As I talk with young advisors at local events and national conferences, I’ve increasingly heard concerns about broaching the topic of future ownership in the firm where they work. Some junior advisors have been promised ownership but don’t have anything in writing. Others don’t know the best way to bring up the topic in the first place.
It can be intimidating to ask the founder if their plans for their practice include you. However, you need to plan your career and to know how it will impact your family and life outside the office.
Take for example, Jennifer’s story:
Jennifer started working as a junior advisor 5 years ago at Flashlight Financial, an RIA firm founded in 2000 by Mike and Steve.
Jennifer recently hit $20M in AUM and was supporting other advisors in creating their plans. She held the Series 66 registration and was half way through the coursework for the CFP. She was also helping train two newly hired advisors and covering the office when Mike and Steve were away.
As Jennifer was taking on these additional responsibilities she had asked about her future at the firm, but each time she broached the subject, Mike and Steve said, “We have at least ten more years left. We will get to this later.” They were focused on other goals such as hitting $500M in AUM and recruiting new advisors.
Jennifer and her husband, however, were thinking of buying a house soon and needed to know if and how ownership would impact their finances.
Jennifer realized she couldn’t wait for her bosses any longer and had to get some answers. She was nervous. She knew the stories of how hard they had worked to start the firm. She didn’t want to step on any toes. She wasn’t sure exactly how to ask and she wasn’t sure of exactly what to ask for.
You can be reassured by the fact that surveys report that 66% of advisors DO want to transfer their firm internally. And data shows that multi-generational firms have higher profitability and value. Founding advisors may have a plan but have not shared it with their staff. Or, they might have just put off planning. The earlier they get started, though, the more options there are. For instance, with a 10 to 15 year runway, younger owners can afford to buy in gradually instead of coming up with the full payment price in one lump sum.
Selling internally allows the founder to define their legacy, and allows them to continue to work while spending fewer hours in the office. They can stay involved with their practice as they see the next generation develop skills and become their own kind of leader.
Be mindful of the fact that the founder has worked hard to get here – likely by risking personal financial investments, working 16-hour days, and answering every phone call and email themselves. This business is their life's work. You aren't asking to take over control, but you do want to be part of its future. It is important to show respect for their labor and investment, and to communicate understanding along with your intention.
BE PREPARED FOR THE CONVERSATION
Consider first why you want to be an owner. You’re making a long-term commitment, taking on financial risk, and shouldering more responsibility. You have to be passionate about your career and the business. You have to understand that having ownership stake in a business is very different than being an employee. Do you know your way around a P&L and a balance sheet? Are you familiar with ALL the different aspects of the company? Are you OK handling quick decisions, working outside your comfort zone, or viewing risk as opportunity? Even if you know you WANT ownership, you also have to be READY for it.
Before scheduling time to talk with Mike and Steve, Jennifer started by researching internal ownership transfers. She asked a couple of friends at other firms what their ownership experiences had been like. She also took time to look over her last performance review.
You’ll want to be thoroughly prepared for the discussion with your boss. Arm yourself with your accomplishments, along with your ideas for your future development. Share your efforts to improve efficiencies, and your thoughts about how to make the company more profitable. Show the founders that you are bringing something to the table, and that you’re willing to make this commitment. Be sure to tie your goals and ideas into the overall goals of the company.
Here are some ideas for starting points for the conversation. You could share a conversation you had at a meeting or conference. “I spoke with a junior advisor who had just become a 5% owner of their firm. It got me to thinking about how much I’ve appreciated your mentorship and would love to hear your thoughts on our future working relationship together.”
Or bring up a past discussion. “When we spoke at my last review you mentioned one day I’d have more responsibility. Could we go into more detail on that today. I’m really interested in helping to grow the firm.”
Another option would be to share statistics on the topic. The recently released study by The Financial Planning Association and Janus Henderson Investors includes results of surveying advisors and their staff and could be a good jumping off point for a conversation. FP Transitions also has many resources on the subject, including several client success stories.
WHEN AND WHERE
If you have regular employment reviews, this can be an excellent time to bring up ownership. If you don’t, or if that review is a long way off, pick a time when your boss has an open schedule, and doesn’t have to head off to a client meeting. Also, avoid days where they’re likely to be stressed about market performance, taxes, or client issues. Being in a good mood and state of mind leads to a more positive conversation.
