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David Grau: Good afternoon, everyone. David Grau here, President of Succession Resource Group, welcoming you to our session today. We’ll give you just a second.

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David Grau: To get everyone in, Zoom always takes just a minute here.

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David Grau: In the meantime, just a couple of quick housekeeping items, while everyone gets in.

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David Grau: Gets access to the webinar.

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David Grau: session today, hopefully you’re in the right spot. We are talking about building your team for succession, so this is certainly geared

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David Grau: towards thinking about internal succession, but we’re going to talk about that as a springboard, or Plan A, and how it, frankly, can help set up Plan B, maybe even Plan C. So even if you’re listening today, and you’re sort of on the fence.

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David Grau: About internal succession planning, the viability, ability to get value, there will…

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David Grau: be more broad conversations than just internal succession, but we’re gonna come back to that, sort of as plan A for today. So, couple of just general housekeeping items. There’s gonna be a couple of quick poll questions. They won’t slow us down today. They’ll pop up.

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David Grau: you can access them, complete them. We do ask if you don’t mind completing them for us. Again, A, they’re softball questions, but B,

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David Grau: they help us… there you go, there’s a poll question… help us bring you better, more refined content. A little bit today. Julie and I are pretty good about adjusting on the fly, but more specifically, we do try to bring

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David Grau: more useful educational content to you throughout the year, and it’s only early June.

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David Grau: So, the more feedback you can give us, the better resources we can provide you in the short term, the better content we can bring you long term. So anyway, I belabored the point. There’s poll questions, there’s one up right now, there’ll be one or two later, but like I said, we’ll continue as we present. If you don’t mind just participating, we’d greatly appreciate it. If you don’t, just stay up there and keep bothering you for the rest of the webinar.

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David Grau: So, second one is the slides. We’re using slides today, obviously, to guide the conversation. You will find them to be amazing slides. We’ve got a great marketing team. Julia and I put a lot of time and effort into them.

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David Grau: to be fair, Julia and Parker put a lot of time into them, and then I took it over for Parker, because he was tied up, we do a lot of project work this time of year.

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David Grau: So I get to step in and pitch it here today and talk with you about this stuff, but the slides are available. We do try to make sure that they are useful to you as standalone resources later.

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David Grau: So if you’d like a copy of those, just let us know. Our team will be reaching out to you, and we’re happy to get you a copy. Last but not least, the session is recorded, so if you have anything that you would like to rewatch, you want to share it with somebody after the fact.

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David Grau: That will also be sent to you, I believe, automatically within, like, 24 hours?

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David Grau: Last but not least, again, we’re gonna focus mostly on planning for internal succession as Plan A, and how that can help support, potentially, a Plan B and Plan C.

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David Grau: But if, as you’re listening today, you think, this is for the birds, or things change over time, it happens, half of our organization

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David Grau: Is dedicated to and focused around

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David Grau: Helping you build a more valuable business, exit that business.

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David Grau: The other half of the business is the listing side, where we can actually help you either confidential, you know, kind of off-market private listing, full-blown listing to bring the most potential candidates in.

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David Grau: So if you do need that solution, it’s different than the rest of the stuff Julie and I will be talking about here today, but we’ve got a whole dedicated team that, if you want to go that route, kick the tires on it.

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David Grau: If you get an unsolicited offer, private equity-backed aggregator, these folks are really good at what they do, and you don’t want to go it alone, we’ve got a whole dedicated team. So, not the topic for today, probably won’t come up again, but just planting the seed.

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David Grau: With that, let’s dive in. So, as we…

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David Grau: look at the calendar for the rest of the year. I mentioned the poll questions help inform the content we bring you. Well, the next two webinars, those are already set. First one coming up is how to get PE value without necessarily having to sell the private equity, or a private equity-backed aggregator.

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David Grau: So that’ll be one I’m excited about, because that’s coming up in July. It’s… we get a lot of questions around this topic, where folks do, like, the values that they’re hearing, but they don’t necessarily want to sell out, like, literally and figuratively, so join us for that session if you’d like to maybe

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David Grau: take a look deeper into that topic of the exit options. And then kind of continuing that trend is one on merger or sale. What’s the right option? Pros and cons of each?

