Transitioning a Firm from Founders to Successors

By Linda Leitz

Being a founding owner of a firm poses many of the standard entrepreneurial challenges. You must balance running the business aspects of the company—everything from doing your accounting to knowing when to order more stationery—and providing the service of the business, in our case, personal financial planning.

Becoming a co-owner who will ultimately allow the founding owner to have a business partner and eventually retire has different challenges. The founder—also known as Generation 1 or G1—had a dream for what the business would be as well as the challenges of starting a business and wondering if it would succeed. In contrast, the successor—also known as Generation 2 or G2—may see many ways the business could be more efficient and reach different people or provide new services, and they may be eager to take the reins of control.

As fiduciaries, founders owe clients a solution for ongoing services when they transition out of the profession. And successors owe clients a transition that has as little disruption as possible. It’s good for clients and good for the profession.

Shared Vision

Lois Carrier and her husband, Dave, co-founded Worthwhile Wealth Council, a Tennessee-based planning firm. She believes that a transition to the successor team can’t be successful “… unless all involved in the process know the history of the company, … how it started, what was the dream, what were the goals, … basically all of the pain of giving birth and then growing it through all of the stages a company goes through.”

Lois and Dave communicate their firm’s history through weekly meetings with their team. They also have a full team approach to delivering services. Clients don’t work with just one advisor; instead, various team members are involved based on what the client needs in specific situations.

Sana Haque, a successor in Gianola Financial Planning, agrees with the Carriers’ approach. “I think it’s really important to have an alignment of values and vision for the firm. … Once you make that connection with the firm and the owner, it provides greater job satisfaction. In my case, this connection was built because I received the support that I needed to grow and develop.”

For successors, it’s important to have a founder who can articulate the vision, values, and structure of the firm. And, just as in romantic relationships, the caution is to “never marry a project.” The successor shouldn’t assume that they’ll be able to change the character of the firm once they are on board or even after the founder has left the firm.

“Maybe She’s Right”

At the same time, founders have a responsibility to stop trying to influence the firm when they leave. This can be hard, as founders often wish to hold on to the entity that took so much of their blood, sweat, and tears to form.

Chip Simon, who founded Taconic Advisors Inc., found that the right match made it easier to start to walk away. Chip was in his early 60s when he decided that it was time for him to begin transitioning his solo practice to a G2 planner. He didn’t think it was practical to hire someone who was new to financial services and train them on all aspects of the profession. He was able to connect with Meredith Briggs, who was already a CFP^® certificant and working in the brokerage and insurance sector. As Chip describes it, “With a 20-plus year difference in age and no desire to ultimately continue in the business, as the founder, I soon realized that there is little to ‘hold on to.’ [I believe in] great deference to the goals and vision of the new partner.”

Although many G1 planners may struggle to convey all their processes and knowledge to their new partner, Chip found that Meredith’s experience, insight, and new perspective could provide productive innovation for the firm and for the clients. He believes that being flexible is a secret to their success. He carries a card in his wallet that says, “Maybe she’s right.” He shares: “We listen carefully and highly trust each other.”

Meredith carries a reciprocal card that says, “Maybe he’s right.” She feels that Chip’s gracious nature and his realization that they would have some differing goals for the succession plan made the transition harmonious. Meredith appreciates Chip’s willingness to allow her to introduce new processes and even hire additional staff and open a new office. “At the same time, I needed to be thoughtful about the business that Chip founded through his own hard work, being careful not to disrupt processes that have worked well for years, and to honor the professional relationships that are the core of our business.” Their succession plan is now in its seventh year, with Chip’s role in day-to-day operations lessening and his full departure planned for early 2023.

Successors may wish to develop a new niche or add services. Changes to the firm will make the most sense when they heighten the client experience or broaden the client base rather than completely upend the existing business model. While there might not be such a thing as “too much innovation,” entering an existing firm with the idea of completely changing everything may be counterproductive.

Age

Sometimes the most obvious issues go unnoticed. Succession plans seem most successful when there is an age difference between G1 and G2. In Chip and Meredith’s case, as in Sana’s case, the age difference between G1 and G2 isn’t just years—it’s decades. While an age difference potentially brings new concepts and technology to a firm, it also serves a fiduciary purpose of providing continuity to clients. Even if planners work primarily with people who are older than them, having an ongoing planning relationship for clients when the founder retires or dies is a huge value to the client.

On the other hand, this can require a delicate balance because many younger planners may have excellent, innovative ideas but might not have fully decided on the direction of their career. There are many cases when a founder put several years of effort into training and grooming a successor, only to have the G2 person leave—either to start a competing firm or to pursue an entirely different career. Chip knew that he was looking for someone “who had ‘an old head on young shoulders,’ that is, a mature view of the world and the responsibilities that come with business ownership.”

Documentation                                                                       

Even in the best of matches, both advisors should document their expectations and milestones at the beginning of the relationship. Some basic requirements from G1 to G2 might be certifications, work product, or business development. For example, an offer letter that outlines that a new planner must obtain the Series 65 within six months of joining the firm and pass the CFP^® comprehensive test within the first 18 months can allow the founder to realize at a reasonably early stage if a potential successor isn’t able to obtain the credentials desired for the values of the firm. The ability to lead a specific number of client meetings and bring on a specified number of clients within a specified time frame can also help determine right fit.

A red flag for successors is a lack of specificity in how they can progress in the firm. One young planner with excellent credentials found that the founders who hired him had a rolling five-year departure plan: Every year, they planned to leave in five years. But just like the patron of a restaurant that has a sign that always says “Free Food Tomorrow,” he never got closer to the promised succession. He ultimately left the firm.

Successors tend to be acutely aware when milestones are met, but the promised rewards are not delivered. It may be because of concerns with the successor’s ultimate ability to run the firm, but it might also indicate reticence on the part of founders to turn over the reins of the company. Having an honest discussion can clear the air and possibly put the succession plan back on track.

Valuation

Academic research has documented that sellers find their own assets worth more than buyers do—hardly a surprise. On the other hand, anecdotally, it seems that planners sometimes undervalue their practices when selling to successors.

There are many approaches to valuation. Some practices use a straightforward multiple of gross revenue, ranging from 1.5x to 3x, which brings a sense of fairness because it’s a simple formula. Firms such as FP Transitions will do a more sophisticated analysis that includes the value of the name of the firm, the average age of the client base, structure of the revenue, tech stack, and various other elements. It’s also somewhat common for a sale of shares in the firm to be discounted when sold to internal successors, and additional discounts have been offered for a large cash payment. Many founders are willing to accept payments over time, while some may require the successor to find an outside source of financing. Succession Planning for Financial Advisors: Building an Enduring Business by David Grau Sr., JD, has great insights on the valuation and sale of financial planning practices.

Resources

Chip and Meredith worked with a business coach in their transition. Having an objective professional who is familiar with our profession and your specific business model can be a great help. And it is sometimes helpful to have a business coach on an ongoing basis to facilitate annual planning and provide input on staffing and marketing issues.

Success and Succession: Unlocking Value, Power, and Potential in the Professional Services and Advisor Space by Eric Hehman, Jay Hummel, and Tim Kochis has been helpful to many practices. Written by both G1 and G2 financial planners, it gives excellent insights on both perspectives. It also provides ideas about how to best meet the needs of clients for the firm’s ongoing viability.

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Linda Leitz, Ph.D., CFP^®, EA, is a NAPFA-Registered Financial Advisor in Colorado Springs.

image credit: istock.com/Portra