Walk­ing a Tightrope

A peace­ful firm tran­si­tion re­quires strik­ing the per­fect bal­ance between the in­ter­ests of founders and suc­ces­sors.

Financial Planning - - Contents - BY BRENT BRODESKI

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.

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