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David Grau: This one’s interesting mostly because we have done more mergers as an organization than I’ve done in my entire career, like, in just the last few years.

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David Grau: Right? Like, I’ve always said I did mergers and acquisitions, but it was a lot more of the A and a lot less of the M.

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David Grau: And frankly, most of the mergers that I did historically, it really was an acquisition. The seller just didn’t go away after the sale. But we’re seeing a lot of actual legitimate mergers that are working really, really well. So we’re going to talk about that compared to just selling and sticking around, and that’s our August session.

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David Grau: So if you’re interested, our bubbly moderator dropped the links for those into the chat, so you can feel free to join us. We’ll also send you more information.

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David Grau: I had mentioned earlier about, sort of, the two sides of our business, right? The listings side that can help you with your exit options, if it comes to that, or…

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David Grau: the consulting services. And so you can see the scope of them here. I’m not gonna read them to you, you can read. But what I will tell you is, if you look at the squares there on the left-hand side, if and when we get the chance to work together.

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David Grau: Or I recognize a few of the names on here already. Just to work together again.

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David Grau: I suspect it’ll be, I mean, number one, yeah, we know the industry, we’ve got a lot of really smart experts here, not counting myself, frankly.

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David Grau: But if you look at the red box in the bottom right, I mean, average tenure of our industry experts is going on 13 years.

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David Grau: Right? I mean, these are people who eat, sleep, and breathe this stuff, and all they do, like Julia joining me here today.

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David Grau: very narrow area of expertise, and they can go really, really deep. So, strategy is a key part of it, for sure, right? But it’s also the ability to then take you from strategy to execution, right? Having the legal.

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David Grau: The attorneys, paralegals, having the CPAs to talk tax strategies, all of that stuff is in-house, which just means less handoffs, which means a more efficient result.

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David Grau: and better overall process. So, that’s us in a nutshell. We’ve been around, like I said, since 2012, team of 23 professionals here.

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David Grau: So, when you’re ready, or maybe when you’re not ready and you just want to have a conversation, let us know.

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David Grau: But let’s dive in. So, Julia and I are going to lead the conversation. I’m going to kick us off

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David Grau: I’m gonna start kind of big picture, and then she’s gonna take us down to the more micro-level stuff that she works on.

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David Grau: With you, your staff, and the elements of your staffing solution that really tie in and support, or don’t support.

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David Grau: the succession planning effort that’s on the horizon for all of us. So, you can see background here, founder and CEO, and I don’t even get any subtitles here on things that I do, because I don’t

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David Grau: get to do webinars. I get to talk to you guys about this kind of stuff, where Julie is actually very client-facing, right? Talking about contingency planning, not the topic for today, but death and disability.

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David Grau: employment contracts, independent contractor agreements, comp plan design, equity programs. So, while I will do the lion’s share of the talking at the beginning, you’re gonna ultimately want to hear from her, because she works most closely with you guys on these types of solutions. So, let’s get to that part.

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David Grau: As far as the agenda goes, let me jump back one here real quick. So, agenda, I want to start out with what succession really means, why these plans, on occasion, fail.

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David Grau: And then, Julia can take us through ways to try to avoid the plan failing. Like, what can you be doing now with your team, staffing comp plan design, to help set you up for more success later?

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David Grau: So, let’s dive in. What does succession planning really mean? Like, what is it? Well, it’s kind of funny, because the answer to this has changed over the years. You’ll see the headline here, succession planning. It’s not necessarily an exit strategy, and so…

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David Grau: I don’t know, it was probably 10 years ago, we sort of shifted the vernacular industry-wide, not just us, but everyone sort of shifted away from succession planning, it’s not an event, it’s a series of events, right? It happens over many years. Well, now it’s less even about the series of events, and more about the strategy, and just having an answer to your client’s question.

