TRANSITION TALK

You took the risk to become independent, hung out the shingle, and spent a myriad of sleepless nights worrying about how to build a business that paid the mortgage. A few bumpy months led to a smoother ride over the years; you now have a strong entity and responsibility over the lives of your clients and employees. As you stabilize, concern shifts from survival to how to perpetuate something that has become bigger than you. Your focus becomes generating growth that secures your future, as well as that of those onboard.

With Growth Comes Challenges

Floyd Green, Founding Partner at Cornerstone Wealth Management in Raleigh, North Carolina faced one of the biggest challenges of his life. Unexpected circumstances forced Floyd to quickly reduce his work hours from 45 to 20 hours a week. Too young to retire and with a staff that had “come to expect a paycheck,” he had to consider how to ensure his business not only survived, but thrived, without him as the sole growth engine.

Thanks to existing relationships, recruiting advisors who shared his vision, values, and passion was the first hurdle cleared; deciding how to effectively incorporate them into the ownership structure would prove more difficult. The issue was not only one of compensation, but also cultivating the motivation and mentality required to be an owner amongst Floyd’s key producers. He wanted to encourage ownership of outcome, a decision-making mindset that considers the future impact on the business.

Last week our president and founder, David Grau Sr., JD, joined BMO Global Asset Management’s Better Conversations. Better Outcomes. Podcast to discuss buying or selling financial advisory practices. The 30-minute podcast explores:

• How to prepare to buy or sell,
• The current acquisition marketplace,
• How to be a qualified buyer,
• How to assemble a team to help you through the process,
• And what success looks like from both buyer and seller perspectives. 

Click here to listen to the podcast.

Podcast is also available through iTunes and Google Play.

For many RIA founders, strategic planning—including succession or exit strategies—is not a fun, “can’t wait to get started” activity. I’ve walked in those shoes.

It felt easier, for awhile, to just go with the flow of how the business was naturally unfolding. After all, our asset levels and revenues were up! Dealing with the more urgent, day-to-day tasks filled my days so it was easy to be the queen of avoidance and procrastination until circumstances were such that I—we—had to act.

We Were Pushed

For the record, I hate being pushed! Most people do.

But we were literally pushed to take succession planning action by both external and internal events in our business. In our situation, there was unexpected staff turnover, a partner’s illness and another’s untimely retirement.

A push could be any number of things that are happening to (and within) your business. A push could also be personal: your health, your marriage, your family. Whatever the circumstance or event, you feel forced to do something when you aren’t ready to take action, or it’s not what you thought you wanted.

Pulled by Vision

In an earlier post, “Mirror-Mirror”, I spoke of the importance of self-reflection and truly knowing what your own personal “win” is relative to your business as well as to the next chapter of your life and career.

For me, clarity around my own vision for our business and my own next chapter (aka my WIN-WIN) was key to experiencing a major shift in perspective.

My excitement about what I wanted next, truly pulled me forward. The feeling of being pulled to the next chapter actually helped to erase the worry and anxiety that had me resisting the process of negotiation and second guessing the sale of our business.

DENVER - The Financial Planning Association® (FPA®) is pleased to announce that FP Transitions is now FPA’s “Official Partner of the Next Generation of Financial Planners” in an effort to support young professionals on their career journeys in the financial planning profession.

This new partnership will leverage FP Transitions’ experience and thought leadership for the benefit of young professionals and financial planning firms looking to build plans for the eventual transition of firm ownership. With thousands of young Certified Financial Planner™ (CFP®) professionals among its member base and a vibrant NexGen community, there is an opportunity to help support members and firms that desire to establish an effective, efficient succession plan. 

“We are pleased to have FP Transitions join FPA as a key partner in supporting our members and their desire for a seamless transition of their firms to the next generation of firm owners,” says FPA CEO/Executive Director Lauren M. Schadle, CAE. “Their support and contributions will directly benefit our members by providing the necessary knowledge and resources to help our young members become firm owners.”

FP Transitions has developed strategies to solve the succession problem for owners of financial planning practices; the next step in supporting the founders cultivating the next generation.

“We’ve worked with RIAs expanding ownership to 20 new partners, father-daughter teams, and everything in between,” says Brad Bueermann, CEO of FP Transitions. “We designed the strategies and solved the financing issue, now the last thing is building the talent. Over two-thirds of our succession clients have executed their plan, transforming over 700 next generation planners into business owners. The greatest challenge for owners of successful financial planning firms is finding qualified next generation leadership. We want to make sure professionals entering the industry understand this opportunity and are prepared to act on it. Partnering with FPA was a natural decision to deliver that message.”

Introducing our new web series: Roundtable Talks. We’ll feature FP experts–along with some guests–sharing their opinions on what’s going on in the financial services industry.

Real experts, real opinions, no script.

