Earlier this year, I was having a conversation with the only surviving partner of what was once a quality, high-service boutique accounting firm. The business had recently merged with a large national firm (a better description was that it had been taken over) and it wasn't long before my firn noticed a difference in the service proposition, which afterward seemed much less personal. The clients we had referred to this firm over the years also noticed, and many began looking for another accountant.
The partner acknowledged that things were far different now, and that while it was positive to have the financial backing of a large firm, it certainly changed the relationships his firm now had with its clients. I asked him the obvious question: "Why, if things were going so well, did you decide to merge?" He told me that they really had no choice. The firm had four partners and all except him were getting ready to retire. There was no way, he said, that there would have been enough money to pay the other three and maintain the business. He seemed sad as he told the story, even though he was now the managing partner of a new branch.
Why, I asked, weren't ownership opportunities offered to those young accountants the firm had hired over the years-many of whom had left? He didn't really have an answer, but it seems obvious to me that the major reason was that the four partners simply did not want to dilute their ownership.
How many financial planning firms, I wonder, find themselves in similar situations? As I attend meetings and have discussions with other planners throughout the country, I am truly amazed at the number of firms that are owned by one or perhaps two people, particularly when these people are in their sixties. One would think that as financial planners they would have a viable exit strategy. Without younger professionals in their firms to purchase their shares, wouldn't they be forced to sell to a firm that may not share their values?
I decided early in my career that I wanted to build a firm that could function and grow without me. To do so meant investing in quality people and offering them opportunities to grow and prosper. Some planners with whom I have spoken have expressed concern that diluting their ownership by offering shares to other professionals may affect their own income. I once pointed out to a planner reluctant to give up her ownership that, besides the other advantages, she would have a market for her shares when she retired. She replied that if she owned 100% of the firm and 100% of the profit, she would be able to invest enough to fund her own retirement. But I wondered where that would leave her clients.
I am sure that my own income has increased in time because of my partners and our additional shareholders-and also because this means I have a market for my shares. Perhaps most important is the fact that our clients know there will be no disruption in the quality of the services they have come to expect. Other planners have told us that they are reluctant to hire young people with ambition for fear that they may be training their competitors. But of course there is also a risk that those same young planners might leave if they feel their opportunities to grow at these firms are limited. Because we have made it possible for the valuable people at our firm to acquire ownership positions, those valuable people have not left. This has been the growth model for successful law and accounting firms for years.
Another benefit of offering ownership opportunities is that these shareholders can serve as your loyal and stable management team. While five of our shareholders are senior planners whose primary responsibilities are to service and attract clients, the other three serve as our chief operating officer, director of investments and director of new business development. All eight, of course, have vested interests in the success of our firm and are dedicated to its growth and profitability. Also, the diversity of opinions at our shareholder meetings has been invaluable and has led us to make what we believe are sound decisions over the years. Someone once said, "None of us is as smart as all of us."
As I look back on my career in financial planning and the development of our firm, I can unequivocally say that the best decision I made was to invite key associates to buy shares in the firm and become partners. To reach our current number of eight, we have added three new shareholders in the past three years and increased the shares of another. (We intend to add other shareholders as well and continue the trend.) No other decision has had more impact on our growth over the years. We have had unusual stability. (Three of us have been with the firm for nearly 25 years.) When we hire new associates, they join us with the full knowledge that they can eventually become shareholders.
That not only means hitting performance targets but sharing our values about financial life planning, ethics and client service.
Our system for buying shares is simple. We value the company, internally, as a multiple of gross revenue. Other firms may settle on a different formula or even get a professional appraisal to value their firms. We chose simplicity, but it is the concept-not the formula-that is important. New shareholders are initially offered an opportunity to buy five shares, which currently represents 4.35% of the firm. As they continue to progress, more shares are offered to them. If they would like to buy shares, the company can finance the purchase over five years at market interest rates. Our experience has shown that their distributions and additional shareholder income will exceed their annual payments (if the payments are extended) after two years. While we are not equal shareholders, none of us has ever voted our shares. At meetings, we each have one vote, and that has made for a very healthy relationship among us. There are other significant advantages:
We each have a market for the shares we own. We have exercised a stock redemption plan that will assure us a fair value for our shares in the event of death, disability or retirement.
We have learned from each other over the years because of the broadened perspective that comes from having multiple owners.
Good people do not leave to establish their own practices or join other firms offering better opportunities.
Key duties are shared by all owners and are not left for one or two people to accomplish.
The incentive to grow the firm is intense.
Our shared values have created a philosophy throughout the firm that we should do what is in the best interest of our clients.
We are able to recruit associates of quality.
I am confident that the firm I helped build will continue without me and will be my legacy to the profession.