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David Grau: When they ask, how much longer are you going to be doing this? And are you having a good answer?

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David Grau: Right? That it’s not, oh, I’m gonna die at my desk, I love what I do. You say that in your 50s, and you laugh, and they laugh, and you move on to the next subject on the agenda.

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David Grau: But when they ask again, and you’re 65, and you say, oh, I still love it, gonna die at my desk, well, now I’m legitimately concerned about you dying at your desk, right? So that’s no longer, you know… I mean, it’s still kind of a laughing matter, but the point is, it’s not a good answer long-term for succession. So what is succession planning, really? I mean, ultimately.

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David Grau: I think it’s more about… you can see the subtext here, it’s an enterprise strategy. It’s about creating a sustainable organization.

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David Grau: Right? You’ve built…

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David Grau: I imagine you built a great client experience, great processes, a good brand, you’ve got a team that really means something, and so…

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David Grau: Succession planning’s your ability to continue to honor the commitment to your clients.

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David Grau: For multiple generations.

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David Grau: Now, whether that’s as aspirational as you want to get with it or not.

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David Grau: it’s also about being able to create sustainable growth, right? I mean… If you’re growing consistently now.

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David Grau: Well, eventually, you’re gonna be 60, and 65, and then 70, and you’re gonna work less, or you’re gonna work less efficiently, or you’re gonna get sick, or your spouse is gonna get… shit happens. It’s gonna happen, right, to the best of us, and so succession planning is about you taking your foot off the gas, and the car doesn’t slow down.

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David Grau: So, that’s something, again, whether you’re focused on monetization, getting the highest value, leaving a legacy.

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David Grau: Succession planning ultimately helps facilitate all of those things, and you can decide the appropriate weighting, right? If you’ve got son, daughter in the business, you’re gonna transition it to them.

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David Grau: Well, great, succession planning is more about the planning than it is the monetization event, but the answer’s gonna be a little different for each of you.

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David Grau: As far as your exit options go, this is where I want to start, because…

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David Grau: I’m gonna make the case for… Making your life more complex.

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David Grau: And by that, I mean, you can build a really lean lifestyle practice in this industry, and make a ton of money, and have very few headaches.

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David Grau: But the business will die with you.

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David Grau: Right? Or you’ll eventually pull the ripcord, sell it, and then exit. And it’s a lot of change, right? For you, for your clients.

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David Grau: If we can think about making your life a little more complex, right, and trying to build an internal team that could succeed you someday, that… that requires growth, that requires bodies.

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David Grau: more bodies means more HR, more policies and procedures. I know the stuff we’re all excited about as business owners.

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David Grau: But when you think about it from an exit perspective, if you do have an internal team, well, then you have good odds that you could sell the business to your team, obviously.

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David Grau: if you don’t end up having that work out, right? Like, sometimes the internal team just doesn’t have the appetite, you don’t have the time… stuff happens, right? But if you build the internal team and that doesn’t work out, well, you still have the internal team, which means

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David Grau: A peer would love to acquire you and all the amazing talent that you have, even if they’re not going to be partners.

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David Grau: Right? And certainly, as you think about, like, private equity, industry aggregators, the last thing that they want to do is buy your job.

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David Grau: We have this happening right now, and it happens multiple times every year, where…

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David Grau: You see these deals out there in the trade publications that are getting these crazy high multiples.

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David Grau: And then you get folks who are retiring saying, well, I’m ready to retire, I’ve got a good business, I’m hoping to get that kind of a multiple. The problem is, those kinds of multiples are being paid to firms where the owner is starting very early, they’re going to remain involved, they’ve got a large turnkey enterprise.

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David Grau: For the lifestyle practice, where the owner’s going to retire in 12 to 18 months after transitioning to clients.

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David Grau: Your peers would love to buy you. And you’ll see, I still put that over here. Even if you don’t have an internal team, you do still have a good option, right? You just only have one option.

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David Grau: And I’m all about making sure that you have options, because the more options you have, the more flexibility you have, the more you’re going to enjoy the process, and frankly, the more value you can get out of it, whether you want it or not.

