Enhancing Bargaining Power
The report also lists four ways in which sellers can reduce the bargaining power of their future successors, while discouraging them from abandoning a succession plan.
The report offered the following advice:
1. Fully institutionalize client relationships: Clients should view themselves as clients of the firm rather than clients of a particular employee, according to the report. This limits a successor’s ability to leave the firm and take clients.
2. Broaden ownership in exchange for successors tying themselves more closely to the firm: Another way to discourage successors from leaving is to offer financial inducements, according to the report. “No rational successor professional is going to voluntarily handcuff themselves to a firm without first receiving a material inducement for doing so,” the report states.
3. Put in place a detailed internal operating agreement and financial transparency: A clearly spelled out plan makes it easier to enforce the conditions of a contract, according to the report.
4. Bring your firm to market several years before you need to: Advisors shouldn’t wait until their backs are against the wall to initiate a sale, according to the report, because being in such a position reduces bargaining power. “”Successors can almost always figure out when the selling owners are in a position in which they have to sell,” the report states.
Buyer Psychology
The report also explored buyer psychology, and offered several ways in which buyers can mentally get themselves ready for a sale. The advice included doing extensive due diligence on the firm’s ownership and any restrictive covenants on successors.
Among the tips given to potential buyers:
• Find out who has voting control over a potential deal before commiting to it.
• Determine whether the sellers are emotionally capable of selling the business. One warning sign is if the owner tried to sell the business previously and failed.
• Determine whether the seller has a realistic view of the firm’s value.