Last time we looked at some do’s and don’ts when it pertains to offering ownership for potential hires and current team members.  This month, we will share the specifics from three, of the many, succession success stories we have observed working with financial planning firms on hiring and integrating new talent.  Below we lay out the details of how several candidates from various backgrounds and possessing a variety of skill sets were able to become owners in their respective firms.

Success story #1 – Female aspiring planner hired out of undergraduate CFP program joins firm with two partners and no other team members, serving about 50 clients and nearly $40MM of AUM.  She started in a support role, with no business development expectations, and accepted low starting salary, but the path to partnership was clear with an estimated date to be 10 years from the start.  In reality, though, the firm grew so quickly, and she was so successful, that the founders offered partnership after 5 years when firm was managing more than $100MM with a team of seven and serving 115 clients. The G2 (second generation owner) had performed all planning analyses and developed into 2^nd chair for a majority of the client relationships, and 1^st chair for a smaller percentage. In addition, she was instrumental in holding the firm together from an operational, client service, and planning standpoint, until they reached critical mass and hired additional support people. As a result, she was able to develop strong bonds with clients that she had led through planning process, and helped transition organization from siloed lifestyle practice generating $300k to $1 million+ in revenue (even though she never had a role in developing new clients herself).

• Deal details: Firm valued ~2x revenue, ~10% equity given to G2 in return for her having accepted lower cash compensation during preceding years.
• Takeaways: Founding owners realized GS contributions over the 5 years were much more valuable than the ~$200k in equity they parted ways with.
  • Non-revenue generating G2 planner can earn ownership.
  • Millennials can see the longer term benefits of sacrificing cash comp in the short term – when the path to upside is clear.

 

Success story #2 – Generation X, female, career-changer joined firm of six with three existing baby boomer generation owners managing more than $120MM for about 100 clients. Her role was to support a senior advisor, which meant taking an initial step back, having come from a corporate environment earning low six figures but starting at her new firm for $50k. In a few quick years, though, she earned the CFP marks and found a niche that helped her successfully bring in new business. Accordingly, she was offered an option to purchase a 10-15% equity stake two years after starting. Today, the Firm is managing almost $300MM for about 150 clients, and this G2 advisor now operates in a COO and advisor capacity.

• Deal details: Firm valued at ~2.5x revenue, equity acquired via 100% seller-financed deal, ~7 year repayment term.
• Takeaways:
  • New hire was not pigeonholed into support role, and instead could flourish by finding a different seat on the bus.
  • Some career changers will take significant reduction in compensation to pursue a more rewarding career, when it has the opportunity to buy into something long term.

 

Success story #3 -  Generation X male, CFP with limited experience, no book of business, joining established firm of 10 managing $200MM. Hired as a support advisor with a strong aversion to business development and no expectations of ownership. Developed into top technical planner within firm and was offered ownership within five years, but turned it down due to uncertainty of long term commitment to firm because founders were unwilling to share in management decisions and had no clear path to retirement. After a few years a clearer vision for the long-term trajectory of the firm was established, and G2 purchased a $300,000 equity stake.

• Deal details: Firm valued at 2.2x revenue, equity acquired with 20% down and an 80% seller-financed note with a 5-year repayment term.
• Takeaways:
  • Don’t assume interest in your firm and your equity offer acceptance as a fait accompli.
  • Team members with superior technical abilities can become owners even if they do not manage relationships and/or generate new clients. There are many ways to build enterprise value.

 

It is worth noting that even though these G2 owners all followed a different path, their contribution to the employing organization was substantial. However, not everyone is capable of this, nor even desires it. Here is a list of characteristics that the founders commonly cited when describing these successful G2 candidates:

• Eagerly took on additional tasks whenever needed, and learned quickly.
• Quickly began taking lead on small sections of the planning process, and then eventually the whole the plan/meeting. Eventually started covering some smaller client meetings without either partner (protecting partners' time).
• Made effort to continuously search for opportunities for improvement.
• Pursued education and completed professional designations outside of work hours.
• Stayed late and came in early, particularly during high-growth periods.
• Genuinely cared for clients and their success.
• Unwavering fiduciary focus.
• Took the lead role in mentoring new interns, part-time workers, and new employees.
• Took an active role in strategic planning and assumed a perspective of what's best for the firm (as opposed to what's best for oneself).
• Always eager to take on more responsibility and reduce pressure/workload of partners whenever possible, in turn, allowing for faster growth.
• Made themselves indispensable.

 

It is unrealistic to expect everyone in your firm to exhibit these characteristics, so these should be predictive indicators into which one of your team members is ownership material. Remember that there is no one size fits all when it comes to equity ownership deal structures, succession planning, and hiring in general. We hope that you will consider these scenarios as you contemplate how a new owner might integrate into your organization.