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David Grau: So, building blocks of a succession plan, and again, keeping the lens on the internal. I’ll say number one is obviously the timeline.

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David Grau: Right? These things do take time. If it’s an external sale to a peer, you need less time. If it’s a sale to your internal team, right, that’s gonna take years to do.

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David Grau: So, we gotta think about the timeline. Number two is also figuring out your priorities. Like I said, if your goal is a duffel bag full of cash on the way out the door.

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David Grau: I mean, that’s gonna influence how you run the firm now, it’s gonna influence your succession decisions, who you want to sell to.

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David Grau: your financials, another big one, right? Almost… well, not almost, regardless of who you sell to, your financials are going to matter, right? So, you want to make sure we keep the P&L as clean and optimized as possible, and I’ll go deeper on each of these in just a second. And then the last one is.

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David Grau: really focus on the internal. We do need the right entity set up, and that is the least exciting part of the process, talking about succession planning.

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David Grau: Valuation. Taxes are even more exciting, exciting to talk about than entity formation.

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David Grau: But the entity is… it’s the foundation of your business, and it really has a pretty big impact.

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David Grau: on not only the succession, but even some of the equity-sharing stuff that, like, Julia and her team would be working on with you.

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David Grau: So, I want to unpack each of these quickly. First one on the timeline.

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David Grau: Number one, don’t stay too long. Now, that sounds obvious, and the problem is.

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David Grau: In your 40s and 50s, no one envisioned staying too long. The problem is, when you’ve stayed too long, you don’t even usually realize it.

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David Grau: Right? It’s when you’re there, you’re 68, you’re 70, and you’ve been in the office, and you’re typing away, working on completing your CE,

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David Grau: You’ve been in there for about an hour, and then your receptionist comes in and turns the old computer on.

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David Grau: in moments like that, where you realize, like, alright, well, maybe I have overstayed my welcome a little bit, even though the team still welcomes me with open arms. So…

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David Grau: Don’t overstay.

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David Grau: But that’s hard. Start with the two easier questions. Number one, not even retirement. Like, if you can figure that out, fantastic, because it’s much like the work you would do with your clients.

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David Grau: If we know you’re 65 now, and you want to be retired by 75, great, that’s a line we can draw in the sand, and it might move, but we can start planning from that day backwards to make sure we’ve got a viable exit strategy for you, and we know what to do, and when to do it, and we’ve got deadlines.

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David Grau: If you don’t know the retirement date, which is, frankly, most of us, at least start with the reducing workload, right? Like, when do you want to go from 50 hours a week down to 30, or 40 to 20, whatever the number is, full-time to part-time or semi-retired.

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David Grau: That… if you can’t even figure that date out.

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David Grau: then put us on the phone with your spouse. He or she can give us some of these dates, I assure you. So just try to figure that part out, right? Because it’s really hard to plan

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David Grau: If we don’t have some idea of when you want to slow down.

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David Grau: And if you never want to slow down.

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David Grau: fine, but it’s important to acknowledge it’s gonna happen to the best of us, and so we just need a backup plan, and your team’s gonna need an answer to this question eventually. The other one is, who’s your ideal buyer? And you may not have an answer to this one yet, either.

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David Grau: Which is why we’re planting the seed on this. But depending on who your ideal buyer is, right, if it’s your internal team, great.

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David Grau: Then we can start figuring that into the plan.

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David Grau: If the answer is maybe, you know, I’m gonna build a good internal team, but really, it would just be selling

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David Grau: To a private equity firm, an aggregator, and getting the big check.

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David Grau: There’s nothing wrong with that either. But that will influence some of your other decisions, and so it’s worth starting to ruminate on.

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David Grau: Which ties nicely into, then, your priorities listening today as the founder, right? Like, what you want does kind of impact the strategy. Again, going back to my last comment, if what you want is

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David Grau: the highest value.

