Being a sole practitioner is great-until it's time to sell
When it's time to carry out a succession plan,
partners in an advisory firm can sell their interests to the other
partners. Sole owners with staffs can sell to qualified employees. But
if you're a sole practitioner, who do you sell to when you have neither
employees nor partners?
Sure, you can always find an outside buyer, but selling to a third party isn't always the best strategy, for a number of reasons. First, client retention rates will be better if your successor is someone who has worked side by side with you for three to five years and is known to your clients. Second, in the long run and with proper structuring of the deal, you can make a lot more money keeping a hand in the business and affecting a gradual succession. (Selling to an outsider is for those who can't make the time or energy to develop a successor, usually because they've burnt out on the business or they need to move quickly into a different career opportunity).
For the sole practitioner with the luxury of planning ahead, her succession options would seem obvious: Bring on an employee and groom that person to eventually fill her shoes, bring on an experienced advisor to buy into her firm as a partner, or merge a smaller firm into her existing company, thereby also creating a partner. Left to their own devices, though, advisors often come up with even more novel solutions.
Doug Pease, 69, had some kind of partnership in mind when circumstances got him to thinking about succession planning five or six years ago. "I'd gotten to the point in my career where I was no longer a salesman, but a financial planner, and I had the systems all worked out for my client's portfolio management. When I suffered a few heart 'glitches,' I decided to join the Silicon Valley FPA and look for someone to share these systems with."
Specifically, what Pease had in mind was entering into a partnership whereby he would join with an established, younger advisor and operate that advisor's portfolios for 25 basis points. It took him five years to find Jim Corbeau, 41, but his plan is now working-with some modifications. "At the 2003 FPA West Coast Roundup, we shook hands on a merger. We each work with our own clients and share revenues after expenses; when I die, the clients will all be Jim's."
Pease merged his sole proprietor operation into Corbeau's existing LLC-Maas Capital Advisors in Eugene, Ore. Says Corbeau, "We debated about whether Doug should buy into Maas and decided it was just a pass-through entity anyway ... we would distribute revenues based on who the primary advisor was for the client, and we have some individual and some shared expenses like E&O, shared office space, etc."
Pease and Corbeau know they could tighten up their agreement in some respects, but say the important thing is that they have a plan in place if something happens to Pease. "If Doug gets hit by a bus, I'll service his clients and pay his beneficiaries two times the revenues from those clients for a specified period," says Corbeau. "And if something happens to Mark, I'll probably sell the [client relationships] and make a payout to his beneficiaries from the proceeds," says Pease.
Bottom line ... Pease and Corbeau's clients are still their clients, but they now know there's a built-in continuity to the practice.
Marc Collier, 60, and George Raftopoulos, 40, took a different tact when they merged forces. Both Commonwealth reps, Mark was finding (somewhat predictably) that running his own practice, with the hiring and firing, compliance and other chores, was getting old. "At a conference session a few years back, a speaker was saying we should think about the things we like and dislike, and get rid of the latter," says Collier. "The list of things I didn't like was getting longer and longer. I just wanted to work on investments and deal with clients now and then."
While at a Commonwealth meeting in Boca Raton in 2003, Collier thought he might like to buy some property in that area, which he realized he could do if he could sell his practice to the right buyer while still remaining involved. "That's when the search began. In June 2004, I offered to merge my firm, Boston-based Wellesley Financial Architects, into George's Boston firm, Pinnacle Capital Management Inc."
Sizewise, Pinnacle had about twice the assets under management of Wellesley and two-and-a-half times the clients. "I'd spoken to some buyers who were smaller than me," says Collier, "but felt my clients would be better served by a firm like George's."
"And I had the infrastructure to take in Marc's client base and grow it without it impeding my existing business," Raftopoulos adds. "I'd been in business since 1987 and, when Marc made his offer, I'd just had a couple of great years and was ready to expand."
Collier will work indefinitely with his clients while receiving an earnout from Raftopoulos. He also gets a W-2 every year from Pinnacle so he can retain health benefits, the value of which offset the earnout amounts he receives. "Probably within the next 1 1/2 years I'll be seeing a strong positive profit margin from this deal," Raftopoulos says.
So aside from the more traditional ways a sole practitioner might structure his succession plan, you can do an informal merger, like Pease and Corbeau, or a formal one, like Collier and Raftopoulos. But there are yet more ways for solos to succeed.
One of many reasons why Rebecca Preston of Preston Financial Planning in Providence, R.I., joined the Alliance of Cambridge Advisors (www.cambridgeadvisors.com) is because "Cambridge members have an agreement that we will fill in temporarily for each other if one of us is hit by a bus." (It's not clear why this bus keeps getting blamed for advisors' hypothetical deaths, but it certainly is a popular reason for succession planning).
Preston's other succession plan is the informal agreement she's come to with a local insurance agent. "He's half my age and we met when working for a money management/financial planning firm, so I have watched him over the years and become friends with him and know that he, like I, puts the clients' interests first. He is taking the CFP course now and has expressed interest in becoming a fee-only planner and buying out my practice."
And, then, there's always the keep-it-in-the-family strategy. Debbie Frazier of Frazier Financial Consultants in Chapel Hill, N.C., a solo practitioner since 1986, discovered three years ago that her son was taking an interest in her practice. "Now he's getting ready to take the final test for his CFP designation and loves the work. I figure I'll work full tilt for five to eight more years and then he'll take over the business. I'll give him small amounts of ownership once he gets certified and after we have the practice valued." Frazier plans to receive a retirement annuity from her son, Rich, as long as her clients are still with the firm.
But this strategy is more than just a succession plan. It's getting to groom a son or daughter, and not just a stranger, to be a part of your old-age plan. "I love having a young person around," says Frazier. "That it is my son is just a wonderful bonus. He brings fresh ideas to the table and has a different set of skills than I do. He's also more organized, more obsessive with his work and less fearful of new technology."
Ten years ago, as a sole practitioner myself, I felt bewildered by the apparent difficulties of constructing a succession plan while maintaining my independence. Now we have multiple models for doing so.