We worked with a group in Florida several years ago that was owned and run by a husband‐and‐wife team, both in their early 60s. Rob and Diane had no children in the business, but they did have one key employee, Mark, who was quite capable, though young at age 29. The owners admittedly were starting the succession planning process very late, but after more than 30 years as fi nancial professionals and entrepreneurs they wanted to cut back their work hours substantially and quickly. They were adamant that they did not want to sell and walk away. They felt strongly, after reading and studying and weighing their options, that an internal sale was best for them and their clients.
So they turned to Mark and offered to sell him 49 percent of the business.
They would fi nance the deal, of course, but they wanted Mark to take on the role of president immediately and begin to assume increased responsibility for the operations. Mark agreed, but seized on his opportunity and bargained for the ability to purchase a controlling interest if the business did well over
the next 24 months. They set up a series of benchmarks to quantify the hurdles and documented the transaction. Rob and Diane went to half‐time status within a year’s time, well below the 30‐hour threshold. Mark worked long, hard hours and with the winds of a good economy at his back, easily achieved the fi nancial goals.
As the controlling owner, Mark decided to bring in a friend of his to help him, promising an ownership opportunity when it came time to buy out the rest of Rob and Diane’s ownership. Together they worked hard, and they began to make the business their own. After every extended vacation, Rob and Diane returned to an offi ce that looked and ran very differently than the one they’d built and, while pleased with the fi nancial progress, watching the change was very hard. They felt their culture had been aban- doned, and they felt hurt. Rob and Diane no longer wanted to be involved, so they sold their remaining ownership at fair market value and stepped out of the business for good, but not on great terms.
When advisors sell their practices to a third party, one that is larger and better fi nanced, they understand and expect that their culture will be absorbed by the buyer and replaced. That’s part of the deal in most cases.
An internal sale is supposed to provide a different result, and it can, if next‐
generation owners have time to immerse themselves in the business’s culture and can appreciate it. As a G‐1 level owner, if you go too fast, often a result of starting too late, culture gets traded in like a used car.
If your culture and the identity of your fi rm are important to you, take steps to preserve those aspects by teaching them to your handpicked succes- sion team. At the same time, don’t be afraid of improving on the current state.
Work with your partners and make the course corrections gradually, as a team, over a period of decades. To do that, you need to surround yourself with people you trust, and you need to start the process earlier in your career. Make teaching and transition and respect for history a part of your culture, and it will carry your business and your team into the next generation.
187
Conclusion Conclusion
Congratulations! If you’ve read all the preceding pages and made it to this point, you’ve graduated from practice ownership and you understand how to build something that will be greater than any one person, something that can outlive you and take care of your trusting clients for generations to come. You hold in your hand the keys to your own business.
You’ve also learned that the process of creating and implementing a succession plan is all about building for the future. It has almost nothing to do with ending your usefulness to your clients or staff—in fact, just the opposite. Succession planning is about growth and collaboration and coop- eration and trust; those are the stepping‐stones that create a path into the future envisioned by the contributors to this book. But we fully recognize that you’re more than a business, and your future is about more than just making money.
In these many pages, we’ve provided the steps and the strategies and the tools to help you build a valuable business, but ultimately a business is not about these things any more than your home is about its wooden frame and concrete foundation. In the end, it is about you. Your work and what you leave behind are a refl ection of you and your values and priorities. Whatever it is you choose to build, picture that day in the future when you do stop, look back, and take inventory of your accomplishments, your successes, and your failures. What is it that will make you most proud? We trust that the steps you take today to better care for your clients, your staff, and your family through the work that you do will be important pieces in your own mosaic.
The independent fi nancial services industry is a special place. In terms of number of advisors and annual revenue growth rates, this model just plain works. One of the reasons the independent sector has grown as fast as it has is through competition, and to be certain, entrepreneurs are great competitors. But there is a key component that is missing, and that is history. As an independent advisor, it is hard to plan successfully for the future when you have little history to look back on and learn from, but that is exactly what you must do. As an independent advisor, you’re in charge of what happens next, and you’re in charge of creating the history that next‐generation advisors will learn from. It is up to you, and us, with
© 2014 FP Transitions, LLC. Published 2014 by John Wiley & Sons, Inc.
help and support from your broker‐dealer, custodian, insurance company, and business coach. We have to fi gure this out together and we have to get started immediately.
Value what you do, literally. You already know what your cash fl ow is, so take step one and submit to the process of a formal valuation, and put equity to work for you immediately. Share the results of your formal valu- ation with your spouse, signifi cant other, your business coach, your kids, and your staff; show them your history, and then get busy building an even better future. Equity in the right organizational and entity structure, with a good plan, will lead next‐generation talent into your business and, maybe, into your circle of ownership. From there, anything is possible and every- thing starts to move forward and under your control.
You wanted to own something of your own. You’ve done that. Now that your future belongs to you and you know what is possible, what will you do with it?
189
About the Companion Website About the Companion Website
This book includes a companion website, which can be found at www.wiley.com/go/successionplan . The companion website contains tools, worksheets, and checklists for the major topics covered in the book.
To access the site, go to www.wiley.com/go/successionplan (password: fptransitions01).
© 2014 FP Transitions, LLC. Published 2014 by John Wiley & Sons, Inc.
