Due Diligence and Documentation Grau, David, Sr
Buying, Selling, and Valuing Financial Practices,
2016, 2016-08-10
Book Chapter
This chapter details the documentation and due diligence required during the merger and acquisition (M&A) process in the financial services advisory industry. Sole proprietorships are limited to ...selling assets, while S corporations and limited liability corporations (LLCs) can choose between asset‐based and stock‐based sales. Most exit plans and external transactions are asset sales and most succession plans and internal transactions are stock sales. The documentation package to support an exit plan includes a valuation, a formal purchase and sale agreement that includes a tax allocation strategy, a nondisclosure/confidentiality agreement, a letter of intent (LOI), financing components, post‐closing and noncompete agreements, security and collateralization, and the bill of sale. Due diligence is the investigation, analysis, and review of an acquisition opportunity before drafting a purchase agreement. To succeed during this process, assemble the right team, including a qualified valuation analyst, a tax professional, a lawyer, and someone familiar with the applicable regulatory structure.
This chapter discusses the importance of having an internal succession plan, explaining various useful steps that advisors should keep in mind. The first step is to clearly define the skills needed ...to run the business in the context of your long‐term goals and vision for the firm. For example, it requires a different skill set to nurture a business than it does to increase growth or reinvent the firm. The chapter also recommends developing a business succession plan that anticipates to a degree what the firm will become along with choosing a successor. Advisors should determine the goals they want to drive and reward within their practice. Advisors should include qualitative goals that help ensure the future success of the firm and prepare key employees for ownership. Once advisors have transitioned ownership shares to a junior partner, they should consider establishing a cross‐purchase agreement among partners. This is a pact saying that you and your co‐owners agree to buy one another's business interests under the terms and conditions set forth in the agreement.
A natural frame for financial advisors is to assure clients that “we'll always be there for you,” but advisors who make such promises but do not create an adequate succession plan for job coverage in ...case of accident, illness, retirement, or death are essentially lying to their clients. A common succession arrangement is a buy/sell agreement with another advisor, who agrees to take over the business once the first advisor retires. However, such arrangements are quickly rendered unworkable when both businesses grow and change after the deal is first struck. Further, the transition for clients from one advisor to another is often abrupt and upsetting. A better approach is to build a multigenerational team of advisors to work with clients for the duration of the financial advising relationship. When one advisor transitions away from the business, another familiar face is already there to take care of the clients, as promised.
Succession Cunningham, Lawrence A
Berkshire Beyond Buffett,
10/2014
Book Chapter
This chapter considers Berkshire’s future beyond Buffett, a question that has nagged the company’s constituents for two decades. The concern was that the fate of the man and the company he built were ...one. With Buffett’s demise went Berkshire. But Buffett has institutionalized Berkshire’s attitudes and practices so that it is poised to endure long after his departure. Buffett and the Berkshire board have formalized a succession plan. As updated in 2006, the plan prescribes splitting Buffett’s job in two: management (a chief executive officer) and investment (one or more investment officers). Berkshire’s succession plan also addresses ownership, as Buffett has been Berkshire’s controlling shareholder since 1965. Buffett most recently held 34 percent of Berkshire’s voting power and 21 percent of its economic interest, always representing 99 percent of his net worth. He has been slowly reducing his stake by planned annual transfers to charitable foundations, a process that will continue for many years after his death.
Getting it Right
The Destructive Power of Family Wealth,
10/2016
Book Chapter
Wealth owners often worry about the cost of putting the right succession plan in place, and of regular health checks on the plan. Every wealth‐owning family has, in effect, a “family office” one or ...more people who handle things in and around the assets of the wealth owner. For wealth owners, educating their children to understand what they need to know about wealth and marriage, and the inevitable risks, is very important. Wealth management is a big business, but a changing and chaotic one, where the players of today may well not be the players of tomorrow. Getting it right, and aligning with the interests of wealth owners, means that there needs to be an understanding that families are about the long term and about relationships. The typical private bank today focuses on asset management, which is where they think they make their money.
The Succession Conundrum Grau, David, Sr
Succession Planning for Financial Advisors,
2014, 2014-06-30
Book Chapter
This chapter defines what a succession plan actually is, and examines why the independent financial services industry is struggling with this concept. Constructed as a one‐generational practice ...model, today's independent advisor provides advice and guidance that are limited to the length of the advisor's individual career, rather than tailoring that advice to the length of a client's life and the client's planning or wealth management horizon. This chapter explores the steps the industry has taken to arrive at this point, and the significant benefits for selecting a different path going forward—one tasked with building enduring and transferable business models.
The Basics You Need to Know Grau, David, Sr
Buying, Selling, and Valuing Financial Practices,
2016, 2016-08-10
Book Chapter
This chapter establishes a foundation for independent financial advisors to sell their business for maximum value and at optimum tax rates, and/or to complete an acquisition on the best possible ...terms, with minimum risk, writing off the entire purchase price over time. In this respect, buyers and sellers do not have disparate goals; a win‐win‐win strategy must be the ultimate goal for the buyer and seller. In doing so, the financial industry and, most importantly, the client base will also emerge as winners through the transition process. This chapter proposes an approach to valuation based on ownership structure and purpose, using clear definitions of job/book, practice, business, and firm to discuss exit strategies and succession planning. The ultimate goals are to protect the enterprise and its client base, plan for transition of leadership, and realize value.
This chapter discusses an important question for boards: Does the board have a succession plan for the board itself? To set this process in place, the chapter offers a comprehensive way for boards to ...keep succession a key part of their process, along with a useful succession planning grid that tracks each board member's potential retirement for the upcoming ten years. The chapter also discusses “single‐issue” board members and how to best utilize their expertise on a board. Board chemistry and the ability to work as a team is a critical factor in board productivity, and it discusses ways to ensure a collegial and cooperative mind‐set on a board. Finally, the chapter discusses the selection process for nominating and searching for new board members. Learning to work with other board members, let alone building a productive chemistry among other directors, takes time.
This case was written by Alan Carsrud and Malin Brännback. It looks at the issues related to a large Catalan (Spanish) firm whose food industry is changing rapidly and who are faced with the issues ...of “cousin consortium” where there are family involved in the business and those whose only connection are dividend check. The firm and the individuals in it have been de-identified.
Every succession plan is unique; no two are exactly alike. While most plans have common assembly components, plans are tailored to every founding or senior advisor's unique goals and requirements, ...and center on that person's need (or sometimes the need of a group of founding or senior owners) for a lifetime of income and benefits, taking into account age(s), health, time frame, business skills, workweek preferences, retirement preferences, and staffing levels and strengths, among other things. This chapter compares and contrasts a formal succession plan to an exit strategy, a replacement strategy, or attrition. The most popular and most effective strategies are examined, as well as strategies that don't tend to work well in this industry (phantom stock plans, ESOPs, granting or gifting strategies).
