Advanced Succession Plan for Your Advisory Firm

DEAR ADVISORS, 

Congratulations! If you’re reading this, you’re starting to get serious about planning your exit. While a continuity plan provides for emergencies, a succession plan allows you to control the contingencies. The Advanced Succession Plan is like having all your estate documents done for your business, and the Buy-Sell Agreement is like your Revocable Living Trust. This is for a business with an owner planning to begin transitioning out within the next 12-18 months. The key components of an Advanced Succession Plan include:

• All features of the Beginner’s Continuity Plan, Advanced Continuity Plan, and Beginner’s Succession Plan apply here as well.

• Identify Your Buyer - 

  • Once you’ve identified an internal successor, talk with them about your exit goals, and if that fits with their career goals and timeline. As you begin the succession process, all the owners should meet at least annually to discuss how the transition is going and if any personal, financial, or business changes need to be made. 

  • If you’ve decided on an External Succession, you may want to list your firm with a firm that specializes in matching buyers and sellers of advisory firms using a thorough and personal vetting process.

• Finalize the Agreement - Finalize the deal terms through a Letter of Intent. That helps to quickly and correctly structure the Buy-Sell Agreement. The Buy-Sell Agreement can be very flexible. It may include a portion of the business, followed by another agreement at the end of the term for the next portion, and so on. It can include adjustments to the buyers or seller’s payments based on the growth of the business. 

• Deal Funding - These are unique to each sale. Here are a few common options to consider:

  • Bank financing - Local banks aren’t usually equipped to fund deals for advisory firms. It’s now possible to secure funding through banks who specialize in providing funding for advisory firms in transition. Be sure to consider both fixed and variable rates.

  • Seller financing - It can be preferable to finance internally for various reasons. This shouldn’t be a problem for a buyer and seller with a good relationship and a business with sufficient cash flow.

  • Installment sale - Most transitions are done over a number of years, where a percentage of the business is transitioned every year or every few years. This is especially beneficial for firms with a high value, or where the owner prefers to transition out of the business slowly.

  • Gifting - Most family firms consider a transfer via gifting instead of through a sale. While there are benefits, it also usually means that both generations will end up paying more in taxes over the long-run. 

• Business Insurance - If the transaction does not include 100% of the firm’s value immediately, then you’ll need additional insurance on and among the owners. 

  • Entity Purchase: the corporation stands ready to redeem the shares of each shareholder so the company is the owner, premium-payer, and beneficiary of any insurance policies. The company may have to pay tax on the life insurance proceeds.

  • Cross-Purchase: each partial owner owns a life insurance policy on each of the other owners. If one owner dies, their shares get stepped-up at death so less taxes are paid over the lifetime. 

  • Unilateral: any combination of the two above.

Stay tuned for next week’s post about the key exit planning components of a Merger or Partnership! It’s our fiduciary duty to have an exit plan in place for our clients. It goes a long way to securing the future of your family and business as well!

Warm regards,

Brooklyn

P.S.

At Ellevate Advisors, we believe that advisors deserve to retire too. What does that look like for you, your family, and your business? Let’s figure it out together! Click here to schedule an initial phone call with our team today or get to know me on my bio here!