A new research report examines how well advice businesses are positioned to respond to the sudden death or permanent disablement of a principal, and finds “a consistent and concerning theme” that most businesses are not as prepared as they should be.
Drawing on insights from Australian advice practices Business Health’s What If…? Research Report points to limited succession planning and undocumented agreements, to the absence of regular valuations and clear transition pathways, uncovering “…significant vulnerabilities that could rapidly erode business value, disrupt client relationships and place undue pressure on staff and families.”
Business Health says at the same time the report identifies a clear opportunity.
“With relatively straightforward planning, structured agreements, and a proactive approach, businesses can significantly reduce risk, preserve value and ensure continuity…”
In the report’s executive summary Business Health says that while most principals recognise the importance of planning for unexpected events, “very few” have taken the necessary steps to protect their clients, staff and the value of their business.
It says planning exists – but it’s rarely formalised, noting that although succession planning is widely acknowledged as important, execution is lacking:
- 67% of principals do not have in place a documented (succession, buy/sell or partnership agreement for example) to maintain and/or buy the business in the event of their sudden death or permanent disablement
- Only a small minority have comprehensive, regularly reviewed plans covering all contingencies
Business Health says this creates real risk “…not just operationally but financially – particularly for the family of the owner and the clients who may be left exposed.”
Its second point is that the business value is often unknown. “More than half (56%) of practices have never had their business formally valued.” Without this:
- Owners may hold unrealistic expectations of value
- Opportunities to optimise capital value, within the current regulatory framework are missed
- Beneficiary equalisation through effective, objective estate planning can be overlooked
- Executing a sale under pressure becomes significantly more difficult
…self-licensed principals face greater operational risk, particularly around who can legally service clients…
The report also points out how licensing structures carry different risks. “Our research included a near-even split between self-licensed businesses and those using external third party licensees,” it says, noting that self-licensed principals face greater operational risk, particularly around who can legally service clients.
“External licensees can provide support, but only if terms and responsibilities are clearly understood and planned for.” In both cases preparedness, not structure, is the deciding factor.
Business Health’s fourth point highlighted is that adviser and staffing gaps create immediate exposure.
- 41% of practices rely on a single adviser, creating immediate continuity and key person risk
- While most businesses employ staff, there is uncertainty around whether staff are prepared, informed or capable of maintaining operations during a crisis
The company says that without clear communication and contingency plans, even well-staffed businesses remain vulnerable.
The report also notes that the size and structure of the advice firms influence preparedness, stating that practices with higher revenue ($2M – $3M and $3M+ ) “…are more likely to have succession agreements in place, suggesting awareness increases with financial stakes.”
It says businesses with a single owner are often the least prepared, despite carrying the greatest individual risk.
On estate planning, the report finds this is incomplete. “While 66% of owners report having some estate planning in place, alignment between estate plans and business succession arrangements is often unclear – potentially undermining both.”
Business Health says there is a consistent theme across all findings. “Advisers are not practicing what they preach” on risk management and continuity.
To mitigate the risks, businesses should prioritise:
- Documenting a buy/sell and succession agreement
- Having the business regularly and independently valued
- Developing clear operational contingency plans
- Implementing formal arrangements with other advisers or practices to continue servicing clients
- Open communication with staff regarding roles in a crisis
The firm says its report is designed “…to challenge assumptions, prompt reflection, and … encourage action. Because the real question is not if the unexpected will happen – but whether your business is ready when it does.”
The report also details how Business Health can help adviser businesses across the areas highlighted in the report. Click here for the report.
