5) Address what happens in the event of an involuntary departure of an owner in the practice. In instances like these, the treatment of the departing owner may depend upon the circumstances surrounding the departure. An owner who is asked to leave as a result of a difference in goals and objectives may be viewed very differently than a person who leaves because of performance issues or, even worse, regulatory violations. Draft these considerations as early as possible, while everyone is getting along well and these issues are still merely theoretical.
6) Address the potential “demographic crunch” in instances where there are two or more senior owners of similar age. An internal buyout arrangement can require as many as seven to ten years or more to payoff from operational cash flow, after taxes, and after replacing the exiting advisor owner. This makes the process impractical for a single remaining owner in his or her late 50s or early 60s. One commonly used solution is to set up an internal ownership track that provides an opportunity for the next generation to step in on a continuity basis and purchase the exiting owner’s shares or interest.
When it comes to continuity planning, successful independent advisors should never settle for something that is “better than nothing,” and should treat the formulation of a continuity plan with the seriousness it deserves. Advisors owe it to themselves, their heirs, their business partners and their clients to have in place a continuity plan that provides maximum fair value to the owners, and balances that with a sustainable financial structure for the firm the owners leave behind.
While none of us wants to believe that our association with our business partners or shareholders may someday come to an end, as it relates to a continuity agreement, it is always good to remember that, one way or another, you will part ways someday with your business, your partners and your clients.
It is important to plan for such events well in advance – especially for those scenarios where the exit may happen in unexpected ways.
David Grau Sr., JD, is the president and founder of FP Transitions (www.fptransitions.com), which partners with independent advisors to build businesses of enduring and transferable value. The above is adapted and excerpted from his first book, “Succession Planning for Financial Advisors: Building an Enduring Business,” published by John Wiley & Sons.