David Goad, owner of Succession Planning Consultants in Newport Beach, Calif., is a thoughtful kind of guy.

Having founded FPTransitions, the Portland, Ore., company that brokers the buying and selling of advisory practices, he eventually left when finally convinced that the "internal succession" carried more promise than the "external successions" promoted by FPTransitions. Thus he built his consulting firm to help advisors conduct successful internal successions.

What has long bothered Goad, though, as well as most industry observers of advisors' succession attempts, is the question of how to formulate a successful succession plan for a solo practitioner who has no "built-in" replacement. Says Goad, "Today, more than ever, any succession plan must consider the client first. What I call the 'solo-to-ensemble' model offers a buyer, seller and clientele the best of all worlds by mimicking a seamless internal succession plan. Those who pursue this strategy will more comfortably discuss with their clients their inevitable, late-career transition, instead of suddenly shocking clients with the news."

How did Goad's thinking evolve toward the solo-to-ensemble model? "These changes aren't being driven by buyers or sellers [supply and demand], as in the past, but by clients and their experiences." First, says Goad, the profession has changed from what it was ten to 15 years ago, when nonrecurring revenues meant nonrecurring client contact. Most firms today have a respectable amount of recurring revenue, which requires advisors to be in touch with clients more frequently. In the old days, clients weren't particularly bothered when they received a notice on their quarterly statements that a new advisor had been assigned to their accounts. But with recurring revenues from investment management services, all of that has changed.

Second, says Goad, "With the economic events of the last two years, my observation-based on studies we perform regularly for our advisory firm engagements-is that clients clearly want a role in the seller's succession planning. Internal successions are highly favored by clients. Inasmuch as the market experience of the last two years may endure for some time, clients will no longer tolerate the sudden introduction of a previously unknown advisor. This has furthered advisors' understanding that succession strategies must not only be client-friendly and but also accommodate early- and mid-career buyers in the marketplace. So we still have supply and demand driving succession planning, but it's morphing in a totally different direction than expected. Very few deals are getting done that bring in an outside buyer with the seller exiting soon thereafter."

The two forms of "solo-to-ensemble" model Goad has increasingly used with his clients-48 engagements in the last 12 months-are the entity merger and the asset merger, which he dubs "Lite Merger."

"The entity merger allows the seller to better monetize the entire value of his firm, including secondary value drivers unique to that firm, such as processes and systems, branding, human capital, marketing niches, etc." And it works as follows: The advisors combine their operations without any initial legal tie-in. They analyze their pre-merger expenses and revenues and compare them to post-merger expenses and revenues, determining what both parties' expenses are in deriving their respective shares of the net profitability of the firms when combined. Advisors enjoy a significant reduction in overall expenses when they come together, making the new entity immediately more profitable than the predecessors by themselves.

"All of this results in lower risk," says Goad, "because if it's successful, the buyer can begin to acquire ownership over, say, two to five years and the success rate is much higher because clients get introduced to the seller's successor over time rather than right away, as with an external succession. In the old method, buyer and seller had to ink the deal before the buyer was introduced to clients. This way there's less risk because there's no legal commitment until both parties have a high level of certainty the arrangement will work out."

With the "lite" merger, or asset sale, client relationships are being monetized, but not the secondary value drivers, says Goad. "Buyers are 'carve-out' buyers looking just for client relationships. The combined operations of the firms lowers or decreases expenses, but there's no recasting and sharing of profits-just two separate businesses in the same working environment. The buyer buys clients-not the seller's entity-over time, as the probability of success grows."

What happens in either case if the seller has sold, say, 20%-30% of his entity or assets and things don't work out? "First, he needs to maintain at least 51% of his business so he still controls the operation while a method is established up-front for buying out each other's shares if the combination fails. With the 'lite' merger, the seller has just sold clients, so there's no continuing relationship or obligation. That's why some advisors like 'lite' better." In practice, says Goad, he's had none of these deals unwind yet.

First « 1 2 » Next