Succession planning for financial advisors building an enduring business

Additional Praise for Succession Planning for Financial Advisors “I firmly believe Succession Planning for Financial Advisors is a fundamental addition to the library of any financial industry professional looking to implement a succession plan or to become a successor Without a doubt, David Grau Sr and the FP Transitions team understand the gauntlet of challenges This resource provides practical tactics that take the pain out of planning a succession strategy to protect your clients and team members, and build a practice that outlives you for generations to come.” —Andrea Schlapia, founder/CEO, Ironstone, Inc “A must read for advisors who are serious in planning for their clients and their companies future I use the motto ‘think things through and follow through’ This step-by-step guide will help advisors get their planning completed and enjoy life more!” —Maureen McAnarney, co-president, VSR Financial Services “FP Transitions’ book gives financial advisors a vital road map for turning a professional practice into an enduring business, which will serve their own financial security while it preserves the well-being of their clients.” —James “Chip” Mahan, CEO, Live Oak Bank “I have followed David’s and FP Transitions’ articles for years His statistical research and, more importantly, his first-hand experience provide an uncanny insight as to how a financial service firm typically evolves and what it takes to create a market for that firm He and the FP Transitions’ team unmask the shortcomings of the traditional compensation arrangements promoted by insurance companies and brokerage houses and provide producers a better way to compensate themselves and ultimately monetize their many years of hard work This book is a must-read for all financial service professionals.” —Donald L Reichert, MSFS, CLU, ChFC, AEP®, CAP; president, Capital Design Associates “You must read this book as one of the first steps in creating your succession plan and embarking on such a significant venture We all can acknowledge how so many advisors are unprepared in this vital area Arm yourself with this valuable information gleaned from years of experience in just this arena David and FP Transitions have examined so many elements to the challenge making it far more possible to execute a viable transition for your firm Why stumble along yourself with no plan in mind when a professional has created a game plan for you? Buy this book and get started!” —Diane MacPhee, CFP® PCC, nationally recognized business coach for Financial Advisors, www.dmacconsulting.org “Being a financial planner/advisor requires a multitude of skills that are not necessarily innate or part of our professional training Through the evolution from sales person to fiduciary the demand for a consistent, perpetuating organization has grown and will continue to grow in the future David and FP Transitions’ book Succession Planning: Building an Enduring Business is not simply about reaping the benefits from past labors (although that is part of it), but about fulfilling the promise we have made to our clients that we will be there when they need us Truly keeping our clients interest’s first.” —Martin Kurtz, CFP, president, CEO, The Planning Center, Inc.; past president, Financial Planning Association (2011) Succession Planningg for Financial Advisors Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more For a list of available titles, visit our website at www.WileyFinance.com Succession Planningg for Financial Advisors Building an Enduring Business DAVID GRAU SR., JD AND THE FP TRANSITIONS® TEAM Cover Design: Wiley Cover Image: © iStock.com/PPAMPicture Copyright © 2014 by FP Transitions, LLC All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Grau, David, Sr Succession planning for financial advisors : building an enduring business / David Grau, Sr pages cm Includes index ISBN 978-1-118-86647-4 (cloth); ISBN 978-1-118-86641-2 (ePDF); ISBN 978-1-118-86642-9 (ePub) Financial planners Executive succession Financial services industry— Management I Title HG179.5.G727 2014 658.1′6—dc23 2014012693 Printed in the United States of America 10 Contents Preface ix Acknowledgments xi Introduction CHAPTER The Succession Conundrum Practices Built to Die What Exactly Is a Succession Plan? Why You Need to Create a Succession Plan Now Your Clients Are Watching You! Why This Industry Struggles with This Concept The Evolution of the Solution Mind Your Own Business The Opportunity at Hand CHAPTER How to Start Creating Your Succession Plan Defining Your Goals Building a Foundation for Success Facing Your Biggest Challenges Equity—A Powerful Business-Building Tool Valuing a Financial Services Practice Practicing Equity Management Building Profit-Driven Businesses CHAPTER Transforming Your Practice into a Business