Advisors’ interest in succession planning and M&A is “nearing all-time highs,” according to RUIA expert David DeVoe, a managing director with Charles Schwab Advisor Services.

Not coincidentally, Schwab unveiled two new reports on succession and transition planning on Wednesday.

Advisors considering retiring need to consider how a succession plan retains the firm’s business philosophy and approach to client service, the role an advisor wants to play in the firm as the transition takes place, and how an advisor’s personal retirement objectives might impact the timing and structure of the plan, the report on succession planning concluded.

Advisors also need to identify if  a potential successor has the skills and expertise necessary to manage the key elements of running an RIA firm, including business management, client relationships and service, and the firm’s investment management philosophy.

The deal structure, according to the report, should clearly outlines roles and responsibilities during the transition, ownership stakes and ownership transfer timetables, and specific deal structure.

In addition, there needs to be a timeline for key transition events, such as when a successor becomes the decision maker in the firm.

“Succession planning is a critical exercise even for advisors who are not ready to sell or exit the business,” Mr DeVoe said in  a statement. “Whether advisors’ clients are verbalizing the question or not, they are wondering ‘what will happen to me’ if something happens to their advisor. Having a comprehensive succession plan in place helps advisors to proactively put their clients at ease, ensure that the future of the firm is directed, and create a more valuable practice.”

Valuing a firm

Schwab’s new report on RIA firm valuation and M&A deal structures includes key drivers of RIA firm valuation and explanations of how cash flow, expected growth trajectory, and risk mitigation influence value.

The report also examines common valuation techniques used for RIA firms, such as a “market” or “sales comparison” approach that establishes an approximate firm value by looking at the selling price of similar business, and a “discounted cash flow” approach that estimates the future cash flows of the business which are then discounted back to a present day value.

Common elements of RIA firm deal structures, according to the report, include retention targets based on the expected number of assets, revenue or clients that will be retained through the deal, and earn-out periods that determine the size of initial payment to the seller and the duration of the payment cycle.

“Similar to planning for succession, walking through a valuation process can be very beneficial even for firms that are not currently engaged in M&A activity,” Mr DeVoe said. “By gaining a better understanding of the key valuation factors including cash flow, growth, and risk minimization, advisors can build stronger, more efficient, and more profitable firms.”