Retiring

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May 10, 2008 12:00 pm

What typically happens when an Indy FA retires?  Can you sell your book, your entire company, or do something else to set up cash flow from the business for many years after retiring? 

Can someone give me an examples of how a person with a $100,000,000 book might handle everything when he/she decides to retire? 


I just started thinking about that this morning and thought you all might know what's typically done in that situation.  Thanks! 
May 10, 2008 12:26 pm

I have a friend who just bought an 80 mil book.  He paid a small upfront (small considering the assets) and the previous FA agreed to stay on as an "advisor" for a year.  They worked out some type of deal where the previous FA gets 10% of the total net from the clients for 5 years then a smaller percentage until some type of number is reached where the new FA will buy him out entirely for a set figure.  They started this about 8 months ago and it seems to be working fairly well, but who knows.  They seem to be seamlessly transitioning though and have lost very few clients.


I think typically it is just a straight buyout with a set percentage of the assets.  I have heard, although I have no actual data, that the new FA typically loses a fairly large percentage of the clients in that situation.
May 11, 2008 12:20 am

So it would by $X up front, and then say he get's that 10% for 5 years, and then 5% for the next 5 years.  If the purchasing FA is producing $600k/year the retiring FA would get:


Year 1-5:    $60k
Year 6-10:  $30k

Would that be accurate?  About how much is the initial payment in this situation?
 
May 11, 2008 8:52 am

Keep in mind, every situation is different. Some will buy out 100% upfront, some will defer all for x years. But ypically there is at least some holdback to ensure e smooth transition, and to confirm that the assets are what they are said to be. Also, if the selling advisor stays on, keeping a holdback ensures his continued participation.



But like any business, every transaction is structured differently. Also keep in mind, when a large firm is being bought by another large firm (as opposed to one "solo" buying the book of another), more commonly the firm and it's employees stay intact. This ensures continuity of the business and retainage of the clients. And often the sellers are not looking to "retire" just yet. They are looking for a seamless way to transition (sell) their business equity before they are forced to liquidate (due to death, incapacity, etc.).



But per your example, Spice, there is no set formula. One other thing - it will depend on the financial wherewithal of the buyer to come up with funds. That is also why there may be an extended buyout.



There are a few firms out there that specialize in this. They could provide more guidance on "typical" formulas for an extended financed buyout.

May 12, 2008 10:27 pm
Broker24:

Keep in mind, every situation is different. Some will buy out 100% upfront, some will defer all for x years. But ypically there is at least some holdback to ensure e smooth transition, and to confirm that the assets are what they are said to be. Also, if the selling advisor stays on, keeping a holdback ensures his continued participation.

But like any business, every transaction is structured differently. Also keep in mind, when a large firm is being bought by another large firm (as opposed to one "solo" buying the book of another), more commonly the firm and it's employees stay intact. This ensures continuity of the business and retainage of the clients. And often the sellers are not looking to "retire" just yet. They are looking for a seamless way to transition (sell) their business equity before they are forced to liquidate (due to death, incapacity, etc.).

But per your example, Spice, there is no set formula. One other thing - it will depend on the financial wherewithal of the buyer to come up with funds. That is also why there may be an extended buyout.

There are a few firms out there that specialize in this. They could provide more guidance on "typical" formulas for an extended financed buyout.

 
do you have any information on the firms that specialize in this? I know that every deal is different but is there a "going rate" for buyouts?
 
Would paying 30% of production to the other FA a year for 3 years be excessive?
May 12, 2008 10:36 pm

In the deals I have seen, 30%/yr for 3 years is obscenely (sp?) low.  From what I have witnessed, transactional books are sold for an upfront fee, while well annuitized books are sold over time.  My firm will value the book to give you a starting point in negotiations and will often fund upfront purchases with 0% loans.  Buyouts over time is simply a matter of peeling off production to the retiring broker.

May 13, 2008 7:30 am
Primo:

Buyouts over time is simply a matter of peeling off production to the retiring broker.

 
Thanks for the info. This is exactly what I am thinking of but what % have you seen with your firm.
 
If 30% is to low, what is the going rate?
Thanks
May 13, 2008 10:55 am

thanks ice i just wanted to get an idea so keeping it around 1.5x's of gross is a reasonable amount.

May 13, 2008 11:36 am

How would you be taxed on that?  Is it basically the same as selling a car or a boat, or is there some other area it falls into?

May 13, 2008 1:36 pm

being a former accountant i thought about the same thing.

 
If it was a payout over time, the purchaser could have it act as if the retiring broker was still employed as it would be under a split number.
 
A lump sum could operate the same way with if the company paying out the retiring partner and the remaining broker repaying the firm out of the gross plus interest if any.
 
Just ideas...dont know the reality of it.
May 15, 2008 2:27 pm

Do you have to be an Indy to sell your book?  I can't imagine EDJ taking it to well when you try to sell "their customers" even if it's to another EDJ FA.  Is that accurate?  Are there companies that are completely fine with this, or does it have to be done as an Indy?

May 15, 2008 4:27 pm

This is true at Jones.  There is a 3-4 year retirement succession plan.  You receive a % of the gross for up to 3 years (70/30, 50/50, 30/70), then you get a "consultant" fee for the 4th year (like 15%?).  You can pretty much work the hours you see as appropriate (they say work based on the % you receive, so theoretically you work 1/2 as much in year 2, 30% in year 3, and really not at all in year 4, but I have heard you pretty much do whatever you need to just to transition the book, then just show up to collect your paycheck and benefits).  If you have a 75mm book, you might not need to work too much after year 1.  If you have a 200mm book, it might take some time.  You also get that % of all the gross that the new advisor builds on their own in those years (the new advisor, who must have 3 years with the firm already, keeps 100% of whatever they had in their previous office).  Not a bad deal.  Not the best out there for non-indy firms, but not the worst either.

May 27, 2008 3:02 pm

What are some of the firms that facilitate the buying/selling of a book from broker to broker?  If I wanted to buy a book where would I start looking?

May 27, 2008 3:40 pm

Question.  Which person has a more respectable business?  The indy guy who buys a $50 mil book or the EDJ guy who takes over a $50 mil book? 

May 27, 2008 4:46 pm

I actually know several wirehouse guys that took over very large books from retiring vets.  It seems to have become more the norm than the exception.  With the advent of teams in our business, there is soon to be no such thing as starting from "scratch", or building your own book.  All my wirehouse friends started on teams, so "startup" capital (those first few years), were not as critical for them.  They are handed many, many smaller accounts ("smaller" being under 500K in a few cases). 

May 27, 2008 5:13 pm
Spaceman Spiff:

Question.  Which person has a more respectable business?  The indy guy who buys a $50 mil book or the EDJ guy who takes over a $50 mil book? 

At least the guy who bought the book didn't start his business based on charity/welfare...

May 27, 2008 5:15 pm
FuturesBroker:

What are some of the firms that facilitate the buying/selling of a book from broker to broker?  If I wanted to buy a book where would I start looking?

 
Here's one option...
 
http://www.fptransitions.com/