Sell and Stay® - the Gradual Exit Plan

The Sell and Stay® path is an often overlooked, gradual exit option hidden amongst the other options of internal succession, mergers, and external sales. For owners who need to–or want to–work towards an exit but are not yet ready to leave the business entirely, Sell and Stay® is an excellent solution. A Sell and Stay® allows an owner to realize a gradual exit that retains value, income, and a more ideal day-to-day.

This type of transaction falls somewhere between a merger and an outright sale. It involves an owner selling his or her practice, but instead of walking away once the sale is complete, they stay on either as a minority owner, an employee, or an independent contractor earning wages for work performed, and, potentially, retaining some percentage of equity.

This path is highly customizable as long as the arrangement is accepted by all M&A partners. It can solve for a variety of situations advisor-owners might find themselves in. The following are some of the most common scenarios that are a best fit for a Sell and Stay transition.

This allows an advisor to continue to work with clients and earn an income without the obligations of ownership and day-to-day operations.

This path can be a good option for single-owner practices where the advisor wants (or needs) to pull back from the practice to some degree. Typically, advisors who find themselves in this situation often suffer from client attrition and end up either selling their practice earlier than they’d like or working to exhaustion, almost always resulting in a negative impact on the practice. A Sell and Stay® can offer a better way.

Common Sell and Stay®  Scenarios

Situation 1: Love the Clients but Dislike the Day-to-Day Obligations of Ownership

Owning and running a financial practice can be satisfying and lucrative, but it requires commitments to both the clients and operational aspects of the practice (e.g., compliance, payroll, personnel management). While some advisors thrive on wearing many hats, others would much rather spend more of their day working directly with clients and less time bogged down by the day-to-day business operations.

In this scenario, an owner may sell complete ownership to an M&A partner and stay on as an employee only. This allows you to continue earning an income doing what you love, while receiving compensation for the investment you’ve made building your business. Choosing a Sell and Stay® path can be a breath of fresh air in an advisor’s career, but you must be ready to let go of your “owner mindset” and support someone else as they take ownership of the future of the business.

Situation 2: As an Alternative to Internal Succession

More and more advisors are taking the gradual route to retirement, slowing down a little at a time. Some have succession or merger plans in place, but not all advisors have the ideal components of a fully internal transition available. Here, a Sell & Stay allows owners leverage a third-party sale to enable some of the benefits often reserved for internal succession.

For a single owner of a successful advisory business without any successors–or successor prospects–on your team, a Sell and Stay can help you enjoy the benefit of a gradual exit without winding down the business. In this situation, you would sell the majority of equity to a third-party M&A partner at the outset with the plan to sell the rest over time. This allows you to receive full value of your business and ensure its future while still exiting on your desire terms.

This strategy might also be attractive to businesses with existing successors. We have seen prosperous businesses with successor teams hit a plateau where they are ready to start their exit transition, but their value has become too great for their successor team to buy them out fully on the desired timeline. In this case, selling to a third-party partner with some retained equity allows you, the majority owner, to have a gradual exit while preserving the succession path of your ownership team within the new entity. Their ownership share may be a smaller percentage, but the value of the equity has increased with the acquisition.

Situation 3: Transitioning into an “Encore Career”

Many advisor/owners like you are natural entrepreneurs. It’s that entrepreneurial spirit that allowed you to work tirelessly for many years to build a successful practice. This spirit also has the tendency to plant seeds of other adventures and endeavors that are hard to ignore. Some advisors have reached a point in their career where they are ready for a new chapter, which, for some, includes a new business venture.

As you already know, starting a business from scratch takes capital, time, and dedication. For those reasons, it may be difficult to simply make the switch. A Sell and Stay® in this situation could allow you to invest the initial money from the sale of your practice to jumpstart your new one while staying on during the transition period and earning steady income as your new business grows.

Situation 4: Ongoing/Chronic Health Issues (For You or a Loved One)

Most advisors account for permanent or prolonged periods of illness or injury in their continuity plans. In reality, however, some health issues can cause brief but debilitating episodes that come and go. For a sole proprietor, managing a chronic condition—for themselves or a loved one—can prevent them from devoting the necessary time to client relationships, asset management, and the operation of their practice.

You can leverage a Sell and Stay® transaction here to remain in a career that you enjoy, continue to earn an income, and reduce any stress you may have about periodically taking time away from work to focus on health issues. The key in this situation is creating an independent contractor or employment agreement with your buyer that accounts for the flexibility you need.

Shifting Your Mindset

Understand that in order to craft a Sell and Stay® agreement that benefits all parties, as a seller you are also committing to a mindset shift. In scenarios where complete equity stake is sold and the exiting owner remains as an employee of the business, there must be willingness to step away from that ownership mentality and step back from the control and decision making of the business. This change is difficult for some advisors to accommodate.

Even as a seller who is retaining a percentage of equity, you’re now sharing control with a new team of owners with their own decision-making processes and communication styles. A Sell and Stay of this nature requires mindset tweaks to accommodate the new make up of the firm, its ownership, and your role within it.

How Sell and Stay® Works

A Sell and Stay® path is in the M&A family, but it is neither a merger nor an outright sale that you get to walk away from after the typical one-year consulting period. It is a combining of resource, expertise, and, in some cases, control.

FP Transitions’ Sell and Stay® strategy involves performing a formal valuation on your practice and determining what your desired exit will look like in terms of timeline, employment level, and ownership. We search for the right buyer using the same tools and expertise as that of a traditional buyer search–either on the Open Market or through a private survey. We offer a non-advocacy approach during the negotiation and documentation processes to ensure the success of the deal as a whole, as well as for all partners of the transaction.

During a Sell and Stay® process, all partners must be willing to work together for a longer period of time than is required in a traditional acquisition. The seller must be comfortable with whom they are relinquishing controlling interest in the practice he or she spent years creating. Transaction priorities and goals for future growth must be aligned. Both sides should be clear about what they’re hoping to achieve and any timelines for employment or retirement. For those reasons, finding the right fit is of utmost importance. There must be a mutual trust to ensure that there will not be any “power struggles” or ego issues as the practice continues to evolve under the new ownership structure.

The FP Transitions buyer search methodology is rooted in the idea that by finding the perfect match, the transaction will be more successful. Our Transactions Team spends time with each and every seller to learn about their unique practice, investment philosophies, and goals. Using what we’ve learned, we can help find the most qualified and best match within a large pool of interested buyers.

How Does Sell and Stay® Work for the Buyer?

A Sell and Stay® strategy offers many benefits to a seller and can create a unique relationship between a buyer and a seller without the former owner’s full exit. However, there are many benefits to a buyer as well.

The most significant benefits of Sell and Stay® are scale, institutional knowledge, and client retention. By retaining the former ownership team, the acquiring firm has access to a skilled team in addition to new clients. This can be especially beneficial for a buyer who is not ready to build up the infrastructure immediately after closing. The new business can tap into the previous team’s expert knowledge of not only the industry, but the unique practice and clients, which helps smooth the transition and operations. This allows client retention is increased and trust preserved post-transaction, protecting value and cash flow.

Not all advisors looking for an acquisition are open to working with a seller in this unique situation. Potential buyers who are open to it will find themselves with more acquisition opportunities and reduced competition.

As you look ahead to the end of your career and consider your options, keep an open mind and you just might find the perfect path for the future of your business as well as your own.

Learn more about your future Sell and Stay® options by contacting an FP Transitions consultant today.