Our first episode centers around the DOL Fiduciary Rule, SEC Business Continuity Amendments, & other recent regulatory concerns. Marcus Hagood and Douglas Kreft share their thoughts on the regulations themselves as well as the potential impact on the industry. Watch the preview below.

This series is an exclusive benefit to our EMS™ members. Not an EMS™ Member? Click here to learn more about the program and its benefits, including annual Valuation, Continuity, and Benchmarking Reports plus a library of resources only available as part of the Equity Management Solutions®.

What do you want to hear about? Click here to submit topic suggestions for future Roundtable Talks, blogs and resources to our Content and Resource Team.

The following sections are excerpted from the book Buying, Selling, and Valuing Financial Practices by FP Transitions president and founder David Grau Sr., JD.

Let's highlight the importance of having a strong transition team in your corner as either a buyer or a seller. In fact, it's important to have a comprehensive team when jumping into most business evolutions, including (but not limited to) entity creation, compensation restructuring, and internal succession planning.

Assembling and Managing Your Team

Advisors who want to buy or sell a business will need some help to do the job right. A typical team for this purpose will include:

- A qualified valuation analyst

- A tax professional

- A lawyer

- Someone familiar with your regulatory structure and your IBD/custodian’s rules & procedures

- A qualified and impartial intermediary

To be clear, this list applies to both buyers and sellers. Both parties typically need their own team, with some slight overlap.

Probably not. 

When one person’s misstep in using a common industry practice gets reported in the press or a blog, a reader may worry if he or she has also strayed. Some have this response to the recent Tax Court case Fleischer v. Commissioner. The many differing opinions and commentaries on that case have advisors asking how this ruling affects their existing entity structures and tax reporting.

Many of the articles on Fleischer either oversimplify the court’s ruling, misinterpret the court’s decision to suggest an advisor with a business entity (either a corporation or a limited liability company) must abandon the entity, or miss the point entirely. The danger in those messages is their failure to understand the details of the Fleischer case, and not emphasizing that in the proper execution of an integrated plan – one that accommodates corporate law, tax law, and FINRA regulations – there would have been a different outcome.

From the Fleischer case, understand this: You won’t have a problem if you do things right. But setting up an entity in a highly regulated industry and operating it correctly is intricate. You cannot do it on LegalZoom or with an attorney or accountant unfamiliar with FINRA regulations. The Fleischer decision does not change the fact that entities are worthwhile for a wide variety of reasons.

The Fleischer Case

In the Fleischer case, the court focused on who controls the earning of the income, citing the two-part test recognized in the 1982 case of Johnson v. Commissioner. In that case, Charles Johnson played for the NBA’s San Francisco (now Golden State) Warriors in the 1970’s. He formed a Panamanian corporation to receive his income from the team. Citing additional precedent, the Johnson court held that the corporation did not meaningfully control Mr. Johnson’s services as a basketball player, nor did the Warriors have notice that its player was contractually affiliated with the entity. For those reasons, passing the player’s salary through the foreign corporation did not shelter Mr. Johnson from employment tax. The Johnson court stated two tests, both of which must be met:

If you’ve been reading my recent posts, you know I consider myself a “win-win” gal.  You’ve read about how the self-discovery of my real win—not owning the business—was key to not only successfully exiting my business, but also launching what I now call “my next chapter.”  

Up to this point, I was primarily speaking of the founder’s win, and that of a buyer. In my research and work with clients who are firm founders, I have noticed that their perspectives on their own personal transition strategies often fall into two camps. That is, some are asleep at the wheel, relying on autopilot; and others are convinced they’ve already got a plan ready to go whenever they are.

In recent months, I’ve come to recognize there is one more win to add to the mix. This realization has come about as I met with a growing number of smart, hard-working “junior” professionals who are frustrated by a lack of clear strategic vision for the firm and their role in it. Even those who are designated successors, described a lack of transparency from the founders regarding the firm’s financial picture, vision and strategy.

It’s been a while since “keeping it in the family,” assumed your literal family. Yet, many advisors approach succession with pride when they have the opportunity to pass their advisory legacy to a son, daughter, niece, cousin, or other relative.

Choosing a successor who is a part of your blood family doesn’t mean the succession process becomes 10 times easier; it doesn’t mean you just hand over the keys one day with a, “See ya later, kid. Don’t burn the place down.” It requires the same careful planning and communication to ensure ownership of the business ends up in the right hands.

Tom and Paul Morrone of US Wealth Management in North Haven, Connecticut have always been a close father / son unit, but that didn’t automatically mean that Paul would step into his father’s shoes one day. Instead, he forged his own path before recognizing the business and the life his father had built was exactly what he was striving for. And still, ownership wasn’t just handed to him.

Tom insisted that Paul EARN ownership, and together they sought help for the succession process. It wasn’t a matter of trust. It was a matter of making sure they hadn’t missed any detail, and that they had the most beneficial path for both of them.

Below, watch the Morrones put their journey in their own words.