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David Grau: Well, you might be able to get a decent value from your internal team, but it’s probably not going to be the highest

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David Grau: value. We can get close, we can approximate it, but it’s gonna take a lot more work, it’s gonna take a lot longer to get there, so if you just want the highest value and you want it quick.

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David Grau: There’s ways to get back.

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David Grau: If you’re thinking internal, I mean, you’re probably thinking internal for these reasons.

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David Grau: Right? You want to maintain control until you’re ready to finally hang it up.

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David Grau: Which means we’re gonna try to keep 51% ownership, at least of the voting equity with you.

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David Grau: Maybe you want a gradual exit, you could sort of dollar-cost average your way up as you sell incrementally, combined with the growth.

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David Grau: Maybe it’s rewarding and attracting team members, we can see the litany of reasons here.

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David Grau: But if you compare the internal relative to what you want from your exit.

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David Grau: that might start to have an impact, right? You want a quick exit, you want flexibility. Depending on your answers to these questions, it’s going to influence

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David Grau: Where you focus, who you hire, and it’s why people say start with the end in mind.

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David Grau: As cliche as that sounds.

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David Grau: It’s important to contemplate, even if the answer changes, because it affects how you run the firm.

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David Grau: On your financials, I want to give you a little bit more tangible here, as far as takeaways go. I mean, yes, you do want clean financials.

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David Grau: And that sounds obvious, right? Well…

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David Grau: But when you’re the sole owner, you’re not really worried about what your financials look like, because you’re the only one looking at them, besides your CPA and maybe your spouse, right?

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David Grau: That’s it. So it doesn’t really matter if you kind of co-mingle some stuff, the accountant can sort it out, they’ll categorize this as a distribution, not really a business expense. As you have partners, or you might have partners.

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David Grau: It gets more important to make sure that you have financials that you don’t have to… you don’t have to explain, you know, multiple items on there.

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David Grau: We just want it to be self-explanatory, it’s clean, and it looks as profitable in reality as it probably is.

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David Grau: As far as targets go, some key performance indicators for you?

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David Grau: target EBITDA margin, or let’s just say profit margin for the sake of the exercise, you’re shooting for usually 30-40% is a pretty safe range.

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David Grau: A little higher is okay, right? If you’re at 45, 50% profit margin.

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David Grau: High five. But you’re probably not going to stay there for very long.

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David Grau: So 30-40% is a good range to shoot to stay within, right? Where you’re investing enough back in the business that it’s sustainable and scalable.

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David Grau: But you’re not investing so much back in the business that you’ve got excess capacity

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David Grau: And a kind of crappy profit margin for a while.

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David Grau: But what ends up happening is firms will be at 30% profit, and they’ll want to be higher on the profit margin, and they can be, right? Because at 30% profit margin, they probably have their team operating at 70-80% capacity. Not a bad spot to be in.

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David Grau: But then as you have success, and you’re growing, you’re bringing new clients on, you’re not having to hire every single year.

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David Grau: But eventually, your team’s gonna be at 85%, 90% capacity, 110% capacity, and you’re gonna be at 45-50% profit, and you know what you’re gonna do.

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David Grau: you’re gonna hire some new young talent, and your profit margin’s gonna drop, and you’re gonna have more capacity. You’re gonna vacillate between 30% to 40% in your target. The other one to compare and compound it with is the growth.

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David Grau: 10% or more, i.e. double digit, Compound the annual growth.

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David Grau: That should be relatively easy, in that half of that, conservatively, is going to come from market appreciation of the assets over any, you know, 5 or 10 year period.

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David Grau: So really what I’m asking here is, like, 5% organic growth, new clients, new assets.

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David Grau: should be obtainable, and if it isn’t, then it might be worth looking at a merger, or maybe you’re already sort of in the back nine of your career, and maybe it makes sense to start looking at doing something in the way of succession.

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David Grau: Because, again, when we have listings, and we have these, and even succession plans, where you see they’ve been growing at 4 or 5% per year for the last 5 or 6 years.

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David Grau: And the seller will say, you know, we’re not in growth mode, we’re, you know, we’re stable, we’re mature. Well, sure.

