Marvin Burt did what many say can't be done; he sold his advisory firm to his staff.> By David J. Drucker

Begin with the end in mind. How many times have you heard this advice?
Marvin Burt took it to heart when, about 11 years ago, he started planning his ultimate exit from this profession. An advisor with a Rockville, Md.-based independent RIA, fee-only firm called simply Burt Associates Inc., Burt knew he would want to start cutting back in his sixties. So he conceptualized an employee team that could take control of the firm and set about putting his plan into motion.
The succession question is, why sell to employees when so many alternatives exist (e.g., sale to consolidator, sale to third-party advisor, merger with younger planner, etc.) and, perhaps even more important, when many in the industry claim it's so hard to do? Because, says Burt, "I needed to know my staff would be taken care of and all my clients would be kept. I wanted to be able to get a reasonable return on my business, and to stay involved for at least five more years. Also, I'd observed a number of mergers and acquisitions and it struck me that there were often culture clashes that disrupted the merger process."
Burt was 65 and his senior staffers were in their late thirties when the sale took place in 2002. Burt was the firm's rainmaker and lead advisor; Fred and Maria Cornelius-Burt Associates' new owners-were Burt's senior staff. Because he knew well in advance that he wanted his employees to be in a position to buy him out, Burt wisely included them in client meetings. "The process of transferring the firm's clients to Fred, Maria and two other professionals has gradually been going on for many years through the process of team planning." By the time of the sale, clients had long known Burt's staff and developed a respect for their abilities.
Critics of this succession strategy say employees, even if they're professionally capable of transitioning client relationships, usually aren't in a position to pay for them. Obviously, there are deal terms-down payments, payments based on earn-outs, balloon payments-that can be manipulated to make the purchase more affordable if both parties are agreeable. In some cases, though, outside financing is still necessary, and Burt's was one of those cases.
"My key people didn't feel they could take on the several million dollars of debt required to buy the firm. I needed to either find different buyers or someone who could buy in conjunction with the staff," says Burt. The latter seemed unlikely: an outside buyer that would assume a majority interest, yet keep its hands off the management of the firm and put no pressure on the staff to distribute the firm's profits. If this buyer could realize other benefits to offset these conditions, then perhaps it might work.
"A CPA group I'd known for 15 years stepped up to the plate. We'd worked with mutual clients for many of those years, were in the same Rotary Club and served on the same Chamber of Commerce committees, so they weren't strangers," says Burt. The negotiations were successful, and Burt ended up with a mixed group of soon-to-be new owners: two principals in his company plus five principals of a large, local accounting firm.
Why would an accounting firm agree to have little control over management or profits? "The accounting firm principals are in it for the synergies this relationship provides," says Burt. "They want to trade clients back and forth. They have a couple of CFPs on staff, but they're doing little financial planning and no asset management."
Burt got a ten-year promissory note and a five-year employment contract. The firm's value was already established by valuations performed in connection with an employee stock option plan (ESOP) previously established by the firm. In return for the certainty of the promissory note (as opposed to an earn-out, where the seller shares the risk of declining revenues), Burt does not participate in any growth of the firm after the effective date of the sale.
Three-and-a-half years of Burt's five-year employment agreement have passed and, at 69 years of age, he now works just Mondays and Tuesdays from home. Burt still advises a few clients and continues doing security analysis and developing investment strategy for Burt & Associates, meeting his modest commitment to the firm of 700 hours per year. "I got rid of the stuff I didn't want to do, like day-to-day management and human relations."
Why did he stick around at all? In many transactions, buyers expect the seller to vacate the premises posthaste. But, many in the business are realizing that it often makes more economic sense to ease out, for at least three reasons. First, it makes for a smoother transition for employees and clients. Both parties can be nervous when the firm's founder and leader starts making retirement sounds. A gradual easing out creates peace of mind for all concerned.
Second, it gives the seller a chance to see that his plan is going to work-that his employees are, in fact, capable of fully transitioning the client relationships. Third, there's more money for the seller because he draws a salary for the term of his employment contract and, if negotiated, benefits from increases in the firm's growth while he remains involved.
The latter wasn't something Burt had to have, however. Having taken a note with recourse to the buyers, he had no downside risk, which was his main concern, but he forfeits growth-related benefits. How a deal is structured to balance risk to the buyer and seller, though, is a matter of personal preference.
Burt & Associates, meanwhile, is humming along under the management of Fred and Maria Cornelius. Says Fred Cornelius, "I'm pleased with the transition thus far, as our AUM has more than doubled since the sale."
The big question mark for Cornelius was marketing. "What I viewed as the biggest risk in this deal was whether or not we could take over as the firm's chief rainmakers." Although he knew the firm's existing clients, Cornelius' previous responsibilities had not emphasized growing the client base. So, as was his newfound prerogative, he made some changes.
"Instead of continuing to take a single rainmaker approach, all four of the firm's financial advisors are now empowered to leverage their relationships to bring in new business. We've done this by fostering a culture of professional development and rewarding excellence with increased compensation and benefits," he says.
Cornelius' theory is that by promoting staff development, clients and prospects will appreciate and be attracted to the firm's heightened level of professionalism. "We have hired or promoted administrative employees as planner assistants and we have encouraged our administrative staff to enroll in the CFP program." Presently, three of the firm's four administrative employees are CFP candidates.
Because the team planning approach served the firm so well before and during its transition, Cornelius has continued this approach, which is becoming more widespread throughout the planning industry. "When clients meet with their planner, they also meet with a planner assistant," he says. "This helps to familiarize the client with another resource in the office and helps the planner assistant get to know the clients better which, in turn, furthers their career development."
An important aspect of any practice acquisition involving an older seller and a younger buyer is client demographics. Fifty-something or 60-something advisors who've been in the business 20 years or more and are easing into retirement are more likely to have aging clients. And, when Cornelius took account of his new asset, this is precisely what he found.
"By benchmarking and segmenting our clientele, I realized our clients are aging and, in most cases, living off their asset pool. We became very aware that we needed to attract an affluent but younger client." The new management team raised Burt & Associates' minimum account size from $500,000 to $1,000,000, and is attracting new clients with investable assets of between $1.5 million and $2 million.
All of which accrues to Burt's benefit. A seller has to be pleased when his buyer seeks to protect and grow his investment. Clients benefit from the new owner's energized vision, and Burt and Fred and Maria Cornelius can feel more secure about their futures.