Are you thinking about selling equity in your financial planning business to your senior professional staff?
Here is my Top 10 ways NOT to do it – hopefully this will help you avoid some of the most common pitfalls that practice owners encounter with this process.
The Top 10 – things NOT to do!
- Make vague and unspecific promises to your senior staff that “one day all of this will be yours”.
- Develop selective memory loss when your staff remind you of those promises.
- Don’t give them a firm timeframe for equity ownership. In this way, you can string them along for a few more years whilst you strip out every dollar of profit to fund your lifestyle needs.
- Set them some super-aggressive KPIs or other aspirational performance targets for equity ownership. The challenge will be good for them.
- When they get close to achieving those targets, simply shift the goal posts. They will get over it eventually.
- Whinge and whine about how your senior staff are good technicians but are unable to help you, the “rainmaker”, to grow the business. Why is it that, like leeches, they can only feed off the carcass that you kill? At the same time, ensure that they are given no encouragement or training to get out there and build the practice. No-one gave you a “leg up”, why should they get one?
- Ensure that your own process of slowing down, taking it easy, and playing more golf starts before you have locked in your senior people with equity. After all, you have worked hard and deserve a few years on the “gravy train” before your ownership is diluted.
- Don’t bother getting your senior staff to sign employment contracts with restraint of trade obligations. They’re not worth the paper they are written on.
- With a sense of secrecy verging on the paranoid, jealousy guard from your senior staff the P&L, balance sheet, budgets and other financial information of the business. It’s your business, not theirs. They won’t need to understand any of this stuff until they become shareholders.
- Only let your staff invest once they threaten to leave. At that point, charge them the same high multiple of recurring revenue that you were persuaded to pay in 2006.
You might smile, but many of these Top 10 are pretty close to the truth of how some financial planning business owners think, feel and behave.
With concerning regularity, this leads to senior staff departures and a feeding frenzy for the lawyers with the subsequent nasty letters, legal proceedings, and “carve up” of the client base.
How to do it better
The better approach is, of course, to plan thoroughly and transparently for your exit, and involve your senior people as part of that process. Your planning process needs to start on an emotional level, and will ideally commence a couple of years before you transition.
Some suggestions to help you get started are as follows:
- Seek some corporate structuring advice. It is crucial that you understand, at an early stage, the tax and asset protection ramifications of your succession plan and whether there may be a preferable way to go. One option might be to restructure the business as a first step, before you transition.
- Consider all options. Whilst you may believe that selling equity to your senior team is the best way to go, you should also give thought to other options such as selling the entire business or client register to a third party, merging, or growing the business with a view to exiting for a higher price in a few years’ time. A discussion with a corporate adviser or your dealer group would be a good place to start.
- Give thought to various different models for transitioning to your staff (for example sweat equity, debt funding, vendor terms, etc), workshop the upsides and downsides of each of these models, and form a clear and considered view on your preferred approach before discussing with your staff.
- If your staff do not yet have the skills, experience, business acumen or financial knowledge to take an ownership role in the business, start up-skilling them now so that this will not be such a big “leap” when the time comes.
