Understanding Sell and Stay®, the Gradual Exit Plan

Posted by FP Transitions on Jan 5, 2023 10:00:00 AM

Understanding Sell & Stay

The Sell and Stay® path is an often overlooked, gradual exit option hidden amongst the folds of internal succession, mergers, and external sales. For owners who need or want to work towards an exit but are not yet ready to leave the business entirely, Sell and Stay® is a perfect solution. Sell and Stay® allows an owner to continue working and earning an income without having to worry about matters such as management, day-to-day operations, or compliance.

This type of transaction falls somewhere between a merger and an outright sale. It involves an owner selling his or her practice, but instead of walking away once the sale is complete, they stay on as an independent contractor, or employee, earning wages for work performed. This allows an advisor to continue to work with clients and earn an income without the obligations of ownership and day-to-day operations.

This path can be a good option for single-owner practices where the advisor wants (or needs) to pull back from the practice to some degree. Typically, advisors who find themselves in this situation often suffer from client attrition and end up either selling their practice earlier than they’d like or working to exhaustion, almost always resulting in a negative impact on the practice. A Sell and Stay® can offer a better way.

Common Sell and Stay® Situations

Situation 1: Love the Clients but Dislike the Day-to-Day Obligations of Ownership

Owning and running a financial practice can be satisfying and lucrative, but it requires commitments to both the clients and operational aspects of the practice (e.g., compliance, payroll, personnel management). While some advisors thrive on wearing many hats, others would much rather spend more of their day working directly with clients and less time bogged down by the day-to-day business operations.

Choosing a Sell and Stay® path can be a breath of fresh air in an advisor’s career, but you must be ready to let go of your “owner mindset” and support someone else as they build upon your foundation.

Situation 2: Transitioning into an “Encore Career”

Many advisor/owners like you are natural entrepreneurs. It’s that entrepreneurial spirit that allowed you to work tirelessly for many years to build a successful practice. This spirit also has the tendency to plant seeds of other adventures and endeavors that are hard to ignore. Some advisors have reached a point in their career where they are ready for a new chapter, which, for some, includes a new business venture.

As you already know, starting a business from scratch takes capital, time, and dedication. For those reasons, it may be difficult to simply make the switch. A Sell and Stay® in this situation could allow you to invest the initial money from the sale of your practice to jumpstart your new one while staying on during the transition period as your new business grows.

Situation 3: Ongoing/Chronic Health Issues (For You or a Loved One)

Most advisors account for permanent or prolonged periods of illness or injury in their continuity plans. In reality, however, some health issues can cause brief but debilitating episodes that come and go. For a sole proprietor, managing a chronic condition—for themselves or a loved one—can prevent them from devoting the necessary time to client relationships, asset management, and the operation of their practice.

You can leverage a Sell and Stay® transaction here to remain in a career that you enjoy, continue to earn an income, and reduce any stress you may have about periodically taking time away from work to focus on health issues. The key in this situation is creating an independent contractor or employment agreement with your buyer that accounts for the flexibility you need.

Situation 4: Gradual Retirement While Preserving Value Without a Successor

More and more advisors are taking the gradual route to retirement, slowing down a little at a time. Some have succession or merger plans in place, but not all advisors have established multi-generational ownership or key employees ready to take over their business. Many advisors are the sole owner, or even the sole team member, in their practice.

As a sole proprietor, gradual retirement is still an option with Sell and Stay®. The strategy allows you to lock in value now, hand off control, and continue to work, earning an income at reduced hours for a set amount of years before fully exiting.

Concessions for Owners Seeking Sell and Stay®

Unfortunately, you can’t have your cake and eat it, too. On the Sell and Stay® path, you will have to adjust the way you’re used to doing things, including how you are compensated. As an independent contractor or non-owner employee, you’ll most likely be taking a reduced salary depending on your newly defined role and the terms of your employment agreement with the new ownership.

While this strategy is extremely flexible and is often customized for each situation, it is always true that in selling you are trading the control and equity compensation of ownership for the benefits and freedom of employment in addition to the paid value of the business. Your mentality, therefore, must change. You are no longer making decisions about the practice’s operations or future, and you must operate within the vision of the new owner(s).

It is difficult for some advisors to remain and work for a business they built but no longer own. As you weigh the decision to sell, it’s important to understand the basics of a Sell and Stay® model to determine if it's a good fit for you, personally.

How Sell and Stay® Works

A Sell and Stay® path is in the M&A family, but it is neither a merger nor an outright sale that you get to walk away from after the typical one-year consulting period. It is a combining of resources and expertise, but not control. It relieves an advisor of the responsibility and obligations of ownership, but not their advisory career or their income.

FP Transitions’ Sell and Stay® strategy involves performing a formal valuation on your practice and determining what your desired exit will look like in terms of timeline and projected employment level. We search for the right buyer using the same tools and expertise as that of a traditional buyer search–either on the Open Market or through a private survey. We offer a non-advocacy approach during the negotiation and documentation processes to ensure the success of the deal as a whole, as well as for all parties.

During a Sell and Stay® transaction, the buyer and the seller must be willing to work together for a longer period of time than is required in a traditional acquisition. The seller must be comfortable with whom they are relinquishing all controlling interest in the practice he or she spent years creating. For those reasons, finding the right fit is of utmost importance. There must be a mutual trust to ensure that there will not be any “power struggles” or ego issues as the practice continues to evolve under new ownership.

The FP Transitions buyer search methodology is rooted in the idea that by finding the perfect match, the transaction will be more successful. Our Transactions Team spends time with each and every seller to learn about their unique practice, investment philosophies, and goals. Using what we’ve learned, we can help find the most qualified and best match within a large pool of interested buyers.

How Does Sell and Stay® Work for the Buyer?

A Sell and Stay® strategy offers many benefits to a seller and can create a unique relationship between a buyer and a seller without the former owner’s full exit. However, there are many benefits to a buyer as well.

The most significant benefits of Sell and Stay® are scale, institutional knowledge, and client retention. By having the former owner on staff, a new owner has acquired a skilled team in addition to new clients. This can be especially beneficial for a buyer who is not ready to build up the infrastructure immediately after closing. Buyers can tap into the previous owner’s expert knowledge of not only the industry, but the unique practice and clients, which helps smooth the transition and operations. Additionally, by having the previous owner on staff, a buyer can increase client retention and trust, thus preserving value and cash flow.

Not all advisors looking for an acquisition are open to working with a seller in this unique situation. Potential buyers who are open to it will find themselves with more acquisition opportunities and reduced competition.

As you look ahead to the end of your career and consider your options, keep an open mind and you just might find the perfect path for the future of your business as well as your own.

Learn more about your future Sell and Stay® options by contacting an FP Transitions consultant today.



Topics: Buying & Selling, Exit Planning, Sell and Stay™