Assessing What You Have Built A Building Problem, Not a Planning Problem A Parable xiii 1 11 14 16 19 19 24 26 33 35 47 49 51 51 55 58 v CONTENTS vi Building Your Ship Rethinking Your Compensation System Balancing Revenue Strength and Enterprise Strength Selecting the Right Entity Structure Remodeling Your Cash Flow Production Model versus Business Model CHAPTER Creating Your Succession Team The People Problem The Secret Formula: G-1 + G-2 + G-3 Plan Before You Build and Hire Mining the Talent Pool Turning Employees into Equity Partners Onboarding Talent with a Book of Business The Case of the Super Producer Help Wanted Ad Solving the Talent Crisis in This Industry A Conversation with the Next Generation CHAPTER The First Step—A Continuity Plan A Dress Rehearsal for Succession Planning What Exactly Is a Continuity Plan? Basic Components of a Continuity Plan Types of Agreements Funding Your Continuity Plan Continuity Plan Dos and Don’ts A Powerful Acquisition Tool Communicating Your Plan CHAPTER Charting Your Succession Course Exit Strategies versus Succession Plans Selling Your Practice Mergers What Doesn’t Work in This Industry Employee Stock Ownership Plans What Does Work? A Lifestyle Succession Plan Goals of a Lifestyle Succession Plan The Family Business—A Special Case “Yes, but ” (Obstacles to Overcome) 60 61 63 65 72 77 81 81 82 85 87 89 91 94 96 98 99 103 103 104 105 106 111 112 115 115 117 117 118 124 126 129 132 134 136 139 Contents CHAPTER Succession Planning Step-by-Step Where to Start Assembling Your Support Team Enjoy the Planning Process Doing the Math Establishing a Fair Price The Nuts and Bolts of a Plan Documentation Bank Financing—Expanding Your Options Beware of Benchmarks and Survey Results CHAPTER A Tale of Ownership Succession Planning Case Study CHAPTER Course Corrections Returning to the Harbor Empowering the Next Generation Growth Is a Sign That Your Plan Is Working What to Do When Your Plans Change What to Do When Their Plans Change Handling the Culture Shift vii 147 147 150 152 153 154 155 166 167 169 171 171 179 179 180 182 183 184 185 Conclusion 187 About the Companion Website 189 About the Author 191 Index 193 Preface his book is going to challenge you and everything you think you know about succession planning As an independent advisor, you own what you do, you are unique, and you are responsible for building something that will outlive you—something that is tied to the lifetimes of the clients you serve We’re going to show you how to just that Along the way, we are going to point out the challenges that lie in your path to building a multigenerational business But we’re also going to help you build the bridges to get there As a guide, you need to know something more about the sources of knowledge and data that support the findings and conclusions and recommendations in the pages that follow FP Transitions is now 16 years old I work there, and along with my partner Brad Bueermann, we are the first‐generation owners and caretakers of our business During our time together and aided by a fantastic cast and crew, here is what we have done with you and for you: (1) More than 5,000 valuations of independent financial services and advisory practices have been completed (at the current and increasing rate of about 120 valuations per month), all with five‐year histories of revenue and growth; (2) more than 1,000 personalized benchmarking studies have been completed and delivered using the data from the valuation intake process (not survey data); (3) more than 1,200 closed transactions (sales or mergers to third parties) have been completed; (4) more than 1,750 continuity plans have been implemented and supported annually with valuations and updated agreements and funding mechanisms; (5) more than 300 internal ownership tracks have been set up and maintained for businesses and firms in this industry; (6) more than 400 new, next‐generation advisors have been made owners through these internal ownership tracks; and (7) more than 1,000 speaking engagements and workshops have been completed to date In addition, we have been hired to set up entities or to consult on the adjustments or recapitalization of more than 250 entity structures per year to make them work in this industry There are 20,000 current registered clients who use FP Transitions’ site and information sources at any given time, 1,500 of whom now pay monthly subscription fees (a service first offered just five years ago), with another 500 signing up or renewing each year T ix Succession Planning for Financial Advisors: Building an Enduring Business David Grau Sr © 2014 FP Transitions, LLC Published 2014 by John Wiley & Sons, Inc About the Author avid Grau Sr., JD, has spent almost half his life in the financial services industry, as a regulator, as a securities attorney, as a mergers and acquisitions (M&A) specialist, and for