Elevating a Legacy : A G2 Success Story

In our first book “Succession Planning for Financial Advisors,” founder David Grau Sr., JD recounted one advisor’s early succession journey, including his ownership team’s bumps and triumphs as they executed the first tranches of their plan. Today, David circles back to provide an update on the successor team and all they’ve accomplished in six short years:

Ten years ago, around 2009, the founder and sole owner of Diversified Financial Consultants in Wilmington, Delaware, hired a local business attorney to help him develop a succession plan for his financial planning practice organized as an S-corporation. Calling on a practice’s local business attorney is a common starting point, and interestingly, it seems to be a common failure point when attempting to mesh the goals of the founder and next-gen advisors.. In this case, the founder’s attorney strongly suggested that in order for the founder to maintain full and unfettered control, the best course of action was a phantom-stock plan.The first draft was professional and thorough. It was also rejected out of hand by the team of prospective owners – they wanted to be real owners and investors in the business they were helping to grow.

A year later, another proposal came from an experienced investment banking firm on the east coast, a group brought in to provide counsel and documentation for an internal succession plan. After a complete round of interviews and much testing of the prospective next-gen advisors, the answer, they said, was clear. This group of next-generation advisors were just not cut out to be owners; there was not an entrepreneur in the group. The best thing to do would be to sell the practice to a third-party when the time came. But the founder and next-generation advisors had something else in mind and they decided to try another route. Right around this time, they read one of our white papers on developing a Lifestyle Succession Plan. They decided to give it a try.

Nurturing the Seeds of a Legacy

In 2011, I had the opportunity to spend a full day on site at this practice, talking to its founder and his four promising next-generation advisors about a lifestyle succession plan. I did a lot of listening too, as FP Transitions was but a part of the journey they’d been on and would go on to complete. It seemed clear to me that this successor team wasn’t given much of a chance to succeed. I remember the details as clearly as if it were yesterday. I also recall that at that time, none of us knew the pathway forward for sure, so we created a system then and there and we started with Tranche One, a gradual buy-in to test the process before proceeding further. We experimented with discounts, interest rates, grants, gifts, and value. In the end, we helped Generation One (G1) and Generation Two (G2) create an opportunity to succeed. After Tranche One, the process moved very quickly.

Fast-forward to early 2014, when Andrew Rosen, Kyle Hill, and David Levy obtained an SBA loan and bought out the founder of Diversified Financial Consultants–completely. 

A Foundation to Build Upon

This successor team acquired a solid practice operated from a small, refurbished Victorian home with just over $150 million in AUM. Now, six years later, this team of next-gen advisors that was deemed incapable of running such a practice has built a strong business with over $560 million in AUM. All of the clients were successfully transitioned to the new, internal ownership team. In essence, this group of next-gen successors brought the practice that they worked for and learned at, into the next century and turned it into a real business.   

“We made the ultimate investment,” says Andrew, one of three partners at the firm. “We invested in ourselves.” The succession plan in this case was accomplished in two steps, or tranches. The first tranche relied on profit-based, seller financing as is common. The second tranche utilized a bank loan to complete the buy-out, de-risk the G1 founder, and to provide an amortization period that would give them time and room to grow. Most plans don’t move quite this fast, but every plan is unique and flexibility is built into every plan we design and implement.

In short order, the successor team built on the strong foundation of a thirty-year old business, retooling as they went. They embraced technology and quickly modernized the CRM system and the financial planning software. They added key employees where necessary and figured out how to do things more efficiently and more effectively. Workweek schedules and vacation schedules were also adjusted to provide lifestyle benefits, retain the key personnel, and to ensure that the clients were well attended to. Very recently, this successor team brought in an outside CEO, recognizing that their business needed to have someone focusing ON the business full time.  

When I asked what they would have done differently, looking back on the series of events, Andrew says, “Not much. Sometimes I wish it had happened a bit sooner, but it worked out well. As younger owners with debt to service, we’re motivated, nimble, and adaptable.” As far as taking on the debt, this group found that to be a very natural part of building and growing a business. Andrew said their business growth should help them fully retire the debt well ahead of schedule.

The Moral of this Story

We often hear founders tell us why their next-generation advisors cannot succeed in taking over ownership; to be fair, they might be right. But founders should understand that a succession plan is a gradual process. The first tranche is a test phase to see if it can work. There is no second tranche unless everyone involved is convinced that the plan is viable based on hard evidence and actual results. Start earlier than you might think–age 50 is a good starting point for G1s–and give the process a chance. If it doesn’t work, you’ll be able to plan more effectively going forward. If it does work, you and your clients will be the primary beneficiaries.

Read more about Diversified Financial's early succession journey in David Grau Sr., JD's book, Succession Planning for Financial Advisors, available on Amazon.