When parents transition their businesses to grown chil- dren, family events can get
tense. So too do the business dynamics,
especially if non-family employees are
left behind upon the older generation’s
departure. Adding to this, the rising
valuations of advisory practices make it
almost impossible for people to buy in,
let alone buy out the owner.
A well-reported transaction illuminates this difficulty. In the deal, a West
Coast financial advisor set up the transition of his practice to his son and another colleague. The terms of the “sale” are
unusual if not innovative, especially in
how the financing was structured.
According to news reports, the father
has turned over all client relationships
to his two successors, and is winding
down his involvement with the business.
In return, his son and the other advisor
will pay him 50% of the total fees generated for the next 20 years.
To ensure I evaluated this transaction
fairly, I asked a group of my colleagues
who specialize in practice management
at BNY Mellon’s Pershing for input.
These four — Lisa Crafford, Tom Kindle,
Barbara Novak and Adam Verchinski —
have worked with hundreds of advisory
firms on management and succession
issues, and bring a balanced and informed
perspective to the discussion.
While none of us is privy to the
unpublished details, the news articles
provided enough facts from which to
draw assumptions. As an example, the
practice manages just over 300 client
relationships and roughly $400 million
of assets, and not one of these clients has
left because of the transition. That level
of loyalty and belief that the founder is
acting in their best interest is encouraging, and common among practices
where an advisor has built deep relationships over decades.
Using the published numbers, we
made some rough assumptions: Average
fees of 100 basis points. Annual revenue
of $4 million. Average client aged 60,
about the same age as the transitioning
founder. Each advisor will be managing
just over 150 client relationships, which is
two to three times greater than the average advisor, according to recent studies.
Using data from financial performance benchmarking studies of advisory firms, which I have been involved
with since the early 1990s, we also made
some rough assumptions about the economics of the practice by comparing this
The Parenthood Trap
Business succession brings lots of baggage when the kids are involved.
FORMULAS FOR SUCCESS
By Mark Tibergien
Selling a practice
with an aging client
base is much like
selling a depreciating
asset. [Don’t] buy
was declining in
value, but rather
use leverage for
something that is
increasing in value.
Revenue 4,000,000 100
Direct Expense 1,600,000 40
Gross Profit 2,400,000 60
Overhead Expense 1,400,000 35
Operating Profit 1,000,000 25
Note: Revenue is total fees generated from clients; Direct Expense is fair compensation to the professional
staff; Gross Profit is what’s left after paying professional compensation to cover overhead and produce an
operating profit; Overhead Expense includes all other expenses such as rent, utilities, administrative staff,
marketing, compliance, etc. Operating Profit is what remains to be retained as earnings in the business or
distributed to shareholders or given to team members as bonuses.