After a monthly team meeting, Jennifer asked Mike and Steve if they had a few minutes to stick around. They always had team meetings on days clients weren’t in the office and often took some extra time to catch up, so it felt like a good opportunity. Jennifer told Mike and Steve how much she loved working at Flashlight, asked what their plans were for the future, and if ownership was an option for her.
Of course, you’ll want to have this discussion confidentially. If you’re more comfortable having the discussion away from the office you could book time in a nearby conference room or suggest lunch or coffee off site.
Being prepared is being prepared for the answer. Your conversation is going to go one of three ways, “yes, no, or not yet.” Whatever the answer, it will shine a light on the way forward, and you won’t know if you don’t ask.
THEY COULD SAY NO
What if you ask and they say no? There could be many reasons for this. They may have family concerns that come into play. They may have another successor in mind. They may have a deal in the works with another firm. They may just not want to have another owner (and, understand that there may be things they can’t share with you).
'No' might not mean you need to leave the firm. If they say 'no', it could be a time to reflect on what ownership really means, as it's not always the be-all end-all. Maybe, without the equity, you’re still in a good spot from a compensation standpoint, or even in a position to gain more experience and further your career in other ways before making a change.
If they are planning an external sale, you can still be part of the plan. Often, in a sale–and especially in a merger–advisors and employees stay on as part of the transaction. At a larger firm a move like this might even open up more opportunities for mentorship, advancement, and ownership.
Knowing that there is no ownership path for you in your current situation presents an opportunity to discover a new path and perhaps seek out something new armed with clear goals, experience, and the right questions to ask up front.
THEY MIGHT SAY “NOT YET”
“Not yet,” is an acceptable answer. If the owner feels you aren’t ready, then, together, you can strategize to clearly lay out the path to ownership. It could mean meeting higher production goals, developing new business, getting a designation, learning management skills, or spending more time in client meetings.
The owner may be interested, but have questions about the logistics of an incremental ownership transfer. Do they need to restructure their entity to create shares to sell? How much, if any, control do they give up initially? How much would the transaction be? They may not know that there are new financing options that could support a transaction. You can help them by sharing what you’ve discovered about the process in your own research. Be patient and give them time to find the answers and talk things over with their CPA, family, and other stakeholders.
Mike and Steve appreciated Jennifer’s, hard work, enthusiasm and obvious care for the clients and the firm. They realized they didn’t want to lose her.
Mike and Steve proceeded to talk it over with their families. The conversations happily surprised them. Steve’s wife said, “now that we are taking more vacations I actually wondered who was holding down the fort when you were away.”
In this case, Jennifer’s questions spurred an acknowledgment of the course things seemed to be taking already, but her request made things more clear and emphasized the need to make things official.
IF THEY SAY YES
If your discussion results in a “yes,” congratulations, you’re on your way to the ownership circle. Schedule a time to discuss things further, and to get on the same page about a more detailed vision of the future.
Together, work with an enterprise consultant to determine if any adjustments need to be made to the business structures (including entity and compensation) in order to support adding ownership. A succession expert can also help you determine the best plan for transferring ownership, ensure your plan is fully documented, and help oversee the implementation of your transition in accordance with your unique business and goals.
Mike, Steve, and Jennifer spoke with an enterprise expert and reviewed their options. In the end, they sold 15% to Jen to be paid back over the next 12 years with a planned review to discuss potential additional ownership after five years. That’s not to say that it wasn’t hard work along the way. All three had to take time to review the financial details, work with professionals to model the deal, and sign a lot of documents. Overall, it took about nine months.
The first phase of your plan is the time where you're testing things out. Remember, it's okay if it doesn't go according to plan. The role of an owner may not turn out to be what you envisioned. You might discover that this new level of your business relationship isn’t going to work out. The plan may go really well and have an owner start thinking of an earlier retirement than they had anticipated. It’s wise to be frank and realistic about these possibilities during your planning.
YOU WON’T KNOW IF YOU DON’T ASK
A successful internal transition is rewarding for the founder, the next generation of owners, staff, families and clients.
A year after becoming an owner, Jen has become more involved in key business decisions. She and her husband bought a house in town. The clients of Flashlight Financial appreciate the multi-generational ownership and the steps the firm has taken to protect the service and assets. Mike and Steve have found it easier than they thought to pass some of the responsibility to Jen, and have been enjoying extended weekends with their grandkids.
It may not be an easy conversation; you don’t know what the result will be. However, the earlier in your career you take the time to make sure you’re on the right course, the more time and opportunity you have to reach your goals and full potential.