Succession plans protect families

Recently, I had the responsibility of helping the daughter of one of our financial advisers deal with personal tragedy.

Her father — I will call him John Smith — unexpectedly died of a heart attack at 51 while on a due-diligence trip. The daughter and her mother were devastated.

John’s wife was so distraught that she didn’t want anything to do with the practice, though it was her only source of income. The responsibility for disposing of the business fell on her daughter’s shoulders.

As background, let me tell you a little about John’s practice. He was the branch manager of a firm with $50 million in assets under management, generating about $400,000 in revenue that was made up of a mix of commissions and trail income.

John’s practice was growing 10% annually. Before his death, his practice had been valued at about $500,000.

John employed two people, a receptionist and a client service professional, who had moved with him from a wirehouse when he decided to go independent almost three years earlier. John was in good health with no prior heart issues.

Normally, the first step in dealing with such a catastrophe would be to review a copy of the succession agreement and execute the plan. Unfortunately, John was like 80% of independent advisers — he didn’t have a documented succession plan or continuing commissions agreement in place.

His daughter, having worked in the practice previously, was concerned about the employees, clients and her mother’s ability to derive some level of compensation from the practice. These weren’t ideal circumstances for any seller, let alone a grieving daughter.

Because there was no written succession plan in place, no buyer could compensate John’s wife based on a future commission stream, as regulations of the New York and Washington-based Financial Industry Regulatory Authority Inc. require.

This would force any buyer either to pay a lump sum amount or a series of fixed payments. What buyer would be willing to pay full value for a practice or guarantee future payments with so much uncertainty?

Timing was critically important to help ensure that the practice stayed intact. Working with our company, Raymond James Financial Services Inc. of St. Petersburg, Fla., John’s daughter interviewed five local advisers interested in acquiring the practice over the course of two weeks.

She finally decided to sell her father’s practice to another Raymond James adviser and agreed to assist in the transition. The buyer agreed to retain both employees.

The final purchase price was $180,000, paid in $5,000 monthly installments over three years.

What can those of you without a succession plan do to ensure that this scenario isn’t a reality for your family or employees?

Below is a basic plan:

Determine valuation.It is important that you determine the fair value of your practice so that you can structure an appropriate purchase agreement. If your broker-dealer doesn’t provide this service, there are several consultants who can provide an independent valuation analysis.

Establish a short-term catastrophic-contingency agreement. This agreement is put in place so in the event you die or become disabled, another adviser steps in to provide a high quality of service to your clients. If you don’t know of someone in your area, contact your broker-dealer and ask them to make recommendations based on your production mix, client service package and culture of your firm.

After you have created your list of succession candidates, you should meet with them to discuss your methodology and philosophy for doing business. The more aligned the practices are, the higher the likelihood of success that the agreement will be executed.

Create a long-term succession plan. Once you have established a temporary catastrophic-contingency agreement, it is time for you to develop a long-term succession plan. Generally, you have four options: Transfer or sell ownership to an employee; transfer or sell ownership to a family member; merge with an outside practice as a succession plan; or sell to an outside entity.

When evaluating your options, be sure to consider your timeline for transitioning out of the practice, who are the candidates best-suited to take over your practice, and your financial and personal goals.

Matthew J. Matrisian is a vice president of the practice planning and acquisitions department of Raymond James Financial Services Inc. of St. Petersburg, Fla.

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