Additional Factors To Consider
Properly funding a continuity plan also requires an accurate determination of value. We recommend that advisors start with a formal valuation before they set up a continuity plan so that all of the owners of the business can agree on the process and whether each can live with the results in a crisis environment. We would also strongly caution against using a multiple of revenue to accomplish this task – depending on the circumstances of the buy-out, and the economic climate, owners who use this approach may commit themselves to a payment obligation that is unsustainable and will threaten the business’s ability to survive.
Bank financing may also be a solution to consider. It is still hard and impractical to obtain financing from a traditional bank for the purposes of funding a continuity plan, given the highly regulated, intangible and service-oriented financial advisory business model, which makes it difficult for advisors to provide collateral. Significant progress continues to be made on this front, however; with proper cash-flow modeling, a strong foundational structure, proper valuation techniques and adequate payment terms, bank financing may be a viable solution should a buy-sell agreement be triggered.
Conclusion
Continuity planning is an inherently tricky challenge for any business, since it establishes the terms for a change of control process in which the seller, due to sudden death or disability, typically will not play an active role. By planning ahead to establish the right sources of funding, though, financial advisors and their designated successors can avoid many of the common pitfalls that can hamper a business both during and after such a transition, and secure a strong future for the business and its clients while providing proper compensation to the previous owner or his or her estate.
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.
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