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Don’t Die at Your Desk: The Best New Approaches for Planning Succession

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WASHINGTON -- It’s a worry that keeps many advisors up at night: What’s the best way to plan for succession? Fortunately, new business models are emerging that can quell fears, and even help the seller and buyer profit more than long-established succession practices.

“Owners of advisory firms misunderstand the options,” according to David Grau Jr., president and chief executive of Succession Resource Group, an Oregon-based succession planning consulting firm. “They don’t realize there’s a new school approach to planning that businesses are beginning to use.”

“Old school” succession options include internal sales which use  promissory notes for financing. That results in the successor using profits to pay back the note, Grau said at the Financial Service Institute’s annual Financial Advisor Summit, in Washington.

Advisory firms can also be sold externally within three months through bidding on web sites, but the firms’ maximum value may not be realized. Another option: “Advisors can choose to do nothing and die at their desks,” Grau said, leaving behind a less-than-satisfactory outcome for clients and survivors.


Smaller advisory firms with at least $500,000 in revenue are increasingly turning to an equity appreciation model that is commonly used in other professional service businesses, Grau said.

The business is first valued, most commonly at a multiple of between two and three times gross recurring revenues. The owner of the firm then grants the successor a percentage stake in the appreciated value of the firm. “That’s the sweat equity,” Grau said. “It provides a growth incentive, and owner and buyer are aligning their goals.”

He cited an example of a firm valued at $2 million with the successor getting a 20% stake. If the firm doubles in value after five years and the owner decides to retire, the successor would purchase the rest of the firm for $3.6 million.

“The owner was able to maintain control for five years, and the equity the successor already has makes it much easier for him to get a loan,” Grau noted.


 An internal succession using an incremental buy-in is also emerging as an attractive option for advisory owners considering retirement.

Using this model, after the firm is valued the owner sells the successor a percentage interest in the firm, which is paid for in cash using an industry lender. If the successor owns 40% of the firm, for example, he or she gets 40% of the profits, which is then used to pay back the lender.

If the firm doubles in value in seven years when the owner is ready to retire, its value is $4 million. The owner will have received $800,000 initially and an equity stake of $2.4 million at retirement. He or she then sells the remaining 60% to the successor, who re-finances the original balance and rolls it into the new credit line to buy the remaining 60%.

“The incremental buy-in is a very good planning tool,” Grau explained. “Lenders like it and so do owners because they can maintain control but also reduce their workload and take some chips off the table. We’re seeing ‘younger’ owners in their 50s do this because it’s the best way to attract talent to help the business to grow.”


A merger-acquisition is another approach. In this model, an owner begins to search for a succession candidate approximately three to five years before retirement, according to Grau. 

When a successor is found, the owner sells 100% of the business for a 50% down payment and a two-to-five-year employment contract to stay on as an advisor and/or a rainmaker. When the contract is up and the owner retires, he or she receives the remaining balance of the payment.

“This is the most common of the new succession planning approaches,” Grau said. “The transition is communicated to clients as a merger, the owner can gradually slow down and there’s greater value in the firm when he retires.”

The equity appreciation model is the latest of the new options, while the incremental buy-in approach to succession is the most desirable, but also the hardest to achieve, according to Grau.

“Attracting the talent isn’t easy,” he explained. “You have to have the right two people on the dance floor.”

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