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David Grau: But any outside buyer’s gonna look at that, and they’re going to assume that’s all come from market appreciation, effectively, which means you’ve probably been going backwards.

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David Grau: And that’s just not a good look from a value and valuation perspective, so double-digit growth, half of that hopefully coming from organic sources, not just all the markets, and then 30 to 40% is what we’re targeting. Bottom line is, bottom right.

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David Grau: And you don’t need to read it necessarily now, hopefully this will be a good primer for you later when you look back on these slides. We need, from an internal succession perspective, I need the profits that somebody would get from buying, let’s say, 10%.

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David Grau: Julia buys 10% of SRG. We need to make sure that the profits that she would get from that 10% are enough to cover the debt service on buying it.

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David Grau: Right? Now, there’s a whole bunch of assumptions baked in there, not the least of which are profit margin, but that kind of is what it is.

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David Grau: But we’re assuming that you’re going to use the industry standard, you know, 10, maybe 12- or 15-year financing. I’m assuming today’s interest rates for commercial loans for an advisor, 8%.

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David Grau: And if you can shoot for double-digit growth, 30-40% profit margin.

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David Grau: Your successors can’t afford to buy in 5 or 10%, they can afford to take out that loan, they’re gonna feel it for the first year or two, but then they’re gonna be cash flow positive, and this thing will basically pay for itself.

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David Grau: So, that’s it on the financials. Your organizational setup, this one I’m going to just touch on briefly, but this is important as Julia then talks about sharing equity, because we need the right foundational tools set up in place.

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David Grau: So the first one is your entity structure.

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David Grau: If you’re listening today, and you are leaning towards doing internal succession now, or at some point in the near future.

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David Grau: Make sure you do not have an LLC taxed as an S-Corp or an S-Corp. We really want, by we, I mostly mean you, but we…

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David Grau: helping you with the spreadsheets, we really want an LLC taxed as a partnership.

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David Grau: Or, if it’s just you, LLC, disregarded. But regardless, it’s going to end up being a partnership, because we’re going to share equity. So we want the LLC taxed as a partnership, we want the individual owners to hold their interest through a personal S-corporation.

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David Grau: Or an LLC taxed as an S-Corp. So they own their interest. This structure

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David Grau: A lot more, we could do a whole webinar on this topic, but…

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David Grau: For the sake of today, I will say.

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David Grau: what it allows us to do is have all the benefits of the LLC,

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David Grau: Which, I mean, they’re incredibly flexible, and they provide some really nice tax benefits, specifically around succession.

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David Grau: And even mergers.

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David Grau: but also all the upside of the S-Corp, and none of the downsides of either one.

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David Grau: So, I’m just giving you the answers to the test. This is the Cliff Notes version. This structure is where you likely will end up, and the nice thing is, it’s not super complex. So even if you don’t necessarily need it quite yet, it’s generally pretty easy to get set up, and you’re not going to feel like it’s over-engineered.

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David Grau: The other component, beyond just the structure is the right agreements.

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David Grau: Right? So, if we’re gonna start thinking about internal succession, we need to make sure we’ve got, in my earlier example here, the LLC,

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David Grau: We need to make sure we’ve got an operating agreement.

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David Grau: Or if you do have a corporation, a shareholder agreement, that is specifically built for multiple owners.

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David Grau: multiple generations of owners, and then we have the ability to lean into some different equity classes, right? Voting, non-voting, profit interest, value rights, like.

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David Grau: give all of these tools to your consultant, like Julia, so that when you decide to start the first phase of equity sharing.

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David Grau: Right? Like, the earliest part of your career track.

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David Grau: That you’ve got a lot of different options to lean into that you’re comfortable with.

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David Grau: And if you don’t, well, then it might be worth coming back and revisiting some of this stuff. The other one is the team design, right? This isn’t one specifically that we would help you with. You have to live this reality, and that is, you… I’m going to label Gen 1, our lead advisor and founder.