the past 16 years at the helm of FP Transitions as its founder and president FP Transitions pioneered the open marketplace concept of practice transition for the financial services industry beginning in 1999, and now assists independent reps and advisors in all facets of practice valuation, equity management, and succession planning David is the author of more than 85 nationally published articles, white papers, and manuals, and writes over 1,000 pages of new material per year on these and related topics David was named one of the most influential people in the profession in an industry survey of financial advisors by Financial Planning g magazine and is a nationally recognized expert on succession planning in the financial services industry He is also one of the nation’s leading speakers and instructors on equity management and succession planning issues, practice value and valuation, and long‐range strategic exit plans, having delivered over 750 presentations and workshops He now lives in Portland, Oregon, with his wife Penny, their two sons, three grandchildren, and four rescued dogs D 191 Succession Planning for Financial Advisors: Building an Enduring Business David Grau Sr © 2014 FP Transitions, LLC Published 2014 by John Wiley & Sons, Inc Index 30-hour threshold: about, 24 case study, 177 83(b) election, 162–163 Accountant, on support team, 150–151 Accounting: Financial Industry Regulatory Authority, 144 for phantom stock plan, 128 Accuracy of valuation, 36 Acquisitions, 125 Adhesion, client, 44 Advertising, for succession team, 96–98 Age of advisors, 98, 104 Agreements: antidilution, 165 buy-sell, 109–112 continuity, 121–122 contribution, 93 enterprise, 165–166 full-ratchet antidilution, 165 guardian, 108–109 noncompete/nonsolicitation, 42 operating, 109, 110–112 revenue-sharing (continuity plan), 106–108 shareholders’, 109, 110–112 weighted-average antidilution, 165 Annual valuations, 35–36, 113, 155 Antidilution agreements, 165 Asset approach to valuation, 37 Asset concentration, 41 Asset sales: internal buyout, 121–122 third party, selling practice to, 119–120 Attorney, on support team, 151 Attrition, 3, 24 Bank financing: availability of, 167 benefits of, 169 case study, 177–178 funding continuity plan, 112 for lump sum payout, 183 succession planning with, 167–168 Bank of America/Merrill Lynch, Benchmark, cautions about, 169–170 Bills, Treasury, 157–158 Bonds, Treasury, 157–158 Bonuses: cash, 127, 129 in cash flow modeling, 75 stock, 127, 129 Books, sharing, 140 Book sales, partial, 121–122 Bottom-line focus, 135 Business See also Family business defined, 53–54 as industry percentage, 54 perpetuation considerations, 68 practice versus, 16, 60–61 ship model for, 59, 60–61 Business growth: employee stock ownership plans and, 130 family business, 138 in independent financial services and advisory industry, 157–159, 182–183 as Lifestyle Succession Plan goal, 135 193 194 Business model: described, 78–79 production model versus, 77–79 Business systems, 44 Buyer-to-seller ratio, 12–13, 33, 64, 114, 115, 119 Buyout, internal: about, 120–121 asset sales, 121–122 continuity agreement, 121–122 deal structure, 121–122 events prompting, 121 partial book sales, 121–122 stock sales, 122 succession plan versus, 122–123 Buyout clause, 165–166 Buy-sell agreements: defined, 109 funding, 111–112 goal of, 110 purposes of, 110–111 Career length, 17, 104 Case study, 171–178 30-hour threshold, 177 bank financing, 177–178 compensation strategy at ownership level, 174–175 consultants, 173–174 interviews and tests for key staff members, 173 phantom stock plan, 172 practice overview, 171–172 revenue-sharing arrangements, 174–175 succession plan implementation, 175–178 valuation, 173–174 Cash bonus, 127, 128 Cash flow: about, 5–6 described, 33 equity value versus, 33–34, 73 importance of, 28 as incentive, 13–14 present value of discounted future, 37 INDEX Cash flow modeling: about, 72–73 bonuses, 75 equity, investment in, 76–77 profit distributions, 75–76 revenue collection, 73 wages, competitive, 74–75 Cash flow quality factors, in valuation: asset concentration, 41 client demographics, 40–41 expenses, 41 revenue growth and new client growth, 41 Cashing out, bank financing for, 183 C corporations: employee stock ownership plans, 129 as entity structure, 66 Certified public accountant (CPA), on support team, 150–151 Change: in organizational structures, 58 resistance to, 143–144 Client relationship index (CRI), 44 Clients: adhesion of, 44 concerns of, 8–9 demographics of, 40–41 management of, 44 new, 41 succession plan, telling about, 150 succession planning, advantages of, 8–9 tenure of, 42 Collaborators versus competitors, Collection of revenue, 73 Commissioner v Duberstein, 162 Commissions, insurance renewal, 39–40 Commission split: about, 15 advantages of, 24, 29–32, 61–63 case study, 174–175 disadvantages to G-3, 100 