SALT LAKE CITY -- Baby Boomers are getting older and so are their advisors which means it's high time to start planning for the next chapter for both parties.
But it's easier said than done.
Succession planning is a critical but often overlooked component of any healthy advisory business. Owners and partners are focused on building the business and dealing with the top-level decisions and obligations while employees -- including the firm's best-performing advisors -- are busy plotting their own futures between client meetings.
Meanwhile, preparing for an eventual or unexpected transition somehow drifts into the background only rearing its ugly head when it's too late to salvage key client accounts and the feelings of all involved.
The problem with this, of course, is that every owner and every advisor eventually wants or needs to realize something tangible after years, decades or even a complete career dedicated to building their businesses and their assets under management.
And for clients, the sudden death or departure for whatever reason of their primary advisor can be an unsettling event that leads them to either jump ship or risk settling for the great unknown to come.
During a breakout session titled "Building a Business That Survives You" here at the National Association of Personal Financial Advisors' national conference, two partners from Briaud Financial Advisors in College Station, Texas offered up candid perspectives from both sides of the succession planning coin.
Janet Briaud, the firm's founder, also happens to be the mother-in-law of Roger Pine, the recently minted partner. Putting aside obvious familial dynamics, the pair laid out the trials and tribulations that both owner and would-be acquirer face in the succession planning cycle.
"I knew I had a problem," Briaud told attendees. "I was by myself but I didn't know how to solve the problem and I was worried about what would happen to my business if something happened to me."
"Maybe someone would come along, I thought," she added. "But that was really just a lot of hope."
Briaud considered selling a share of her business in a roll-up deal to a larger firm but wasn't enamored with either the financial terms or the uncertainties that come with getting into bed with a large acquiring firm.
And for Pine and his wife, who both worked as advisors in the firm, their professional growth options were essentially limited to taking a solid decade or more to build a practice from scratch, steal some of mom's clients to speed up the process or find another firm and start anew.
"In all honesty, our options were limited," he said. "[We] were distressed buyers. I could have gone to another firm but that would mean losing all the things I've done and all the work I've put into developing relationships with clients and employees at this firm."
For Briaud, selling to her daughter and son-in-law gave her peace of mind knowing that they shared her values, vision and standards for client service -- something that couldn't be assured in a roll-up deal. And that's to say nothing of the less-than-desirable preferred return terms those type of buyouts entail.
Unlike many firms, which often use a graduated leadership ladder or track that establishes performance benchmarks to determine when or how much stake an ambitious employee can buy in for, Pine said forgoing this conventional wisdom and buying in for 50% right off the bat made the most sense.
"If it all blows up, it's going to be messy whether it's 10% or 50%," he said. "I'd rather spend my time working on developing and growing the business than focusing on earning merit badges along the way."
Whenever and however the decision is made to buy into or sell an interest in an advisory firm, both Pine and Briaud strongly recommend building a thorough but flexible discounted cash flow model that goes beyond valuation metrics -- whether it's "x" times revenue or "x" times earnings -- and takes into account important factors including the average age of existing clients, client attrition rates, anticipated asset growth rates and all the other factors that will directly impact the value of the now shared business.
"Going through the process and doing the homework really helps you understand the business that you're investing in," Pine said. "It's the most important investment you'll make in your life. For the seller, he or she knows all this stuff intuitively. But as the buyer, you might not really know it the way you should until you go through the exercise."
After the deal is structured and the details are ironed out -- for example, whether it includes financing from the seller or how important decisions like expansion or third-party investors -- it's important to communicate all the nuances and ramifications of the union to existing employees.
Not only will this keep everyone on the same page, but it establishes the framework under which the next pool of potential partners will operate in any future succession planning discussions.
"Ownership is not an award for past performance," Pine said. "Your invitation to make a pitch is the reward. And you might only get one chance, so prepare well."