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Practice Planning

Inside a Successful Succession

The key ingredients for a smooth transition? Planning and patience.

Thomas “Tif” Joyce, a solo advisor and owner of Sonoma County Wealth Advisors, started thinking about retirement in 2010. He wanted to extract the financial value of the practice, of course, but among all the options to do that, there was one non-negotiable: Nothing could interrupt the lives of his clients or his clients’ children.

“While we do have some wealthy people, mostly we have regular folks who did everything the hard way and were patient,” Joyce, now 62, says. His average client has been with him 10 years, is over 65 and has about $1 million in assets.

Few selling advisors simply hand over the keys to the business, cash the check and walk away. Many attempts to monetize a practice at the tail end of a career go belly up. Joyce’s experience shows how patience and planning are vital to extracting the full value of even a relatively small firm.

The Game Plan

The first step was going to David Ryan of Upton Financial Group, an advisory brokerage firm, to set up a plan of attack. On Ryan’s advice, Joyce kicked off the process by getting a valuation on his business: 2.3 times revenue.

Joyce then sent a confidential letter to advisors within 50 miles of his Santa Rosa office. That’s when the clock starts ticking, said Ryan. “Everyone talks, so you’ve got to go quick.”  

To all who signaled interest, Ryan sent a nondisclosure agreement followed by detailed information about the firm and its clients. Of the approximately 20 advisors approached, all came back with offers. “Everyone wants to buy… it’s hard to build from scratch,” Ryan says.

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The Successor

Joyce put each through a filter: He wanted someone younger, of course, but not too young. “I didn’t want to train them because there’s too much that could go wrong.” He wanted someone with roots in the area, a focus on financial planning over brokerage sales and fluent in the new technology available to advisors and clients. “We needed to embrace the tools of the modern age and I wasn’t getting it done,” Joyce says.

One of those advisors kicking the tires was Ken Weise, a fellow LPL advisor who was 15 years younger, had a practice about half the size of Joyce’s and had integrated Riskalyze and Red Tail into his workflow.

“I wasn’t chomping at the bit,” Weise says. “Tif had a much bigger practice. It was a little scary. But I drilled a little deeper… The value I could bring was very good and the personality fit was right.”

The Money

Half of all deals fall apart at the letter-of-intent phase, Ryan says, usually because of financing.

“Some of the numbers we were offered were great, but then we asked how they were going to pay for it,” Ryan says.

Joyce and Weise decided on a “sell-and-stay” deal: Weise would buy out Joyce over time; Joyce agreed to remain a principal with an earn-out agreement. The final terms and his commitment to help the transition until he is 67 meant minimal disruption to clients, and he could value the firm at 2.1 times revenue, close to his original estimate; Joyce declined to disclose the exact amount.

A fair price for Weise, but “a chunk of that down payment was still coming from me and I needed to find additional funds,” he says. A small business loan prohibited the seller from having a continuing role in the business after 12 months, so that option was out.

For most sell-and-stay options, broker/dealer financing is the only real viable option, Ryan says. But even there, Weise said, “I had to jump through a lot of hoops and I felt like I had to kind of pull some strings.” In the end, the firm provided a five-year note that allowed Weise a six-month grace period in which he didn’t have to make payments.

“The fact that the practice was so fee-based, versus transaction-oriented, gave me a comfort that what I was buying should be fairly reliable,” Weise says.

The financing is important for the buyer, but in many ways even more critical for the seller, Ryan says. “If you’re carrying paper or you’ve got something contingent, you’re making an investment in the guy who is buying your practice. You better have the ability to say something and be part of it,” Ryan says.

The Result

Following the sale last January, Joyce started working two days a week, and plans to stay with the business for another four years.

While clients knew Joyce was looking for a successor, the duo planned the introduction very carefully, with a series of lunches at his house where clients could “meet the new guy” in an informal environment. “You never want to surprise anybody,” Joyce says.

The same goes for the buyer and seller in every successful transaction, Weise stressed. “It seems like a big hurdle to buy a business, but it’s not bad if you baby-step your way through it,” Weise says. “In the next 12 months, I’d like to be in the position to be ready to do it again,” he says.

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