disadvantages to owner, 24, 28–32, 61–63 Commitment, lack of, 184 Index Communicating continuity plan, 115–116 Compensation See also Revenuesharing arrangements about, 25 case study, 174–175 equity (see Ownership grants; Stock grants) list of, 128 Competitors versus collaborators, Consultants, 173–174 Contingent financing, 119 Continuity agreements, 121–122 Continuity partners, 115 Continuity planning See also Continuity plans advisor’s age/career length and, 104 ownership base, reasons for widening, 83–84 purpose of, as succession planning dress rehearsal, 103 succession planning versus, timing of, 104 Continuity plans See also Continuity planning agreement types, 106–111 annual valuation, 113 bank financing, funding with, 112 buy-sell agreements, 109–111 communicating, 115–116 components of, 105–106 defined, 104 described, 104–105 disability, defining, 113 disability insurance, funding with, 111 funding, 111–112 guardian agreements, 108–109 involuntary departure of partner/ shareholder, addressing, 113–114 life insurance, funding with, 111 Lifestyle Succession Plan goals and, 135 ownership track, internal, 114 planning for funding, 111–112 195 Practice Emergency Program, 114 revenue-sharing agreements, 106–108 spreadsheet format for, 113 stand-by arrangements, 115 as succession planning step, 150 succession plans versus, 104, 105 tips, 112–114 trailing 12 months, caution about, 112–113 valuation and funding, 112 valuation tips, 112–113 Contribution agreements, 93 Control, losing, 144–145 Corporations, 121 See also C corporations; S corporations; Shareholders’ agreements Cost: of professional valuation, 36, 37 of setting up and running ESOPs, 131 CPA (certified public accountant), on support team, 150–151 CRI (client relationship index), 44 Culture: sales, 10 shift in, 185–186 Deal structure: asset sales, 119–120, 121–122 contingent financing, 119 continuity agreement, 121–122 internal buyouts, 121–122 partial book sales, 121–122 seller financing, 119 stock sales, 119–120, 122 third party sales, 119–120 Defensive strategy, 10–11 Demographics, client, 40–41 Dilution, shareholder, 165 Disability, defining, 113 Disability insurance, lump-sum, 111 Discounted future cash flows, present value of, 37 Discounts, minority, 159–161 Diversifying risk, 84 Documentation, 166–167 196 Earn-outs, 119 Eat-what-you-kill approach: about, 15 advantages of, 24, 29–32, 61–63 case study, 174–175 disadvantages to G-3, 100 disadvantages to owner, 24, 28–32, 61–63 Economic marriage, 45 Emerson, Ralph Waldo, 16 Employee benefit plan, employee stock ownership plan as, 129 Employee Retirement Income Security Act (ERISA) of 1974, 128 Employee stock ownership plans (ESOPs): benefits of, 130–131 cost of setting up and running, 131 drawbacks to, 131–132 as employee benefit plan, 129 growth rate and, 130 guidelines for, 130 history of, 129 mergers versus, 131 selling practice versus, 131 statistics, 129–130 taxation of, 130, 131 EMS (Equity Management System): about, 132, 133 documentation, 167 Ensemble Practice, The (Palaveev), 51–52 Ensembles: defined, described, 51–52 Enterprise agreements, 165–166 Enterprise strength: defined, 64 revenue strength, balancing with, 24–25, 64–65 in valuation, 35 Entitlement versus opportunity, 138 Entity size and entity structure, 65 Entity structure See also specific structures about, 25, 65–67 INDEX advantages of, 66–67 business perpetuation considerations, 68 entity size and, 65 flow-through entities, 66 formalities, internal, 70 liability considerations, 67 ownership of, 69–70 profit distributions and, 69, 70–71 shareholders, 69–70 size and, 65 taxation and, 67–68, 69, 70, 71 Equity, investment in, 76–77 Equity-centric organizational structure, 57 Equity compensation See Ownership grants; Stock grants Equity management: defined, 47 goal of, 48–49 schematic, 87 steps in, 47–48 as succession planning step, 148–149 “Equity Management: Determining, Protecting, and Maximizing Practice Value,” 39 Equity Management System (EMS): about, 132, 133 documentation, 167 Equity manager, on support team, 151 Equity value: about, 5–6 cash flow versus, 33–34, 73 described, 33 importance of, 27, 34–35 measuring, 33–34 monitoring, 35 ERISA (Employee Retirement Income Security Act) of 1974, 128 ESOPs (employee stock ownership plans): benefits of, 130–131 cost of setting up and running, 131 drawbacks to, 131–132 as employee benefit plan, 129 growth rate and, 130 Index guidelines for, 130 history of, 129 mergers versus, 131 selling practice versus, 131 statistics, 129–130 taxation of, 130, 131 Evaluation period, for succession team, 92 Exit strategies See also Selling practice about, succession plans versus, 117–118 Expenses, practice, 41 External sale of practice: about, 118–119 asset sales, 119–120 contingent financing, 119 deal structure, 119–120 geography, 119 price and terms, 119 quality of match, 119 seller, average