Financial planners who want to create and implement an internal succession plan at their firms have tough issues to face, and one of the biggest is the necessity of discounting the value of stock for young partners, according to advisors on a panel at the FPA Retreat in La Jolla, Calif.

Marty Kurtz, chief executive of the Planning Center, wanted a sustainable succession plan for his firm, but quickly realized that its initial valuation wasn’t realistic for his junior advisors.

Jon Yankee had the same problem. Yankee, a partner and chief executive at FJY Financial, also saw that valuing his firm’s shares at anything close to what outside buyers were offering was not going to be affordable for the next generation.

Kurtz and his elder owners “took a bitter pill and took a couple million [in valuation] off the table” to help out the next generation. Yankee concluded that the sale of equity tranches to successors has to be done at a discount, up to 50 percent initially, then later with a 20 to 25 percent haircut.

For Kurtz, part of the solution was to lay out a business development plan for the next generation that would generate enough in profits to pay for their shares. That process helped engage them as managers-in-waiting with clear incentives to grow the firm.

Some attendees at the session said they have given equity slices to future partners in return for commitment from these employees, the type of commitment that isn’t always rewarded with pay and bonuses. That’s a controversial move, though, as some consultants believe you shouldn’t just give away ownership stakes.

“You’re not giving it away,” Yankee countered. “You are rewarding people for building the firm.”

The alternative to a discounted internal transition is selling to an outsider. But an outside buyer will be looking to ramp up growth and possibly change the client-centric and employee-friendly culture that the selling planners have built and cherish.

It’s a difficult process picking out those who will be future partners within your firm and requires deliberation, the panelists said. And relationships change within the firm once former employees are tapped as partners, Yankee added.

Change isn’t easy for owners, either. “You don’t detach overnight,” Kurtz said. “You walk away from conversations [and] let other people make decisions.” 

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