Did you ever support a favorite sports team that performed with excellence under a certain coach or manager, only to drown in mediocrity as soon as the coach retired? That otherwise superior coach failed at succession planning and no one knew it until the next coach took the reins.
Without a doubt, the financial advisory industry needs more entrants, but it also needs more mid-level performers to step up to leadership as colleagues and mentors retire. A good succession plan remedies these needs before resulting in lost business and – ultimately – in formerly loyal clients feeling they must turn elsewhere.
While traditional succession planning takes various forms including family succession, sales with transition periods and minority-stake mergers, a relatively new type has grown in recent years – junior partners buying into the equity of their firm with a view to becoming senior partners over a long time frame.
To understand this trend, we caught up with David Grau, Sr., President & Founder of FP Transitions, an industry-leading consulting firm providing entity structure and M&A services, succession and transition planning and business valuation, which completed over $4 billion in equity purchases in 2021 and closes over 80% of its deals.
Grau authored over 90 books, articles, white papers and manuals, including a highly rated how-to guide to succession planning, is a sought-after speaker and received recognition by various industry publications for his influence and prominence in the wealth management industry.
He informs us about the origins and future of this trend, its benefits and responsibilities and the next steps a junior partner interested in a buy-in should take.
WSR: We hear there’s a massive trend in junior partners making equity buy-ins in the independent financial advisory space. Please tell us about this trend including the causes, the strength of the trend, what the typical deal structure looks like and why it’s important to the broader industry.
Grau: Succession planning has evolved in the last two decades. Equity buy-ins have become a more prevalent component of today’s succession strategies because they are an optimal solution for any multi-generational firm building a sustainable and transferrable business.
Given our aging advisor demographic, the need to create ownership pathways to retain top talent and more flexible and accessible bank financing options, this evolution makes a ton of sense for our industry. We expect to see continued growth over the next few years, as well.
In advance of inviting key employees to buy-in to the firm, independent fee-based practices must create the right entity structure and compensation system. Stock, rather than clients, will be what is valued, bought and sold in this transaction.
This process of shifting from a one-generational practice to an enduring, investable, profitable and valuable business requires a focus on profitability matched with a scalable growth plan. Once these foundational elements are in place, firms like ours prepare next generation owners for the opportunities and obligations now in front of them.
This trend is solving for one of the largest issues in wealth management today. Ensuring the business continues to serve clients well beyond a one-generational need horizon is crucial to the long-term sustainability of our industry.
WSR: What advice would you have for a junior partner wishing to make an equity buy-in? What are the right factors for a successful transaction and the steps a junior partner should take to prepare?
Grau: Start by learning everything you can about this process, even before you ask “the boss” about buying in. We’ve seen many of these buy-in opportunities start with a next generation advisor approaching and explaining the process to the owner directly!
Our industry has only recently started maturing into a multi-owner, multi-generational landscape, so this concept is new to almost everyone. It really helps to understand that this opportunity comes with lots of long-term obligations and you, as a younger advisor usually without a lot of extra money, must navigate those issues.
This isn’t about gifting or granting ownership, this is about earning it and paying for it, after taxes, over time as you help grow the business.
Where does the money come from? Who finances these transactions? How long does the buy-in process take? What if it fails? What if something goes wrong? What if everything goes very well and the business doubles in size?!
All of these questions have answers and both sides of the transaction need to understand the process, but it has to start somewhere – it might as well be with you! Seeking support from external partners can avoid costly mistakes and frustration that can stem from inexperience. Leaning on an expert partner like FP Transitions during this process can really ensure a seamless transition and optimal execution.
WSR: What are some common roadblocks or mistakes you have seen with junior partner equity buy-ins? What kinds of creative solutions have you seen to these obstacles?
Grau: The most common mistake is a founding owner looking for a younger version of himself or herself to be an owner and successor. Judging the next generation against that kind of standard makes the first step almost impossible.
Owners have built a business, which required a specific set of entrepreneurial skills. This self-reliance worked well during the building phase, but now twenty years later that job should be done.
If the goal is to build an enduring, investable business, the process must shift to gradually creating a “successor team” of two or more younger owners who cumulatively buy-in and gradually ascend to a command position, helping that business get bigger, stronger and attract even greater talent.
Growth and endurance are really the key to all of this. That is why we define succession planning as “a gradual, incremental transition of ownership, leadership and production responsibilities from one generation to the next.”
Succession plans require 10 to 20 years to do the job properly. As someone who has assisted hundreds, possibly thousands, of advisors seeking to build a multi-generational firm, I can assure you it’s within your reach. My advice is to start early and leverage the right expert partner to ensure a smooth transition for your clients, your employees and most importantly, yourself.
Julius Buchanan, Senior Contributing Editor at Wealth Solutions Report, can be reached at email@example.com