Walking a Tightrope
A peaceful firm transition requires striking the perfect balance between the interests of founders and successors.
A peaceful firm transition requires striking a balance between the interests of founders and successors.
With the average age of RIA founders now over 60, they and next-generation advisors are increasingly finding themselves in an awkward tug-of-war and, perilously, on the very tightrope that is supposed to bridge the gap between the generations.
Founders want to realize the economic benefits they’ve earned for a career’s worth of toil. Next-generation successors want the opportunity they have rightfully earned to become owners. Clients want a safety net that assures continuity.
As in the book, “Men Are from Mars, Women Are from Venus,” founders and next-generation successors often speak entirely different languages. They are in different places and stages, have followed different paths to becoming advisors, have different financial needs and capabilities. And, frankly, they have not practiced balancing on the succession tightrope.
Here’s a summary of how I view the typical founder perspective: I started in commission sales working for a large financial institution. I took a big risk to go independent. I put my personal finances and family at risk. In the early days, I did everything, including taking out the trash. I made big sacrifices, worked long hours, and went into debt starting my firm. There was no backstop. I survived as a result of hard work, dedication, a few good decisions, not screwing up too often and gaining the trust of wonderful clients.
Along the way, I went from a sales representative to top advisor to managing a team and a business. It wasn’t easy. I learned most of what made me successful via the school of hard knocks — something the next-generation just does not appreciate. And unlike me, they are not entrepreneurs. Maybe I’ll eventually be ready to transition my business to the next-generation, but, of course, I’ll expect my successors to show me the money.
My payday will reward me for a career of hard work. Selling will allow me to realize my own financial independence, provide generational wealth for my family who sacrificed in my absence, and allow me to be generous to causes I value.”
On the other side of the fence, here’s how I view the typical successor perspective: After getting a business degree [and possibly even an advanced degree], I joined a small RIA before it was successful. I earned a CFP on my own dime. I passed on several lucrative opportunities along the way — offers from headhunters and competitors. I dealt with the drama of working for a small firm and a shoot-fromthe-hip entrepreneur. The promise of eventual ownership kept me loyal. My personal contribution is a significant reason for the firm’s success; the firm would be much smaller were it not for my work. There is no way the founder could have built this, like we did together, on his own. I took excellent care of clients when the founder frequently traveled and lived life large. I professionalized a small practice that otherwise would have floundered. I’ve pondered starting my own firm but
Founders, start early. If internal succession is the goal, allow 10 to 15 years. Otherwise, you may sell your stock for a fraction of what it’s worth.
remained loyal to the firm and the founder. Now it is my time to assume ownership and control the firm. It is only fair. In fact, it’s overdue.
So the question is: How to bridge that gap? The ideal approach would create a scenario that is good for all sides — the founder, successor(s) and clients. And the only way to achieve this is to align interests. Each party needs to understand and empathize with the other parties’ perspective, needs and goals. If either the founder or successor plays to win, all tend to lose and the opportunity to maximize value is lost.
Tips for Gaining Alignment
I’ve learned lessons regarding alignment the hard way. Here are some ideas that might help avoid the tug-of-war matches I’ve had.
• Start early: Most founders start thinking about transitioning equity too late. If internal succession is the goal, start 10 to 15 years before you retire. Otherwise, you may find yourself selling your stock for a fraction it’s worth.
• Appreciate the sacrifice: Founders took risks and contributed a lot to the success of the firm. Successors should empathize in appreciating the founder’s entrepreneurship.
• Be generous: Founders. however, should overpay successors in the form of equity grants or discounts. This will make them loyal and lock them in. If you start early enough, the initial stock they buy can be leveraged to buy you out later.
• Don’t be greedy: Both sides could leave bites on the apple. One example, if successors paid extra for a successful transition, all parties could laugh to the bank.
• You’re not that important: This applies to founders and successors. Just like 80% of people think they are above-average drivers, founders and successors overestimate their respective importance and contributions. It took a founder, and a team, to get the firm where it is today. Respect this reality.
• Consider BATNA: That is, best alternative to a negotiated agreement. What’s the backup plan if the parties fail to agree? Smart founders and successors evaluate each other’s BATNA, don’t overplay their hands and focus on reaching a reasonable outcome for all. The founder-successor tug-of-war is complex, multifaceted and far more dynamic than can be covered in one column. But whether you are a founder or a successor, don’t let your emotions, or years of accumulated scar tissue, get in the way of negotiating an aligned, fair deal that can be beneficial to everyone.