age of, 120 seller criteria, 119 seller financing, 119 stock sales, 119–120 Fair market value, 36–37, 162 Family business: about, 136–137 building versus starting, 138 growth considerations, 138 opportunity versus entitlement, 138 ownership track, 138 planning process, starting early, 139 talent, importance of, 137–138 valuation, 139 Federal Reserve, 157–158 Fee income, 39 Financial analysis of succession plans, 153–154 Financial Industry Regulatory Authority (FINRA): accounting, 144 entity structure and securities revenues, 67 gross dealer concession, 29 phantom stock plan, 128 197 rules and regulations, 10, 151 succession team, 84 transactional revenue, 40 Financial Planning Association (FPA), 11 Financial records, sharing, 140 Financing: bank, 112, 167–168, 169, 177–178, 183 contingent, 119 seller, 45, 119, 168–169 FINRA (Financial Industry Regulatory Authority): accounting, 144 entity structure and securities revenues, 67 gross dealer concession, 29 phantom stock plan, 128 rules and regulations, 10, 151 succession team, 84 transactional revenue, 40 Firm: defined, 54 as industry percentage, 54 Five-year plans, rolling, 13 Flow-through entities, 66 Formalities, internal, 70 Foundation for success, 24–26, 85–87, 148 Founding owners See G-1 (Generation One) FPA (Financial Planning Association), 11 FP Transitions See also specific topics about, 12 Equity Management System, 132, 133, 167 as equity manager, 151 GlidePath strategy, 123–124 “Independent Financial Service Growth Rate Study,” 157–158 listing and selling system, 12–13 Practice Emergency Program, 114 Research and Analytics department, 157–158 Succession Maintenance Program, 167 198 Full-ratchet antidilution agreements, 165 Funding continuity plan: bank financing, 112 disability insurance, lump-sum, 111 life insurance, 111 planning for, 111–112 valuation and, 112 G-1 (Generation One) See also specific topics income-perpetuation strategy for, 135–136 multiple-tranche strategy and, 156–157 plans, change in, 183–184 revenue-sharing arrangement, disadvantages of, 24, 28–32, 61–63 risk, diversifying, 84 wages, competitive, 74 G-2 (Generation Two): age, ideal, 83 contribution agreement signed by, 93 empowering, 180–181 hiring, training, and retaining G-3 level succession team, 84–85 money, lack of, 141–142 multiple-tranche strategy, 156 number of, ideal, 83 partnership track, 85 plans, change in, 184–185 readiness, lack of, 140–141 risk, diversifying, 84 stock grants, 163–164 valuation and, 154 G-3 (Generation Three): advice for, 99–101 empowering, 180–181 hiring, training, and retaining, 84–85 money, lack of, 141–142 multiple-tranche strategy, 156 number of, ideal, 83 partnership track, 85 plans, change in, 184–185 readiness, lack of, 140–141 INDEX revenue-sharing arrangement, disadvantages of, 100 risk, diversifying, 84 GDC (gross dealer concession), 29, 38, 114, 152 Generation One See G-1 (Generation One) Generation Three See G-3 (Generation Three) Generation Two See G-2 (Generation Two) Geographic location: as marketplace demand factor, 43 as seller criterion, 119 Gilliam, John, 99 GlidePath strategy, 123–124 Goals: defining, 19–24 popular, 20 profit, 46 Goals of Lifestyle Succession Plan: bottom-line focus, 135 continuity plan, 135 general, 134 growth, building, 135 income-perpetuation strategy for founder, 135–136 Tranche 1, 134 Tranche 2, 134 Great Recession, 18 Gross dealer concession (GDC), 29, 38, 114, 152 Gross recurring revenue multiple, 64–65, 154–155 See also Trailing 12 months Growth: employee stock ownership plans and, 130 family business, 138 in independent financial services and advisory industry, 157–159, 182–183 as Lifestyle Succession Plan goal, 135 Guardian agreements: described, 108 disadvantages of, 108–109 Index Havens, John J., 17 Health issues, 184 Help wanted ad, for succession team, 96–98 Home building analogy, 19, 152 IARs (investment advisor representatives), IMCA (Investment Management Consultant Association), 11 Income See also Cash flow fee, 39 independent financial services and advisory industry, 28 perpetuation strategy for, 135–136 Income approach to valuation, 37 Incubator: about, 91 goals, 134 Lifestyle Succession Plan, 132, 133, 134, 156–157 minority discounts, 159, 161 stock grants, 163–164 in succession plans, 141 “Independent Financial Service Growth Rate Study,” 157–158 Independent financial services and advisory industry: age of advisors, 98 career length, 17 growth rates, 157–159, 182–183 history, lack of, 187–188 income statistics, 28 rules of, 10 talent crisis, solving, 98–99 wirehouses versus, 1, 27, 28 Individual books organizational structure, 56–57 Insurance: disability, lump-sum, 111 life, 111 practices based on, 44 Insurance trails, 39–40 Internal buyout: about, 120–121 asset sales, 121–122 199 continuity agreement, 121–122 deal structure, 121–122 events prompting, 121 partial book sales, 121–122 