This week our President & Founder, David Grau Sr., J.D., is traveling to NYC to receive an Icons & Innovators Award from Investment News along with 19 other incredible industry visionaries and thought leaders.
We are incredibly proud of David and our team who continue elevating the industry with new ideas for long-term business growth and sustainability.
Please join us in congratulating David on this honor!
The market for financial services practices has changed. 20 years ago, people didn’t see resale value in a financial planning practice. When an advisor retired, they just hoped they’d find someone who would agree to take over their book. As the industry matured, however, sales started taking place. It wasn’t easy – there were no standards for valuation or deal terms, no strategies for client retention, few financing options, and concerns about liability.
These days, those issues have mostly been resolved, providing for a real marketplace and more competitive prices for practices. It’s a seller’s market, and in our open marketplace sellers often field 50 or more inquiries for every practice listing. Practices are being purchased by regional and national firms, RIAs, banks, and private equity groups. There are many more options for an advisor upon retirement than existed 20 years ago.
EXPLORING YOUR OPTIONS
What if you receive an unsolicited inquiry–either a letter in the mail, an office visit, or a phone call? If your business plans do not include selling, you could file the offer away for the future in a file that may well include other such letters. On the other hand, maybe the offer sparks your interest to learn more about what options you have in the marketplace. Selling what you have built can be a good strategy when the time and circumstances are right.
Selling Your Practice
Completing a formal valuation is step one. Step two is securing that value with a continuity plan.
Having a formal, written continuity plan in place for the unexpected exit of an owner–especially if they’re the only owner–is paramount to ensure your practice and its clients are protected.
Annually updating the plan is just as important as the signatures on the document itself. Your plan and contingencies must evolve along with your business. An up-to-date and accurate agreement will prevent confusion in an already emotional and chaotic situation should the plan need to be implemented. Each year you must account for any business growth (or decline) as well as changes in compensation, personnel, client base, and other practice details.
The infographic below breaks down some continuity basics and options.
click to enlarge
Ensure your business is safeguarded against the unexpected. Explore FP Transitions' Continuity Planning services or call 800.934.3303 to update (or establish) your continuity plan.
Setting up and agreeing to proper and reasonable payment terms is an essential part of the selling or acquisition process. The following questions are common for both buyer and seller when it comes to deal structuring, especially in regard to financing the transaction:
- What types of financing are available?
- What is seller financing?
- How are payments structured to promote post-closing co-operation and motivation for both parties?
- Are there contingencies to the payment of the full purchase price?
- Does client attrition affect the final purchase price?
Underlying virtually every acquisition is the assumption that the seller will offer some kind of financing to support the transaction. There are four primary types of seller financing, the last three of which include contingencies that may alter the final purchase price.
- A basic promissory note
- An adjustable or performance-based promissory note
- An earn-out arrangement
- A revenue sharing or fee-splitting agreement
Seller financing is less a matter of the sufficiency of a buyer’s cash reserves and more the basic payment structure technique that recognizes the importance of keeping the seller motivated to help with post-closing client retention. Post-closing seller motivation and support is critical in a transaction that involves a relationship-based business.
buying & selling
Successful, ambitious, and conscientious advisors ask questions like: How do I create next-level growth? What will it take to build a firm that delivers an extraordinary experience to my clients and their families? How am I going to achieve my own next-level life?
The answer starts with another strategic question: What has to happen to give you the freedom to focus on precisely those aspirations?
Your catalyst for growth in all three areas lies in the talents of your team. Make your A players your #1 priority and you’ll have an alchemy that expands your available time and transforms exhaustion and obstacles into more space and energy.
But it doesn’t come without a cost. The cost is personal sacrifice of current habits, beliefs, ego, and behavior, plus an investment of more time now to blend together the ingredients for that alchemy. Your results will come from your ability to:
- let go and stay focused on the big picture,
- place yourself in service to your team, and
- treat them like your best clients.
Building Your Team
Your firm’s succession plan is designed to gradually transition ownership, leadership, and growth responsibilities to the next generation of advisors. The goal is sustainability of the firm, and it is accomplished through a plan that coordinates the changing roles of the founder(s) and the successor team over many years.
Selling equity in the business in a series of steps or “Tranches” gives both the founder and the next generation of owners the time to wisely manage the transition and to prepare for the changes to come. The transfer of ownership from the founders (G1s), to the second and third generation of owners (G2s and G3s), starts with Tranche 1. Tranche 1 is usually a shift of 10% to 20% of ownership to the next generation. Tranche 1 is often called the incubator stage and allows for all parties to test the waters and to prepare the business structure for the journey ahead.
The second step, Tranche 2, tends to move ownership to 70%/30% or 60%/40%, with G1 retaining the majority ownership position. The tranche system – selling to G2s and eventually G3s – not only widens the ownership base but also provides increasing continuity support as the firm develops and the successor team comes together.
As our clients progress through Tranche 1 we are often asked, “When should we start Tranche 2?” And the answer is: It depends, but also know that Tranche 2 tends to start well before the final payments are made by the G2 owners in Tranche 1.
Building Your Team
In 20 years of helping financial practices transition, we have closed over 3,000 successful deals–both on the open market and through privately organized transactions. Each deal is different, but we have been able to identify certain key traits and behaviors that facilitate the most successful acquisitions.
1. Build a strong business foundation
Advisors who take the time to self-assess and build (even if it takes a few years) present as a better candidate to sellers. They have ensured their business has the cash flow and capacity to service an influx of clients. Successful buyers are those willing to put in the work to prepare their business, and take care to make the transition as smooth as possible for the outgoing owner and new clients.
Business succession from parent to child is an age-old practice in human history, from humble cobblers to royal families. The practice stemmed from necessity—parents taught their children the trade they knew in an effort to teach them to survive. What started from necessity became custom and, eventually, tradition. In many professions, this tradition is still a point of pride. Advisory business owners will often see this as the best path to build an enduring practice and retain their client base.
For some advisors, the idea of passing the business to a family member is their preferred choice and seems to be the easiest path forward. One day, the founder steps out and the child steps in. Most advisors even consider gifting their business to their children, with or without a written contract, rather than selling it to them. Here are some simple reasons you should think twice before taking this route.
The IRS Considers Your Business to Have Value
Many advisors think, “I’ll just give my children the business when I’m ready to retire.” We hear this all the time from founding owners whose children work with them in their business. Be wary, though – although certain types of gifts are exempt from this rule, generally speaking, a gift whose value exceeds the annual exclusion is taxable to the giver of the gift and likely will be applied against the giver’s lifetime estate tax exemption.