Conan the Barbarian opens with the line, “What does not kill me makes me stronger!” However, to quote Philip the Bulgarian, “Whatever kills me, kills me and that is really not good for me.”

Many succession plans are getting tested and they are not about to get stronger. They are about to get killed unless we help them.

For years and years, most advisory firms have carefully, even if slowly, constructed succession plans. They have recruited younger people, developed those recruits’ skills and given them leadership opportunities. Other firms have entered into a dialogue with friendly “neighbor” advisories or even sketched out deals with potential buyers or institutional investors. But now that the Covidian wave has appeared, it looks like our sandcastles may just wash away, and we may have to start all over again.

If the history of the great recession is any indicator, the damage will likely be extensive and will have a lasting impact. In our firm’s experience, the likely impact of a coronavirus crisis is that many firms will abandon their already fragile internal succession plans and seek refuge in the safety of institutional buyers and larger organizations. Unfortunately, many such buyers may themselves be vulnerable, and many may withdraw from the market—remember all the banks that were buying RIAs?

The likely result is that the industry will be in a state of confusion for some time, at least until the next bull market fuels another surge in private equity interest and/or firms regain enough confidence to engage in their own internal construction projects and build their castles again. Unfortunately, the last time this happened founders were in their late 50s and early 60s. That was 12 years ago. Those advisors are much older now, and as we speak, the waves are arriving at the beach.

In discussing the impact of the latest crisis on succession, I would propose we take the same approach as an emergency room: We should treat patients according to the severity of their condition, rather than to the order of their arrival.

Saving First-Time Buyers
For many professionals, the issue of failing succession structure is not an abstract idea about the future but a very real and pressing problem of the present. In a number of firms, up-and-coming team members (G2) have purchased equity from the founders and have financed the purchase with the help of a loan. Depending on the price of the equity, the loan payments could often be financed by the profit distributions of the firm with some cash outlay from the buyers, but not a significant amount. Unfortunately, the crisis has changed all of that.

Throughout the industry, many loans to new partners are “under the water” (to use a mortgage term). The professionals who bought the equity can only make the payments at the cost of significant personal sacrifices or else they might not be able to make the payments period.

As much as it is tempting to conclude that bear markets are part of the “natural” risk of the industry and that the buyers should have known that this is part of the deal, it is also best to remember that these are the “best and the brightest”—the select individuals we rewarded with ownership. We can’t let the reward punish them out of existence. Most firms should try and help if they can.

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