stock sales, 122 succession plan versus, 122–123 Internal Revenue Code (IRC) See also Taxation gifts, 161–162 reorganizations, tax-free, 125–126 Section 102(a), 161 Section 102(c), 161–162 Section 368, 125–126 stock grants, 161–162 Internal Revenue Service (IRS) See also Taxation employee stock ownership plans, 129 reorganizations, tax-free, 125–126 stock grants, 162 Interviews and tests for key staff members, 173 Investment Advisers Act of 1940, 27 Investment advisor representatives (IARs), Investment in equity, 76–77 Investment Management Consultant Association (IMCA), 11 Involuntary departure of partner/ shareholder, 113–114 IRC (Internal Revenue Code) See also Taxation gifts, 161–162 reorganizations, tax-free, 125–126 Section 102(a), 161 Section 102(c), 161–162 Section 368, 125–126 stock grants, 161–162 IRS (Internal Revenue Service) See also Taxation employee stock ownership plans, 129 reorganizations, tax-free, 125–126 stock grants, 162 Job: defined, 52 as industry percentage, 54 mentality, persistence of, 28–29, 49 200 Kadlec, Dan, Lawyer, on support team, 151 Liability considerations in entity structure, 67 Life insurance, 111 Life Insurance Marketing and Research Association (LIMRA), 11 Life raft model, 58–59, 60–61 Lifestyle Succession Plan See also Succession planning described, 132–133 failure of, 136, 180 goals of, 134–136 multiple-tranche strategy, 132–134, 156–157 results of, 179–180 rewards for planning ahead/starting early, 136 schematic, 133 success of, 179 Limited liability company (LLC) See also Operating agreements advantages of, 68, 69 described, 69 documentation for, 167 formalities, internal, 70 internal sales, 121 onboarding talent with a book of business, 94 ownership of, 69–70 profit distributions, 69, 71 S corporation versus, 69–72 setting up, 71–72 shareholders, 69–70 taxation of, 68, 69, 71 LIMRA (Life Insurance Marketing and Research Association), 11 LLC See Limited liability company (LLC) Lump sum payout, bank financing for, 183 Management, client, 44 Market approach to valuation, 37–38 INDEX Marketplace demand factors, in valuation, 43 Marriage, economic, 45 Match, quality of, 119 Math, doing the, 153–154 Mergers: acquisitions versus, 125 defined, 125 employee stock ownership plans versus, 131 rarity of, 125 taxation of, 124–125 as term, 124–125 “Millionaires and the Millennium: New Estimates of the Forthcoming Wealth Transfer and the Prospects for a Golden Age of Philanthropy” (Schervish and Havens), 17 Minority discounts, 159–161 Minority ownership interest, 159–160, 164–165 Multiple-tranche strategy: in Lifestyle Succession Plan, 132–134, 156–157 in succession plans, 141 succession team and, 91 National Association of Personal Financial Advisors (NAPFA), 11 National Center for Employee Ownership (NCEO), 129–130, 131 Net new client growth, 41 Noncompete/nonsolicitation agreements, 42 Obligations created by stock grants, 161 Obstacles to succession planning: books and records, sharing, 140 change, resistance to, 143–144 control, losing, 144–145 defensive strategy, 10–11 industry rules, 10 next-generation personnel not ready, 140–141 next-generation successors lack money, 141–142 Index own money, paying yourself with, 142–143 sales culture, 10 tools/strategies, inappropriate, 9–10 Onboarding talent with a book of business: about, 91–92 contribution agreement, 93 evaluation period, 92 LLCs, 94 S corporation, 93–94 taxes, 93–94 valuation, formal, 92–93 “One class of stock” rule, 70, 159, 161 Operating agreements: defined, 109 funding, 111–112 goal of, 110 purposes of, 110–111 Opportunity versus entitlement, 138 Oppression, shareholder, 164–166 Oregon Administrative Rules, 27 Oregon Revised Statutes (ORS), 26–27 Oregon Securities Division, 26–27 Organizational structures See also specific structures about, 25, 51 changes in, 58 equity-centric, 57 individual books, 56–57 ORS (Oregon Revised Statutes), 26–27 Owners: founding (see G-1 (Generation One)) planned (see G-2 (Generation Two)) potential (see G-3 (Generation Three)) succession planning, advantages of, 4–8 thinking like, 14–16 Ownership: of entity structure, 69–70 minority interest, 159–160, 164–165 widening, reasons for, 83–84 Ownership grants: about, 126–127 201 company withholding/deductibility, 162 disadvantages of, 185 fair market value/basis, 162 obligations created by, 161 rules for, 162–163 strategic use of, 163–164 taxation of, 126, 127, 161–163 as tenure issue solution, 163–164 vesting issues, 162–163 Ownership track: continuity plan tips, 114 family business, 138 Palaveev, Philip, 51–52 Partial book sales, 121–122 Partners, continuity, 115 Pay cuts, avoiding: case study, 175 cash flow remodeling, 74 obstacles to succession planning, 142, 143 Payment terms, 44–45, 119 PEP (Practice Emergency Program), 114 Perpetuation, business, 68 Pershing, LLC, 39 Phantom stock plan (PSP): accounting for, 128 case study, 172 as