Marvin Burt did what many say can't be done; he sold his advisory firm to his staff.> By David J. Drucker
Begin with the end in mind. How many times have you heard this advice?
Marvin Burt took it to heart when, about 11 years
ago, he started planning his ultimate exit from this profession. An
advisor with a Rockville, Md.-based independent RIA, fee-only firm
called simply Burt Associates Inc., Burt knew he would want to start
cutting back in his sixties. So he conceptualized an employee team that
could take control of the firm and set about putting his plan into
motion.
The succession question is, why sell to employees
when so many alternatives exist (e.g., sale to consolidator, sale to
third-party advisor, merger with younger planner, etc.) and, perhaps
even more important, when many in the industry claim it's so hard to
do? Because, says Burt, "I needed to know my staff would be taken care
of and all my clients would be kept. I wanted to be able to get a
reasonable return on my business, and to stay involved for at least
five more years. Also, I'd observed a number of mergers and
acquisitions and it struck me that there were often culture clashes
that disrupted the merger process."
Burt was 65 and his senior staffers were in their
late thirties when the sale took place in 2002. Burt was the firm's
rainmaker and lead advisor; Fred and Maria Cornelius-Burt Associates'
new owners-were Burt's senior staff. Because he knew well in advance
that he wanted his employees to be in a position to buy him out, Burt
wisely included them in client meetings. "The process of transferring
the firm's clients to Fred, Maria and two other professionals has
gradually been going on for many years through the process of team
planning." By the time of the sale, clients had long known Burt's staff
and developed a respect for their abilities.
Critics of this succession strategy say employees,
even if they're professionally capable of transitioning client
relationships, usually aren't in a position to pay for them. Obviously,
there are deal terms-down payments, payments based on earn-outs,
balloon payments-that can be manipulated to make the purchase more
affordable if both parties are agreeable. In some cases, though,
outside financing is still necessary, and Burt's was one of those cases.
"My key people didn't feel they could take on the
several million dollars of debt required to buy the firm. I needed to
either find different buyers or someone who could buy in conjunction
with the staff," says Burt. The latter seemed unlikely: an outside
buyer that would assume a majority interest, yet keep its hands off the
management of the firm and put no pressure on the staff to distribute
the firm's profits. If this buyer could realize other benefits to
offset these conditions, then perhaps it might work.
"A CPA group I'd known for 15 years stepped up to
the plate. We'd worked with mutual clients for many of those years,
were in the same Rotary Club and served on the same Chamber of Commerce
committees, so they weren't strangers," says Burt. The negotiations
were successful, and Burt ended up with a mixed group of soon-to-be new
owners: two principals in his company plus five principals of a large,
local accounting firm.
Why would an accounting firm agree to have little control over
management or profits? "The accounting firm principals are in it for
the synergies this relationship provides," says Burt. "They want to
trade clients back and forth. They have a couple of CFPs on staff, but
they're doing little financial planning and no asset management."
Burt got a ten-year promissory note and a five-year
employment contract. The firm's value was already established by
valuations performed in connection with an employee stock option plan
(ESOP) previously established by the firm. In return for the certainty
of the promissory note (as opposed to an earn-out, where the seller
shares the risk of declining revenues), Burt does not participate in
any growth of the firm after the effective date of the sale.
Three-and-a-half years of Burt's five-year
employment agreement have passed and, at 69 years of age, he now works
just Mondays and Tuesdays from home. Burt still advises a few clients
and continues doing security analysis and developing investment
strategy for Burt & Associates, meeting his modest commitment to
the firm of 700 hours per year. "I got rid of the stuff I didn't want
to do, like day-to-day management and human relations."
Why did he stick around at all? In many
transactions, buyers expect the seller to vacate the premises
posthaste. But, many in the business are realizing that it often makes
more economic sense to ease out, for at least three reasons. First, it
makes for a smoother transition for employees and clients. Both parties
can be nervous when the firm's founder and leader starts making
retirement sounds. A gradual easing out creates peace of mind for all
concerned.
Second, it gives the seller a chance to see that his
plan is going to work-that his employees are, in fact, capable of fully
transitioning the client relationships. Third, there's more money for
the seller because he draws a salary for the term of his employment
contract and, if negotiated, benefits from increases in the firm's
growth while he remains involved.
The latter wasn't something Burt had to have,
however. Having taken a note with recourse to the buyers, he had no
downside risk, which was his main concern, but he forfeits
growth-related benefits. How a deal is structured to balance risk to
the buyer and seller, though, is a matter of personal preference.
Burt & Associates, meanwhile, is humming along
under the management of Fred and Maria Cornelius. Says Fred Cornelius,
"I'm pleased with the transition thus far, as our AUM has more than
doubled since the sale."
The big question mark for Cornelius was marketing.
"What I viewed as the biggest risk in this deal was whether or not we
could take over as the firm's chief rainmakers." Although he knew the
firm's existing clients, Cornelius' previous responsibilities had not
emphasized growing the client base. So, as was his newfound
prerogative, he made some changes.
"Instead of continuing to take a single rainmaker
approach, all four of the firm's financial advisors are now empowered
to leverage their relationships to bring in new business. We've done
this by fostering a culture of professional development and rewarding
excellence with increased compensation and benefits," he says.
Cornelius' theory is that by promoting staff
development, clients and prospects will appreciate and be attracted to
the firm's heightened level of professionalism. "We have hired or
promoted administrative employees as planner assistants and we have
encouraged our administrative staff to enroll in the CFP program."
Presently, three of the firm's four administrative employees are CFP
candidates.
Because the team planning approach served the firm
so well before and during its transition, Cornelius has continued this
approach, which is becoming more widespread throughout the planning
industry. "When clients meet with their planner, they also meet with a
planner assistant," he says. "This helps to familiarize the client with
another resource in the office and helps the planner assistant get to
know the clients better which, in turn, furthers their career
development."
An important aspect of any practice acquisition
involving an older seller and a younger buyer is client demographics.
Fifty-something or 60-something advisors who've been in the business 20
years or more and are easing into retirement are more likely to have
aging clients. And, when Cornelius took account of his new asset, this
is precisely what he found.
"By benchmarking and segmenting our clientele, I
realized our clients are aging and, in most cases, living off their
asset pool. We became very aware that we needed to attract an affluent
but younger client." The new management team raised Burt &
Associates' minimum account size from $500,000 to $1,000,000, and is
attracting new clients with investable assets of between $1.5 million
and $2 million.
All of which accrues to Burt's benefit. A seller has
to be pleased when his buyer seeks to protect and grow his investment.
Clients benefit from the new owner's energized vision, and Burt and
Fred and Maria Cornelius can feel more secure about their futures.