What is a contingency plan?
A contingency plan is an agreement between two or more advisors designed to protect your business in case of your death, disability (temporary or permanent), loss of license, and possibly even retirement (although most plans do not deal with succession planning). There are a variety of plan types to solve for these issues:
- Revenue Sharing Agreements — This plan type is the most basic, simply agreeing at the broker-dealer level to share revenue between a named successor and your spouse. While simple and easy to setup, many broker-dealers no longer support these types of plans and they provide the exiting owner the least favorable tax treatment.
- Buy-Sell Agreement — This plan type is a contract between an owner and potential buyer to sell the business in case of a triggering event and contains a valuation methodology, payment terms, and other obligations of the parties necessary to create a turnkey plan that could be quickly executed and provide the selling advisor or their spouse/estate with the most favorable tax results.
- Cross Purchase — Similar to a Buy-Sell Agreement but this type of agreement is reciprocal with the two parties agreeing to purchase in case of a triggering event.
- Shareholder/Partnership Agreements — These contracts are among multiple owners of a company, ensuring that in case something happens to an owner, the business continues and the family receives the value. Given the internal nature of the transition, these plans have very good retention rates and are tax favorable relative to a revenue sharing agreement.
- Contingency Retainer — For advisors that do not have a contingency partner, but want to ensure the business is transferred to a qualified successor and a fair value is received, a Contingency Retainer agreement is a standby type of agreement between the advisor, Succession Resource Group, and the broker-dealer/custodian. The agreement engages SRG to work with the spouse and broker-dealer/custodian to find and close a deal with a buyer, usually within 60 days of a triggering event.
Why should I have a contingency plan in place?
Establishing a contingency plan is a proactive step in safeguarding your business, your clients, and the value you’ve worked hard to build. Life and business are unpredictable—whether it’s a sudden illness, death, disability, or another unforeseen event, having a plan in place ensures that you’re not leaving the future of your practice to chance.
A well-structured contingency plan helps minimize disruption, maintain operational continuity, and preserve your firm’s value. It also provides peace of mind to clients, employees, and stakeholders by clearly outlining how the business will proceed if a triggering event occurs.
What is the difference between a contingency plan vs. succession plan?
A contingency plan preserves your business in case of an unexpected transition, such as death or disability. There are limitations set for financing terms and the transition would happen quicker than a succession plan. A succession plan is for a planned transition with the goal of growing business value. It is typically a deal with flexible financing terms. Succession plans are much more complex and aim for a gradual transition over 5-10 years, for example.
Do I need to have a contingency partner to have a contingency plan?
No, you do not need a contingency partner identified in order to have a contingency plan in place. A retainer agreement may be the best option for you if you don’t have a partner willing to commit to such a legally binding agreement. A retainer agreement is an agreement with Succession Resource Group, where we would assist in searching for a buyer for your business upon an unexpected life event, such as death or permanent disability (a triggering event).
If I already have life insurance, do I need a contingency plan?
Yes, you definitely still need a written contingency plan. Insurance is a tool to fund a contingency plan, but many plans are not funded with life insurance. Either way, a life insurance policy does not take care of your business or clients and it does not result in maximum value to your beneficiaries.
Do I need a contingency agreement if my spouse is my contingency plan?
Naming your spouse as your contingency plan may seem logical, however should not be your only plan for the following reasons:
- Lack of Licensing and Industry Knowledge – If your spouse is not a licensed financial professional, in the event of your death or incapacity, your spouse cannot legally operate or manage your business and may unintentionally violate compliance regulations. This can delay critical decisions, create legal complications or even lead to revenue loss.
- Emotional and Logistical Burden – in the wake of a tragedy such as death or disability, relying on your spouse to manage the sale or transition of your practice, negotiate with buyers, and maintain business operations (if able) adds a heavy burden during a time of grief. This is neither fair nor practical.
- Limited Continuity or Client Retention – Your spouse is not in a position to provide continuity of service, a critical element in client trust. Without a vetted successor in place, clients are left with uncertainty, your Broker-Dealer/Home Office is likely to step in and assign clients to a new advisor, potentially with littler regard for fit, and the goodwill you’ve built over decades can dissolve quickly.
Professionally drafted contingency plans, such as SRG’s, ensure that a licensed, pre-approved successor can step in immediately, that the transition is compliant and orderly, that your beneficiaries receive the full value of the business, and most importantly, that your spouse is supported, not burdened, with a clear direction and pre-arranged steps upon an unplanned even.
Do I need to reciprocate a contingency plan with my partner?
No, but you can. You can easily be someone’s contingency partner without them also being yours or vice versa. You can also be each other’s contingency partner with different plans and terms of agreement applicable to your individual businesses.
Would my spouse be a good contingency partner?