cash bonus plan, 128 as stock-based compensation plan, 127–128 Planned owners See G-2 (Generation Two) Planning See also Continuity planning; Succession planning exit, family business, 139 for funding continuity plan, 111–112 replacement, rewards for, 136 Plans, change in: G-1 (Generation One), 183–184 G-2 (Generation Two), 184–185 G-3 (Generation Three), 184–185 Plans, rolling five-year, 13 202 Potential owners See G-3 (Generation Three) Practice See also Selling practice business versus, 16, 60–61 buyer demand for, 12–13, 33, 64, 114, 115, 119 defined, 52–53 described, 56–57 expenses, 41 gross recurring revenue multiple, 64–65, 154–155 as industry percentage, 54 insurance-based, 44 life raft model, 58–59, 60–61 size of, 43 tenure of, 42 type of, 43 value, effective, 21–22 value, rule of thumb for, 6, 12, 34 Practice Emergency Program (PEP), 114 Present value of discounted future cash flows, 37 Price, fair, 119, 154–155 Production model: business model versus, 77–79 described, 77–78 Profit distributions: in cash flow modeling, 75–76 entity structure and, 69, 70–71 limited liability companies, 69, 71 S corporations, 46, 69, 70–71 Profits: distribution of, 50 function of, 75 goal for, 46 importance of, 49–50 value and, 45–47 Pro forma spreadsheets, 143, 148–149, 153–154 Promissory note, performance-based, 119 PSP (phantom stock plan): accounting for, 128 case study, 172 as cash bonus plan, 128 INDEX as stock-based compensation plan, 127–128 Reasons for succession planning: clients, advantages to, 8–9 owners, advantages to, 4–8 Records, sharing, 140 Registered Investment Advisers (RIAs): about, 1, 11 as succession team members, 84 Rejuvenation effect, 182–183 Reorganizations, tax-free, 125–126 Replacement planning, Retirement, gradual, 22, 133 Revenue: collection of, 73 growth of, 41 recurring versus nonrecurring, 39–40 strength of, 24–25, 64–65 transactional, 40 Revenue-sharing agreements (continuity plan): about, 106–107 advantages of, 108 applicability, 107–108 disadvantages of, 107 forms, 107 Revenue-sharing arrangements: about, 15 advantages of, 24, 29–32, 61–63 case study, 174–175 disadvantages to G-3, 100 disadvantages to owner, 24, 28–32, 61–63 RIAs (Registered Investment Advisers): about, 1, 11 as succession team members, 84 Risk, diversifying, 84 Risk factors, transition: about, 41–42 client tenure, 42 level of, 42 noncompete/nonsolicitation agreements, 42 practice tenure, 42 technology use, 42 Index Rolling five-year plans, 13 Sales culture, 10 Schervish, Paul G., 17 S corporations See also Case study about, 69 described, 70 employee stock ownership plans, 129 formalities, internal, 70 LLCs versus, 69–72 minority discounts, 158 onboarding talent with a book of business, 93–94 “one class of stock” rule, 70, 159, 161 ownership of, 70 profit distributions, 46, 69, 70–71 stock grants, 161 taxation, 67–68, 70, 71 SEC (Securities and Exchange Commission), 40 Section 102(a), of Internal Revenue Code, 161 Section 102(c), of Internal Revenue Code, 161–162 Section 368, of Internal Revenue Code, 125–126 Securities and Exchange Commission (SEC), 40 Securities Exchange Act of 1934, 27 Seller, average age of, 120 Seller criteria: geography, 119 price and terms, 119 quality of match, 119 Seller financing: benefits of, 168 in deal structure, 119 drawbacks to, 168–169 valuation and, 45 Selling practice: about, 3, 12–14 asset sales, 119–120, 121–122 contingent financing, 119 continuity agreement, 121–122 203 deal structure, 119–120, 121–122 employee stock ownership plans versus, 131 events prompting, 121 externally, 118–120 internally, 120–123 partial book sales, 121–122 seller, average age of, 120 seller criteria, 119 seller financing, 119 stock sales, 119–120, 122 succession plans versus, 117–118, 122–123 succession team, dissatisfaction with, 183–184 Shareholders: dilution of, 165 entity structure and, 69–70 involuntary departure of, 113–114 oppression of, 164–166 Shareholders’ agreements: defined, 109 funding, 111–112 goal of, 110 purposes of, 110–111 Sharing books and records, 140 Ship model for business, 59, 60–61 Silos See also Practice defined, described, 51, 56–57 SMP (Succession Maintenance Program), 167 Sole proprietorship: about, 55–56 asset sales, 121 tax issues, 67 Spreadsheets: for continuity plan, 113 pro forma, 143, 148–149, 153–154 Stand-by arrangements, 115 Steps in succession planning, 147–150 Stock-based compensation plan, phantom stock plan as, 127–128 204 Stock bonus, 127, 129 Stock grants: about, 126–127 company withholding/deductibility, 162 disadvantages of, 185 fair market value/basis, 162 obligations created by, 161 rules for, 162–163 strategic use of, 163–164 taxation of, 126, 127, 161–163 as tenure issue solution, 163–164 vesting issues, 162–163 Stocks, average annual return on, 157–158 Stock sales: internal buyout, 122 third party, selling practice to, 119–120 Strategy: defensive, 