David Grau can be fairly called the granddaddy of the advisor-transition business. His firm, FP Transitions, founded in 1999, has done nearly 5,600 valuations of wealth management firms, given advice on about 1,200 transactions and has more than 1,700 continuity plans in place.

Grau has incorporated the data he’s acquired over the years into a new book, Succession Planning for Financial Advisors: Building an Enduring Business (John Wiley & Sons Inc., 2014).

The gist of the book is that advisors must start the succession process early enough to transition from the usual “eat-what-you-kill” business model, where advisors manage their own books (even as part of a team), into an entity that will endure after the founder is gone. This enduring entity needs to be a single firm with employees compensated with a salary and bonus. It needs to make ownership stakes available to the next generation of advisors, who pay for shares with bonuses paid out of profits. A complete transition will take a decade or longer.

An outright sale to a third party is another option, but rarely happens because founders can’t afford to give up the cash flow from their businesses. A sale also doesn’t produce as much total value. Neither does a revenue-sharing arrangement with a successor, which is the option available to advisors who can’t or won’t build an enduring firm.

A long-term internal transition can produce a final value of six or seven times revenue—several multiples higher than a straight sale, Grau says.

That makes an internal sale the obvious choice for an owner—as well as the next generation.

“When you sit down and think about the choices for the next-generation advisors, they can either hang out their own shingles and try to do it all, or become part of a team and take a million-dollar practice and grow it into a $10 million business over 15 or 20 years,” Grau says. “The question is, which one will be more satisfying? And which will be more lucrative? When we lay out the arguments in a spreadsheet in front of 30-year-olds, 85% of them sign up and commit.”

FA: How would you describe a true succession plan?
Grau: Succession planning isn’t about shutting down and putting yourself out to pasture. It’s about building something. That’s the fun part. That’s what entrepreneurs are wired to do. Advisors’ businesses are not just their most valuable asset—those businesses are what fuel their lifestyles. And they can’t let that asset die.

FA: But most advisors never develop a true succession plan. Why is that?
Grau: First, they struggle with what a succession plan is. They think it is selling their practice. They quickly conclude that they don’t want to sell. So if selling is the only option, they’re just going to work forever. They don’t need a succession plan. But that’s wrong. Selling is not a succession plan. A succession plan is building a business to outlive you. When you reframe it that way, and explain that it’s about the future, not just about you but about the staff and your clients and their families, then advisors get very interested in the proposition.

Second, we’ve found after doing thousands of cases that more than 90 percent of firms do some form of the eat-what-you-kill compensation system. It’s almost everybody. But that is not how you build a business. It is how you build a broker-dealer, though. It’s how you build an OSJ.

It’s how you build an office complex in a wirehouse. But it has nothing to do with how to build a business in an independent model. That’s absolutely the wrong model if you want to build a practice that will outlive you. When you do an eat-what-you-kill system, the business takes no money to the bottom line. It’s an unprofitable business by definition. The advisors get paid off the top line and get paid like owners without taking on any of the risk, and worse, never taking on the skill set of an owner. With that kind of compensation system, a firm is built to die when the founder is gone.