191
About the Author About the Author
David Grau Sr., JD, has spent almost half his life in the fi nancial ser- vices 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 fi nancial 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 infl uential people in the profession in an industry survey of fi nancial advisors by Financial Planning magazineg and is a nationally recognized expert on succession planning in the fi nancial services industry. He is also one of the nation’s leading speakers and instruc- tors 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.
193
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 fi nancing:
availability of, 167 benefi ts 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, 1 Benchmark, cautions about,
169–170
Bills, Treasury, 157–158 Bonds, Treasury, 157–158 Bonuses:
cash, 127, 129
in cash fl ow modeling, 75 stock, 127, 129
Books, sharing, 140
Book sales, partial, 121–122 Bottom-line focus, 135
Business. See also Family business defi ned, 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 fi nancial services and advisory industry, 157–159, 182–183
as Lifestyle Succession Plan goal, 135
Index Index
© 2014 FP Transitions, LLC. Published 2014 by John Wiley & Sons, Inc.
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:
defi ned, 109 funding, 111–112 goal of, 110
purposes of, 110–111 Career length, 17, 104 Case study, 171–178
30-hour threshold, 177 bank fi nancing, 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 fl ow:
about, 5–6 described, 33
equity value versus, 33–34, 73 importance of, 28
as incentive, 13–14
present value of discounted future, 37
Cash fl ow modeling:
about, 72–73 bonuses, 75
equity, investment in, 76–77 profi t distributions, 75–76 revenue collection, 73 wages, competitive, 74–75
Cash fl ow quality factors, in valuation:
asset concentration, 41 client demographics, 40–41 expenses, 41
revenue growth and new client growth, 41
Cashing out, bank fi nancing for, 183 C corporations:
employee stock ownership plans, 129 as entity structure, 66
Certifi ed 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, 7 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
Communicating continuity plan, 115–116
Compensation.See also Revenue- sharing arrangements about, 25
case study, 174–175
equity (see Ownership grants; Stock grants)
list of, 128
Competitors versus collaborators, 7 Consultants, 173–174
Contingent fi nancing, 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, 7
as succession planning dress rehearsal, 103
succession planning versus, 7 timing of, 104
Continuity plans. See also Continuity planning
agreement types, 106–111 annual valuation, 113
bank fi nancing, funding with, 112 buy-sell agreements, 109–111 communicating, 115–116 components of, 105–106 defi ned, 104
described, 104–105 disability, defi ning, 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
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 alsoC
corporations; S corporations;
Shareholders’ agreements Cost:
of professional valuation, 36, 37 of setting up and running ESOPs, 131 CPA (certifi ed 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 fi nancing, 119 continuity agreement, 121–122 internal buyouts, 121–122 partial book sales, 121–122 seller fi nancing, 119 stock sales, 119–120, 122 third party sales, 119–120 Defensive strategy, 10–11 Demographics, client, 40–41 Dilution, shareholder, 165 Disability, defi ning, 113
Disability insurance, lump-sum, 111 Discounted future cash fl ows, present
value of, 37
Discounts, minority, 159–161 Diversifying risk, 84
Documentation, 166–167
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 benefi t plan, employee stock ownership plan as, 129
Employee Retirement Income Security Act (ERISA) of 1974, 128 Employee stock ownership plans
(ESOPs):
benefi ts of, 130–131
cost of setting up and running, 131 drawbacks to, 131–132
as employee benefi t 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:
defi ned, 2 described, 51–52
Enterprise agreements, 165–166 Enterprise strength:
defi ned, 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 specifi c
structures about, 25, 65–67
advantages of, 66–67 business perpetuation considerations, 68 entity size and, 65 fl ow-through entities, 66 formalities, internal, 70 liability considerations, 67 ownership of, 69–70
profi t 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:
defi ned, 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 fl ow 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):
benefi ts of, 130–131
cost of setting up and running, 131 drawbacks to, 131–132
as employee benefi t 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
Evaluation period, for succession team, 92
Exit strategies. See also Selling practice about, 3
succession plans versus, 117–118 Expenses, practice, 41
External sale of practice:
about, 118–119 asset sales, 119–120 contingent fi nancing, 119 deal structure, 119–120 geography, 119 price and terms, 119 quality of match, 119 seller, average age of, 120 seller criteria, 119 seller fi nancing, 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
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:
defi ned, 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 specifi c 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
Full-ratchet antidilution agreements, 165 Funding continuity plan:
bank fi nancing, 112
disability insurance, lump-sum, 111 life insurance, 111
planning for, 111–112 valuation and, 112
G-1 (Generation One). See also specifi c 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
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:
defi ning, 19–24 popular, 20 profi t, 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 fi nancial services and advisory industry, 157–159, 182–183
as Lifestyle Succession Plan goal, 135 Guardian agreements:
described, 108
disadvantages of, 108–109
Havens, John J., 17 Health issues, 184
Help wanted ad, for succession team, 96–98
Home building analogy, 19, 152 IARs (investment advisor
representatives), 1
IMCA (Investment Management Consultant Association), 11 Income.See also Cash fl ow
fee, 39
independent fi nancial 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 fi nancial 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
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), 1 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:
defi ned, 52
as industry percentage, 54
mentality, persistence of, 28–29, 49
Kadlec, Dan, 8
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 alsoOperating 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 profi t 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 fi nancing for, 183 Management, client, 44 Market approach to
valuation, 37–38
Marketplace demand factors, in valuation, 43
Marriage, economic, 45 Match, quality of, 119 Math, doing the, 153–154 Mergers:
acquisitions versus, 125 defi ned, 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