10–11 rethinking, 20–22 Strength, revenue, 24–25, 64–65 “Strong man” approach, 131, 159 Success, foundation for, 24–26, 85–87, 148 Succession Maintenance Program (SMP), 167 Succession planning See also Lifestyle Succession Plan; Succession plans; specific topics case study, 171–178 clients, advantages to, 8–9 continuity planning as dress rehearsal for, 103 continuity planning versus, enjoying process of, 152–153 importance of, 1–2, 4, 152–153 obstacles to, 9–11 owners, advantages to, 4–8 reasons for, 4–9 steps in, 147–150 timing of, 22–24, 148 Succession plans See also Succession planning; specific topics INDEX continuity plans versus, 104, 105 defined, 2–3 exit strategies versus, 117–118 financial analysis of, 153–154 math, doing the, 153–154 selling practice versus, 117–118, 122–123 uniqueness of, 117 Succession specialist, on support team, 151 Succession team See also Talent dissatisfaction with, 183–184 employees, turning into equity partners, 89–91 formula, secret, 82–85 help wanted ad for, 96–98 hiring, training, and retaining G-3 level, 84–85 multiple-tranche strategy, 91 onboarding talent with a book of business, 91–94 success, foundation for, 85–87 super producers, 94–96 talent pool, mining, 87–89 Super producers, 94–96 Support team: assembling, 150–151 CPA/accountant, 150–151 lawyer, 151 succession specialist, 151 Supreme Court (U.S.), 162 Survey results, cautions about, 169–170 Takeovers, 125 Talent See also Succession team crisis of, solving, 98–99 importance of, 137–138 onboarding, 91–94 recruiting, 6–7, 87–89 Taxation See also Internal Revenue Code (IRC); Internal Revenue Service (IRS) of acquisitions, 125 of employee stock ownership plans, 130, 131 205 Index entity structure and, 67–68, 69, 70, 71 flow-through entities, 66 of mergers, 124–125 onboarding talent with a book of business and, 93–94 reorganizations, tax-free, 125–126 of stock grants, 126, 127, 161–163 Team, support, 150–151 See also Succession team Technology use, 42 Tenure: client, 42 practice, 42 stock grants and, 163–164 Tests and interviews for key staff members, 173 Texas Tech University, 99 Third party, selling practice to: about, 118–119 asset sales, 119–120 contingent financing, 119 deal structure, 119–120 geography, 119 price and terms, 119 quality of match, 119 seller, average age of, 120 seller criteria, 119 seller financing, 119 stock sales, 119–120 Time frame for succession planning, 148 Time magazine, Timing: of continuity planning, 104 of succession planning, 22–24, 148 Trailing 12 months See also Gross recurring revenue multiple balancing revenue strength and enterprise strength, 64–65 caution about, 112–113 effective value and, 21–22 rules of thumb concerning, 6, 12, 34 Trajectory, workweek, 22–24 Tranche 1: about, 91 goals, 134 Lifestyle Succession Plan, 132, 133, 134, 156–157 minority discounts, 159, 161 stock grants, 163–164 in succession plans, 141 Tranche 2: about, 91 goals, 134 Lifestyle Succession Plan, 134, 156–157 Tranche 3, 159 Transactional revenue, 40 Transition risk factors: about, 41–42 client tenure, 42 level of, 42 noncompete/nonsolicitation agreements, 42 practice tenure, 42 technology use, 42 Treasury bills, 157–158 Treasury bonds, 157–158 UBS, U.S Federal Reserve, 157–158 U.S Supreme Court, 162 Valuation: accuracy of, 36 annual, 35–36, 113, 155 asset approach to, 37 case study, 173–174 cash flow quality factors, 40–41 client relationship index, 44 cost of, 36, 37 fair market value, 36–37 family business, 139 funding continuity plan and, 112 G-2 (Generation Two) and, 154 income approach to, 37 insurance-based practices, 44 market approach to, 37–38 marketplace demand factors, 43 INDEX 206 Valuation: (Continued ) onboarding talent with a book of business, 92–93 profitability and its impact on value, 45–47 questions about, 36 reasons for, 155 revenue, recurring versus nonrecurring, 39–40 transition risk factors, 41–42 valuation multiples, range of, 36 Value See also Valuation effective, 21–22 fair market, 36–37, 162 payment terms and, 44–45 profits and, 45–47 realizing, 5–6 rule of thumb for, 6, 12, 34 Vesting issues, 162–163 Wages, competitive, 74–75 Wealth, transfer of, 17 Weighted-average antidilution agreements, 165 Wells Fargo, Wirehouses, multigenerational, 1, 27, 28 Workweek trajectory, 22–24 ... to the power of succession planning and building a valuable and enduring business The primary reason is cash flow Advisors are married to their SUCCESSION PLANNING FOR FINANCIAL ADVISORS 14 take‐home... various plans, what we call ? ?succession planning schematics” or blueprints 19 20 SUCCESSION PLANNING FOR FINANCIAL ADVISORS Many advisors have an idea of what they’d like from a succession plan, such... titles, visit our website at www.WileyFinance.com Succession Planningg for Financial Advisors Building an Enduring Business DAVID GRAU SR., JD AND THE FP TRANSITIONS® TEAM Cover Design: Wiley Cover