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Practice Management > Succession Planning

The Big Question: How Can Junior Advisors Buy Out Firm Owners?

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I got the following e-mail in response from to my June Investment Advisor column, “The 6-week Solution to Succession Planning.”

“Read your June article about hiring younger planner for succession planning purposes,” it said. “Makes sense in some ways, and I like the 6-week training plan. But what is the likelihood that these young folks can afford to buy you out in 5 or 10 years?”

While my column was mostly about creating a better process for retaining young advisors in advisory firms—which is a good thing for myriad reasons—there certainly is a succession planning component to ending the revolving-door syndrome. The subject of how to build a successful succession plan could fill volumes (and firms such as FP Transitions have built entire businesses around succession programs such as their Equity Management System). Yet, in my work, I’ve found that there are a few basic principles that all such succession programs should include to maximize their chances of success.

To start with, like most folks who offer advice about succession planning, I can’t overemphasize the importance of a long enough time horizon: you simply can’t identify a potential successor, groom them to run your firm, prepare your clients to accept them, and grow the practice to buy you out, all in a couple of years. We’re looking at a ten-year project and longer, here.

However, that doesn’t have to be as long as it sounds. We and others have found that most transitioning owner/advisors today don’t simply want to sell their firm and ride off into the sunset. Most would prefer to gradually cut back their time commitment to the firm, while transforming their role from doing most of the heavy lifting to a reduced client load, troubleshooting, and mentoring their successor(s). Many also find the ongoing income stream from such a role attractive.

The first step toward making this transition work is finding the right successors. I say successors because this is a case where two—or more—is way, way better than one. Finding the right successor is where most plans fail. It can take years of working with someone to determine if they are “successor” material, and many things can happen during that time: your heir apparent doesn’t measure up, decides ownership isn’t for her or him, finds your firm to be a bad fit, has personal changes such as marriage or divorce, or just takes a “better” job.

To hedge your transition bet, we find it’s far better to hire and train two or more potential successors, much the way law and accounting firms manage the problem. That way, if one doesn’t work out for whatever reason, you’re not back to square one—and day one. You still have at least one advisor to take over the firm. But ideally, you’ll have more than one, which makes the economics of success far more workable. Which brings us to the $64,000 question: How can junior advisors afford to buy out owner advisors? The short answer is that they can’t, at least, not in the vast majority of cases. But the firm can—if you make doing so one of your main goals. I won’t go into the math here, but the idea is that with the leverage of junior advisors, your firm can handle more clients—as those junior advisors become senior advisors, it can handle a lot more clients, and possibly, bigger clients. The increase in revenues will provide the capital to buy out the owner/advisor; particularly if he or she is phasing out over a number of years.

Sounds simple, doesn’t it? Hire enough junior advisors, give yourself enough time to make them into senior advisors, and buy yourself out, from the increased firm revenues, as you phase out your workload. Of course, it’s not quite that easy, but it is the best bet for many advisors today who are looking for a viable exit strategy and don’t have much margin for false starts. Because the stakes are high, my final advice is to institute revenue-based bonuses for everyone in the firm to focus all your employees and partners on the goal of growing the firm—the key to your succession plan.


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