Conversations about succession planning at an advisory firm often start when its founder asks, “What if I got hit by a bus?” As a founder myself, I can tell you it’s easier getting run over than planning an orderly succession. Certainly easier than strategizing.

If such a thing were to happen at my firm, Accredited Investors, we would come together through crisis as we have in the past. Whenever our firm has had any kind of upheaval, the staff has united to figure out how best to get through it. A crisis following the hypothetical bus accident I’m in would mean certain people would step in to handle my management and client responsibilities as CEO.

Secondly, clients would understand that I am no longer around, which means they must make choices about whether to stay. We have a team concept at Accredited, so I suspect most clients would continue to work with the other people on my team.

There is also insurance to help tackle the financial repercussions of my sudden absence. So we have grappled with a crisis situation. But there’s more to think about when founders sell their practices.

First, founders are selling the past to cohorts buying the future. At Accredited, we currently have 10 shareholders, including my founding partner, Wil Heupel, and me. With all the people who have ever worked here, we have built a sustainable company. But its future may well be different than its past.

I once spoke with a couple of shareholders exploring an idea about which I was not enthusiastic. As they were discussing things, I became distracted considering whether I was coming from the past or looking toward the future. When Wil and I were running the business, we could set a direction we agreed about, but we were also able to recalibrate quickly if we wanted to.

Now, with almost 50 employees, things are more muddled. The truth is I am still confused about when I am paving the way and when I am in the way. I suspect both things happen. I asked the shareholders at this meeting which one it was. I also asked for reverse mentoring—I need a better understanding through their eyes about the things that they need from me and the things that are no longer necessary.

As the firm continues to take on shareholders, the overlap between our common objectives diminishes. When Wil and I started the firm, we were similar ages, our kids were similar in age, and we had many shared interests. Every subsequent shareholder had something in common individually with others, but fewer shared things with the entire group. This has a huge impact on our decisions, because we often conflate what is best for ourselves with what is best for the business.

As more shareholders come in, what is best for each of us begins to get marginalized. This means a lot more compromise and hurt feelings. And if the shareholders don’t communicate those feelings, the tension permeates the room. The only way to handle this is through open dialogue.

Different people, of course, are open about their feelings to different degrees. We had a shareholder who for several months was planning on leaving the firm, but we did not know it. And yet this shareholder was involved in long-term decisions—helping craft the buy-sell arrangements, sitting in on client meetings and compensation discussions.

This was clearly not in the best interest of our firm, but the departing shareholder did not feel comfortable talking with us about leaving. The fact that we weren’t having open discussions about the shareholder’s actual career path meant everybody was making suboptimal decisions. While this example is clear cut, there are more subtle ones. Sometimes people’s management responsibilities are shifted and there are questions about who gets to buy what percentage of the shares being offered. If a person is not open with the group about his or her feelings, unhealthy triangles inevitably form.

It’s generally not helpful to talk about who did what, but it is useful to try to understand what the roadblocks are to communication and look at ways to increase a level of shared interests among those who own a firm.

Profit margins change everything. Again, when Wil and I were growing the business, we never paid much attention to them. We simply made short and long-term decisions that we thought would be good for our clients and the firm. I believe that our shareholders today have the same interests, but the profit motive has certainly made things more complicated.

Since Wil and I are selling our shares based on EBITDA, we can get a better share price by investing less in the business. You would think, meanwhile, that those buying into the firm would want lower EBITDA because it reduces their purchase price, but they also need those earnings to help them pay down the bank debt financing their share purchases. The banks, for their part, want to make sure the margins are reasonable so their debt can be serviced.

In other words, profit margins are conspicuous sticking points in succession plans. Creating a strategy around these margins is critical. If they are too high, there is not enough being invested in the business. If they are too low, the partners could face problems sustaining the business.

We’re No Angels

It can also be complicated if you characterize yourself as an angel. In the beginning, we had some rules that we thought would be good for the succeeding generations. We have a no-nepotism policy, for example, because we didn’t want employees to worry they would be treated less fairly than family members. We also decided to sell shares internally at a lower price than a private equity firm would have paid.

But we are not angels. We can believe these decisions came from the right place, but in the end, they are business decisions. We are not giving away shares in our company. If we did, it would be because we have to. A succession plan should be viewed the same way: It’s not the gesture of a saint: It’s best for me because it creates an orderly process for selling my shares to people whom I trust, people whom I know will take care of clients in a way I’m most comfortable with. I am making a decision that blends the rational with the emotional; I don’t need wings to do this.

Be Ready For Departures

When a firm changes hands, there is going to be turnover. I would love for all of our shareholders to stay forever, but that is unrealistic. Over time, as people change and the business changes, some people may no longer feel they fit in at a company the same way they did before. They may not be contributing the same things. That kind of turnover is very difficult because it might create the impression that there are good guys and bad guys at the table. Sometimes, the situation simply is what it is and it’s nobody’s fault.

Lastly, it is important to acknowledge how weird it is to be in transitional phases like these. Most founders are having a whole host of things happen to them simultaneously: They see a diminished role for themselves in their businesses. They are looking in the mirror and coming to grips with aging. They must gradually let go of a business that’s been a huge part of their lives. They are trying to figure out what this new life is going to look like, and wonder if they are still needed.

This is incredibly difficult. One of the reasons I sometimes cling to things that may not matter much is that I worry everything will unravel if I let go. Not the business—me. Working through these feelings allows me to get away from an “I deserve” mentality and more into an appreciation of change. I tell our clients that the only thing we can guarantee is impermanence; the same is true for us.

In any case, I am making sure to look both ways before I cross the street. Because even though succession planning is not easy, it is worth it.  

 

Ross Levin, CFP, is the founder and chief executive officer of Accredited Investors in Edina, Minn. He can be reached at [email protected]