Many financial advisors drag their feet when it comes to finding a successor, especially if there's no internal candidate to fill their shoes. With each passing year, this becomes a bigger problem for procrastinating baby boomer advisors (at least those who don't work in wirehouses). And that makes it a problem for the industry in general.

Although many advisors would rather "die with their boots on" than transition their practices, the welfare of their clients depends on finding a worthy successor well in advance.

In Part I of this article, we outlined the pros and cons of finding someone already working inside the firm to take over your business. Now let's look at the major pluses and minuses of looking outside.

The Pros
Getting top dollar for your firm. Over the last decade, as the industry has begun to recognize the intrinsic value of a book of business, the valuations of financial advisory practices have increased. Five years ago, advisors were clamoring to purchase practices so they could grow. That mania has subsided somewhat, but there are still plenty of interested buyers out there, especially for certain kinds of firms. With listing services such as the ones offered by FP Transitions, sellers can advertise an available practice to a wide pool of potential buyers. They will have many suitors from which to choose-and might even set off a bidding war. An external search typically yields a bigger group of qualified candidates and increases a seller's chances of getting the best price for the firm. That's a big advantage over grooming an internal successor.

Top dollar or top candidate? Of course, many advisors would prefer to find the best replacement rather than sell to the highest bidder. And it's not just because they want to do right by their clients but it also serves their own financial interest: Many deals have an earn-out component, in which the buyer of the practice makes ongoing payments to the seller based on the firm's revenue. That means the new advisor must fit well with the clients to retain them, otherwise the selling advisor won't get paid.

Let's say the retiring advisor receives a third of the value of the practice as a down payment, and two-thirds is structured as an earn-out over a period of five years. That means it's important for the new owner to get along with the clientele. Even if the buyer offered 50% down, the seller could end up with much less than the practice is worth if that buyer can't retain the clients.

In an extreme case, all the firm's clients might leave the new advisor, which means the seller earns nothing beyond the down payment. Thus, because of the way most deals are structured, sellers have a vested interest in finding a qualified replacement.

The Cons
A big investment of time and energy. While choosing an external successor may help you get top dollar for your firm, narrowing down the field of candidates often requires a significant investment of time and energy. Imagine this scenario: You decide it's time to transition your practice, which is located in South Dakota, so you bite the bullet and announce that you're looking for a successor. By using a listing service and networking with colleagues, you receive far more inquiries than you'd expected. Although you specified that only those willing to move to South Dakota need inquire, you still get responses from dozens of interested advisors, including:

A 40-year-old independent advisor (affiliated with a different broker-dealer) who lives just across the state border and has 15 years of experience;

An advisor with a small practice whom you don't know but who's affiliated with your broker-dealer;