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RIAs 12 Tips for Ownership or Management Transition


Joan M. Ridley, CEPA, CBI, CFP™

You will leave your practice. You just don't know when, nor do you know if your exit will be voluntary, or, involuntary due to your inability to work for whatever reason. With 49% of Financial Planners over age 50 (according to The Future of Practice Management survey by the FPA), and about 75% over age 50 as demonstrated by another industry survey, the latter is fast becoming a real possibility. Don't wait until you're burned out, have lost key clients or key people before you take steps to create and correctly document a solid plan to transition ownership or management. The first steps you need to take right now might surprise you because they are all about creating a sustainable business. Yes, I mean "business". Start by viewing your practice as a business.

To have an enterprise that is sustainable, even when you are no longer calling all the shots, you need to see it as a structure that has systems that will survive you. Creating a sustainable business is critical whether you hope to transition ownership or management. Besides wanting your enterprise to thrive for the benefit of your clients, employees and your standing in the community, there is another important consideration. There is a high probability that you will need to finance part or all of the transaction, especially if you sell the practice to employees or family in the business. Creating a sustainable business is the best way to increase the probability that your acquirers will be able to satisfy your note, in an up and down economy, maximizing what you will receive.

By the way, I speak from experience. I "merged" my first practice into a much larger one which we sold a few years later to what was then called American Express/IDS. I then established another RIA in another geographic market which I sold 10 years later to a member of the ING Private Client Group. But, I did not have anyone to prepare me and my practice. While I was pleased with the proceeds, I later discovered that I left cash on the table the second time, according to the acquirer. With every transition, the stress was almost overwhelming because I did not have anyone to guide me before, during and after negotiations and closing. So what do you need to do to create a sustainable registered investment advisory practice that has real value and that will thrive when you're gone? Here is a list of the basics for you to start working on now.

12 Tips for a Sustainable Registered Investment Advisory

  1. Execute agreements with employees.
    1. Execute employment agreements with non-compete and non-solicitation provisions
    2. Execute a written retention plan with your key people that incentivizes them to remain after ownership transition. Include post-exit (yours) performance incentives and related bonuses.
    3. Execute these documents first. They will protect the value of your practice should you decide to sell to an outside third party rather than to those employees. Failed negotiations with employees could create ill-will, opening the door for them to leave and take valued employees and clients with them before negotiations with, or ownership transition to, a third party are complete.
  2. Execute a buy-sell agreement with: 1) the proper triggers; 2) the best provision for how to value your practice (there are 3 basic ways); and 3) funding that is dedicated to supporting the buy-sell. This document should not be confused with a sales agreement or the emergency operating plan.
  3. Execute an emergency operating plan that spells out business operations in the event you, the owner, do not show up for any reason. The purpose of this document is very different from a buy-sell. You need both. Unlike the buy-sell, it should be drafted by an experienced business consultant and not by an attorney. Nor should its provisions be rolled into the buy-sell or a stock redemption agreement. The buy-sell addresses change in ownership whereas the emergency operating plan is all about operations, even if the buy-sell is triggered.
  4. Clean up your database. Make sure it is complete and accurate. Use an industry recognized CRM.
  5. Document your business and marketing plan. Maintain three year rolling projections with clear strategies and tactics for proactively marketing for, and bringing in, new clients, in addition to cross-selling to existing clients. Keep good records that document: 1) how effective each marketing tactic is; 2) the value proposition; and 3) how each drops dollars to the bottom line. Add this data to the projected revenues and operating expenses. Be realistic and take into consideration the inevitable loss of revenues chiefly due to aging, death, and disability of clients. Have your advisory firm named as the advisor of choice in the clients' legal documents, as long as such a provision does not run afoul of compliance requirements. Always create a relationship with the clients' likely eventual decision makers and their adult children.
  6. Clean up your financial records.Make sure that: 1) they are displayed correctly from an accounting standpoint; and 2) that they provide all of the important detailed information, so that an acquirer can properly assess the profitability of each of your product and service lines. Use industry-recognized software.
  7. Maintain an engaging website that clearly articulates your target market and how your firm is different from the competition. Maximize search engine optimization. Keep it current. Make sure you are in compliance.
  8. Maintain an impeccable compliance record. Your hiring policies should support your firm's stellar compliance record.
  9. Discover what your enterprise value is. Be clear about what "enterprise value" means and why it's important to you. "Enterprise value" is a more realistic estimate of the eventual closing value of your practice, and, it details how the strengths and weakness of your practice's value drivers (there are at least 50) impact its market value. Understand over what period of time you will receive the proceeds after tax and enter that data into your personal long term cash flow. Some business entities can be particularly problematic from a tax stand-point.
  10. Assemble a quality team of professional advisors to help you address the issues listed here. You will need advisors with special expertise that you do not have on your team now. Also, the advisors that you typically work with on client matters will probably not have the expertise that you need for your own situation. Reach out to an experienced Certified Exit Planning Advisor at 214-692-9192 to help you design and implement this process and to help you assemble your team.
  11. Update your organizational chart. Is it consistent with your written work flow process?
  12. Commit to writing your work flow process. A new hire, or a potential acquirer, should be able to read it and understand exactly how your business operates every day.

Bonus Tips:

  • Do not enter into any discussion with any potential acquirers (especially employees and family) until 1) you have created a sustainable business by completing the above items; 2) you have thoroughly qualified your potential acquirer in every way, including creditworthiness if your buyer is not in a position to pay all cash; and 3) you have prepared a detailed lifetime cash flow that reveals how much cash you will need and when you will need it. This goes way beyond how knowledgeable your potential acquirer is about the services and products you offer and how well the potential buyer works, or will work, with your clients. Make sure that you have entered into a solid employment agreement (see #1 above before having even a casual discussion with any potential acquirer).
  • You are an expert about investments, and other related personal financial matters. You tell your clients to choose you because you are the expert in your space. Accept that same advice for yourself. You will soon discover that there is far more to know about preparing for ownership or management transition than you might think.
  • There could be a lot of issues to address. Engage assistance at least 20 months before you wish to have discussions with potential buyers, especially employees or family, about transitioning ownership or management. Keep in mind that your ownership transition advisor will probably not be compensated for selling you insurance, securities, or a success fee. For that reason, your advisor will likely be compensated totally by fees.

Still Not Convinced

Create a feasible, workable plan. Planning for your departure and actually leaving it are two different things. If you still are not convinced that you ought to have a solid written ownership and management transition plan, please check with your compliance officer. The SEC has Rules that address this issue.

Call us today to discover how we have helped other RIAs and how we can help you address the issues discussed in this article at 214-692-9192.

Copyright 2016 Joan M. Ridley


Joan M. Ridley is President of Business Wealth Solutions, a business consultancy that helps business owners protect, preserve, and enhance value, often in preparation for management or ownership transition for manufacturers, wholesale distributors, and B2B services, coordinating her efforts with the client's personal financial advisors. She is a Certified Business Intermediary, Certified Business Exit Planner, and a Certified Financial Planner™. In 2013 she received the first Excellence in Exit Planning Award conferred by the Exit Planning Institute for her pioneering contribution to this new discipline. She is the Founder of the North Texas Chapter of The Exit Planning Institute. Call 214-692-9192 and visit www.bwsllc.net.

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