In most cases, although a spouse might know the clients and potentially work with you on a day-to-day basis, if the spouse is not licensed, the spouse would not be able to purchase the business and service the clients. They could agree to get licensed, but given contemplated triggering events, it is unlikely they will want to, or be able to, take the time to get licensed.
Can I have more than one contingency partner/plan?
Yes and No. Yes, you can be more than one person’s contingency partner, meaning you may be listed as the buying party for more than one advisor/business. You may also list more than one partner/buyer in your own plan, however you must identify precisely what portion is being purchased/sold by/to each partner/buyer listed, or that the business would be sold jointly and severally amongst all listed partners/buyers. No, you cannot create multiple active contingency plans with multiple buyers listing the same assets/stock. If you have an active contingency agreement, you must cancel one plan before creating another if you wish to change your partner(s) or the terms of the agreement.
Can you help me if I have multiple buyers in mind?
Yes. Our Contingency Planning Elite service is built specifically for those with multiple buyers in mind.
How is the value of my practice determined and what value do I put in my contingency agreement?
Most commonly, a stated value, formula or a formal valuation at the time of the triggering event would be used to establish the value of the assets transitioning in a contingency plan.
Should I discount the value of my business for a contingency plan?
Maybe. The value of your business under normal circumstances, such as retirement, may in theory be greater than the value of your business if you are unable to support the transition (death or disability for example), however the ‘discounted’ value can be accounted for in one of two ways: 1) Explicit discount – state discount percentage; or 2) Implicit discount – 1 year claw back to account for attrition.
What about my team? How can I protect them upon unexpected events?
You can capture special considerations, like the continued employment of key staff, in your contingency plan. The condition is typically for one year following the trigger event, to assist in the transition of the business, and is difficult to enforce beyond the one year.
How are contingency plans typically funded?
Life insurance, disability insurance, earn-out (a percentage of revenue) or a promissory note are typical ways to fund a plan.
Who pays for the life insurance policy if this is included as a funding mechanism in my contingency plan?
During the term of the contingency plan, or until one of the identified triggering events occurs, the seller would pay the premiums of such a plan. When a triggering event occurs and the policy is paid out to the buyer, listed as the plan beneficiary, the sum of the premium value is added to the purchase price. Additionally, any proceeds that exceed the purchase price shall be retained by the beneficiary.
What are the tax implications of a contingency plan?
There are different tax implications depending on the type of plan you choose such as ordinary income tax, long-term capital gains tax (LTCG), tax-free etc. In the event of your death, the sale of your business asset is generally classified as personal goodwill, resulting in the proceeds being taxed as capital gains to the seller—namely, your estate or beneficiaries. If the triggering event is disability or loss of professional license, a portion of the sale is typically allocated to restrictive covenants to ensure they are enforceable.
I set up a contingency plan several years ago, what’s the maintenance requirement?
We recommend reviewing your plan annually to ensure that the terms remain applicable and viable. If no updates need to be made, you can store away for another year.
What happens if my contingency partner isn’t able/interested/financially capable to follow through with our agreement?
If your designated contingency partner is unable, unwilling, or financially incapable to commit to their obligations under your agreement, it’s still crucial to have safeguards in place to protect your business, clients, and beneficiaries. SRG provides a Contingency Retainer service designed for advisors without a reliable contingency partner. This agreement involves SRG to work with the advisor’s spouse and broker-dealer/custodian to find and close a deal with a qualified buyer, typically within 60 days. As a reminder, it is important to regularly review and update your contingency plan, which includes assessing whether your chosen partner remains a suitable fit and ensuring that the methodologies and valuations applied are still appropriate.
What do I do after my contingency agreement is signed?
The next step would be to communicate the plan to your stakeholders. The broker-dealer and OSJ need to be aware of the plan and be able to support it as well as the clients. It’s also recommended that you include a reference to your plan in your estate plan and document the names and contact information for all of the key parties who would need to provide assistance in facilitating a successful transition of your business.
Why use SRG’s contingency agreement vs. my Broker-Dealer’s that’s free?
Although a contingency plan provided by your Broker-Dealer or home office may appear cost-effective at first glance, these standardized templates often overlook critical opportunities. In contrast, SRG’s comprehensive and tailored approach delivers enhanced advantages, such as improved tax efficiency, stronger client retention, and better preservation of your business’ value for your beneficiaries.
I signed my contingency plan, now what?
The next step is to communicate the plan to your stakeholders. A signed contract in a filing cabinet is better than no plan, but by a slim margin. For a plan to work well, the broker-dealer and OSJ need to be aware of it and be able to support it, as well as the clients. Most advisors will either send a letter or discuss the contingency plan with their clients, just in case it is ever needed.
