list of ones with financial services experience. But Mr. Innes warns that the cost of an extensive, professional analysis may run into four or five figures. This is still a good investment for a large MGA, but perhaps may not be worth it in the case of a small advisory practice. No advisor wants to spend $20,000 to find out his or her practice is worth $80,000, he says.

Earning out and mentoring

Finding and cultivating a younger successor is an alternative to simply selling up and walking away from the business. As David Chalmers, an advisor with the Rogers Group in Vancouver, pointed out in a presentation he made to the Advocis Banff School last year, an “earn out” means that the successor doesn’t have to come up with a large lump sum. It also allows the mentor to ease into semi-retirement.

Mr. Chalmers said it’s important to manage the transition properly, choose the right words, and make certain that clients understand that having a younger advisor is often in their best interests. “I’m very cognizant of the age of my clients compared to my own age,” he stated. He tends to retain those clients who are a few years older, while those who are closer to his own age or younger may be better served by his associate. An 80-year-old, he explained, will not be well served by another 80-year-old who is just as likely to pass away.

Compensation arrangements and client transfers can all be worked out. The real challenge in mentoring is finding the right fit. “It’s very hard to find good people to succeed you in the business,” commented Mr. Chalmers.

Young blood

Advocis president and CEO Steve Howard says that he thinks many advisors would prefer to bring in their own successors, and believes his association can help. Through relationships with community colleges, as well as through their Life Licensing Qualification Program (LLQP) and Certified Financial Planner preparation courses, he says Advocis is busy priming the pump with new advisors. Full-time students enjoy free membership while they’re in school, and are able to visit Advocis’ Career Connection web page to find jobs and potential mentors. “It’s in its infancy,” he says. “But we will continue to shepherd it.”

Mr. Howard also mentions that a volunteer committee dedicated to “recruitment, apprenticeship, mentoring and succession” has been formed. The immediate priority is “building a reservoir” of new people in the industry, but he expects Advocis will also publish guidelines and checklists to help advisors deal with succession issues such as buy-out financing and due diligence.

Lawrence Geller, is an advisor and the moderator of

He suggests that potential successors should have “skin in the game.” He means by this that their compensation should be based on the amount of new business they produce. “People of my generation don’t believe in entitlement,” he says. “It’s not that people aren’t willing to work, but don’t ask me to pay you a fee or retainer or draw if you’re going to turn around and tell me you want to do it your own way,” he says.

Mr. Geller’s web site contains a section to encourage discussion between mentors and protégés, but personally he has had trouble finding a suitable successor. He expresses frustration with the attitudes of some candidates who came from outside of the life insurance industry. “They don’t understand the nature of the business or how you get paid, that you have to sell, and that clients have to want to buy.”

It also strikes Mr. Geller as unreasonable that someone should expect to buy his business for a relatively low multiple of earnings. “Why would anyone sell for less than they would net in only two or so years when the alternative is better?” he asks. There seems little reason to give up a steady income stream in return for a relatively small lump sum payment. He jokes that he would be better off if he simply closed the doors to his office and moved off to Florida.

Sitting on renewals

If advisors can’t find a suitable mentor or buyer, should they just keep on doing as they’ve always done? Terry Zavitz, head of an insurance agency in London, Ontario, doesn’t think so. “I do think we have a duty of care,” she says. “Just to sit on a block of business because you’ll get more, that’s not fair to clients.” While she doesn’t think the practice is rampant at the moment, she’s not sure how insurers will react to paying commissions for declining activity. “How much of that will insurance companies take?” she wonders.

Although she does not ever plan to retire, she does expect to slow to a more relaxed pace and take on more of a mentorship role as she approaches her 60s. “At some point in time you become a detriment to your company,” she says. “You have to find your place in the world, you can’t work 60 hours a week at age 75. You have to make a transition so you’re actually doing great things, but not the same things.”

Related to the same topic …