Risks and Rewards of an Insider Transfer (especially Family Firms!)
DEAR ADVISORS,
Bill was just like thousands of other financial advisory firm owners in that the thought of retiring from his business was never far from his mind. He daydreamed about transferring the business to his kids, or perhaps to one of his associate advisors, but he couldn’t tell if they really wanted to own the firm and or if they even had the skills to lead.
And, of course, they had no money.
Bill’s advisory firm was his financial lifeline. He relied on it for income, and needed to sell to a buyer who had cash, and a plan. If he were ever to enjoy his retirement, he needed a white-knight buyer to appear on his doorstep bearing saddlebags of cash. So, Bill did what most advisors: nothing.
If you think that transferring your advisory firm to your children or an associate advisor is risky, you are right. Insider transfers face three major risks, but we have a solution to each!
Insiders usually don’t have enough money to pay top dollar for your book. Here are 2 solutions...
The best solution is compensating your potential buyers as they grow the value of the company. Sellers must instill their team with a culture of driving the value of the firm. However, an insider transfer may not be a suitable strategy if the seller’s goal is to get the highest asking price possible. You should hire your own financial planner to help you objectively identify what you need from a financial and personal standpoint.
Another solution is designing a tax-sensitive transition strategy. Advisors should work with a Certified Valuation Analyst (CVA) to calculate a modest but defensible valuation for the advisory firm. By using a lower value as the purchase price, the size of the tax will be correspondingly reduced. The difference between what owners will receive from the sale of the business at a lower price and what owners want to be paid after they leave the business is “made good” through a number of different techniques to extract cash from the company after the owner leaves it.
Insiders’ management skills, ownership abilities, and commitment to ownership are likely untested. Here is a solution...
If this is your concern, then you need a leadership team. Even if you have a career track or partnership track established for your associate advisors, the leadership team creates a space for them to “cut their teeth” on smaller business management projects. They’ll be able to decide if owning a business is really something they want. It will take several years to get the leadership team set up the way you want and get into the rhythm of working together since you may be used to running the firm on your own. It’s worth the effort though, because you can be confident that associate advisors who make it to this level will be good partners, and eventually owners when the time comes. It’s also a good way to make your firm more valuable, so there would be leaders in place if something were to happen to you. This is crucial for an insider transition, because they typically take longer than a third-party sale.
Sellers in internal transitions often lose majority control of the business before they are completely cashed out. Your solution is…
Sellers can craft a plan to retain control through an incremental sale of the company based on improving company cash flow over time. As you design and implement your strategy, it’s important to take notes about what you’re thinking, and the rationale behind your decisions. Succession plans take many years, so it’s helpful to have your notes to refer back to when (not if, but when) disagreements arise or hard decisions must be made. Hiring an exit coach is a good way to keep track of the exit plan and hold yourself accountable to sticking with it as the years get long.
Don’t let the risks of an insider transfer keep you from recognizing all the benefits! If you don’t need the maximum price for your business, you would probably find an insider transfer to be a better fit for the following reasons.
Keeping the advisory firm in the family or extending the seller’s legacy through his or her hand-picked group of successors.
Getting more satisfaction from your work because you’re spending time with people you know and trust, almost like a family.
Attracting and rewarding key employees.
Retaining control until all, or most, of the purchase price is received.
Enjoying a relatively easier transition because you don’t have to implement as many changes as quickly as many third-party transfers require.
Remaining active in the business while gradually reducing day-to-day responsibilities.
Staying in touch with your favorite clients.
Providing time for owners to build up personal assets (via distributions of cash) before their exits.
At Ellevate Advisors, we coach clients until they’re ready to hire a team like Advisor Successions to finalize the details of the sale. Their services include valuations, finding buyer or seller candidates, closing the sale, providing financing, and assisting with the transition of client relationships. After closing the deal, advisors continue working with us on “post-transition” projects as long as needed. If you found this helpful, you should schedule a complimentary consultation to start the conversation. Don’t wait to secure the future of your family and business!
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!