Even if the founder were able to grow the firm's assets by 10% during the years it takes to groom her successors, we're still talking about the loss of millions of dollars in earnings and enterprise value. Making things worse is that the heir apparent would likely expect a discount on the purchase price, assuming that the firm experienced growth in the time since that person started working there. In fact, that employee may deserve such a discount because he or she likely purchased a minority equity stake.
When someone starts an RIA firm, she brings drive, ability and entrepreneurial instincts to run it for the long term. It’s rare that the other people around her do, and it’s tough to find successors who are willing to put their money where their mouth is. In fact, the founders have often surrounded themselves not with other entrepreneurs and rainmakers but with technical people who complement their qualities. They likely haven’t trained someone to replace them.
Trade-offs
Nevertheless, many founders look beyond the estimates of how much they could be leaving on the table by pursuing an internal succession plan because they feel their clients would be better served by the existing team. For them, no amount of money is as important as leaving a legacy and rewarding those who helped the firm grow.
What’s more, pursuing an internal transition often provides owners with the opportunity to lessen their workload while they ease into retirement. The other thing to consider is that although an external succession plan can generate significantly higher valuations on the surface, much of it comes down to the deal terms and how easily your firm can be integrated with the acquirer’s.
As difficult as it is to admit for some, this succession planning conundrum can be unsettling for founders to solve—and that's why many choose not to.
Industry influencer and transition specialist Carolyn Armitage is a managing director with ECHELON Partners, a Los Angeles, Calif.-based firm that provides investment banking, valuation, and consulting services to registered representatives, IBDs, hybrids and RIAs nationwide.