The majority of advisors who wish to retire in three years are no more prepared for their exit from the business than those who plan to retire in 10 years. At least that’s a statistical surprise from the recent Investment News/Moss Adams 2010 Study of Financial Performance of Financial Advisory Firms, sponsored by Pershing Advisory Solutions (for more information, visit www.pershing.com/advisorstudy). Only about 30% of advisors—at both three and 10 years from retirement—said they were ready.
This obviously means the majority are not.
It seems many advisors don’t even have a buy/sell agreement in place, or at least not one that gives much direction to the sellers, buyers, estates, heirs and businesses that will be affected.
Challenges in these agreements revolve around the terms of exit, the triggering events, how the ownership stake is valued, how the transfer of ownership is funded and whether both parties to the buy/sell agreements feel disposed toward honoring the contract. One reason that last issue even comes up is because many agreements do not declare the sale back to the remaining owner(s) as a put, but rather as a right of first refusal. Similarly for the buyers, the call provision is often absent or silent on what to do about price and terms in cases when an owner gets dismissed from the firm, as well as when they leave voluntarily.
This raises many questions like: What will happen to your business if something happens to you? What will happen to your long-standing relationship if your buy/sell agreement sows confusion instead of clarity? What will happen to your retirement plans if the buy-out blows up? What will happen to the business if a heavy repurchase obligation weighs it down or drives the buyers away from the deal?
Seeking Counsel
Seeking professional help to construct a useful buy/sell agreement seems obvious, but it is frightening how many advisors create their own documents on the cheap. Pulled off of websites or borrowed from others, poorly prepared agreements often lack consideration for the local tax implications, corporate law in the state where they reside, provisions for both voluntary and involuntary termination, and how to resolve disputes. The consequence of saving money in the beginning is a bigger bill in the end.
The time to seek professional help is before you become partners, or prior to the merger or acquisition. As with a prenuptial agreement before a marriage, it is easier to come to agreeable terms when you like each other than when you are attempting to resolve a problem.
Recently we have received several calls for help from advisors who failed to negotiate the terms of a buy/sell agreement as part of their original merger transaction. I’m thinking of one particular case in which a merger was conceived as the first step in the older partner’s succession plan. His departure was meant to be the conclusion of the transaction. Why didn’t they establish the foundation for price and terms before consummating the merger? Alas, that was not part of the deal.
Unfortunately, when facing the end of a career—as with a marriage—decisions tend to be emotional and filled with conflict. An agreement would not necessarily have ameliorated the emotional distress, but it would have allowed both parties to traverse a fact-based path that was developed when both were coherent, relatively objective and working in harmony.
Now the challenge is how to manage through the exit with minimal disruption, if not complete happiness on both sides. When both parties passionately disagree on the price and terms, it is important to unbundle the issues. If they can come within a reasonable range on the assumptions, there is a chance that the emotional challenges will be resolved.
Developing the Assumptions
When buy/sell agreements are unclear, most disputes focus on the price to be paid and the timing of the payments. Inevitably, the seller wants to get the highest possible multiple paid immediately, while the buyer wants a price that is cash-flow affordable and a payment schedule stretched over time. The other issues that arise are usually less complicated to resolve.