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David Grau: Your job, obviously, to start with is to get clients, grow the firm, but eventually, you’re gonna have enough of that where you don’t have as much time to prospect anymore.

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David Grau: you’re gonna hire Gen 2. Most of you have probably already done that.

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David Grau: you’re going to mentor and train them, you’re gonna push the simpler client casework down, they’re going to take care of that. Eventually, you’re going to have a couple years go by, and they’re gonna be

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David Grau: They can hopefully be pretty good at their job.

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David Grau: And you’re going to want to push more work down because you’ve continued to grow.

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David Grau: To push that work down, we need Gen 3 there to catch it, so Gen 1, Gen 2 teams up to train the younger incoming 25, 26-year-old CFP,

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David Grau: Right? Who, in 2 or 3 years, might be able to take some solo work off of Gen 2.

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David Grau: Remember, these were your old C&D clients. They get pushed down again.

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David Grau: But they continue to get great client service from somebody who’s sort of appropriate to take care of that size account. And by virtue of pushing this work down, it frees up the Gen 1 to eventually, you’ll see here, focus on CEO-related

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David Grau: duties and roles, growth of the organization, stuff that only you can do. Mentoring and training, or Gen 2 and Gen 3 advisors.

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David Grau: This structure, ultimately, is scalable.

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David Grau: Right? Because eventually, where it gets really fun to watch is when Gen 2 is training more Gen 3s, and you weren’t involved as the founder.

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David Grau: Now it starts to really have some legs.

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David Grau: But we gotta be attracting people, and we gotta be retaining them.

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David Grau: So why… why do these things ever fail, right? I mean, I showed you how to set the entity structure up, I told you generally at a high level, right, what should be in your governance documents. I mean, number one, I’d say starting too late.

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David Grau: Like, for internal succession in particular, it takes 5 to 10 years.

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David Grau: After having the right butts in the right seats.

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David Grau: To start the equity sharing process, to eventually getting you down to no ownership, that’s a 5-10 year process.

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David Grau: And so, as you think about, you know, what you’re most or least confident about, you’ll see in the poll question here, I mean.

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David Grau: The timeline, we can do a lot of really great stuff in the spreadsheets, we’ve got great financing resources, but

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David Grau: We lack a time machine.

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David Grau: Or at least, you know, the only one we have is, you know, the one you’d see in, like, Napoleon Dynamite. You don’t want to rely on that to solve your succession issues. So, starting too late is a big one. So, start as early as you can. You really cannot give this topic enough time.

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David Grau: Because it’s a moving target, right? It’s just like the financial planning work you do with your clients. Number two is not really fully evaluating all your options. In this one, I mean…

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David Grau: Especially here in the last couple years.

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David Grau: We’ve had folks that we created an amazing off-ramp for them, right? The succession plan, it’s gradual, the next gen bought in, we’re partway into it, and then they start reading the headlines, and they see, oh, shoot, people are getting a lot more value out of their firms.

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David Grau: than I’m getting.

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David Grau: I’m not sure I want to sell the last 51% to my internal team when I see the kind of multiples that people are getting out here.

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David Grau: Just make sure you fully evaluate.

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David Grau: what your options are, and just understand them. Again, we’ve got the session coming up in July on PE deals, how to get that value if you don’t want to sell the PE. The problem is, when you sell the PE and getting those values, it’s not the same thing.

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David Grau: As selling internally, and not just different in terms of the value, but how you get paid, the level of risk in your appetite for that.

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David Grau: But I do want to make sure, as you get ready to embark on selling to your internal team, sell to an outside organization, that you just go into it with eyes wide open, because there’s no do-overs.

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David Grau: Third one here, disconnect between value expectations and cash flow.

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David Grau: I will just give you one quick example. There was a… a great

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David Grau: shop at one of the… I think it was a large… one of the largest independent broker-dealers, but they were mostly on their own RAA anyway. It’s mostly fee-based. Great firm, $10 million in annual fees, like I said, a little bit of brokerage, but not much.

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David Grau: And at $10 million in annual revenue.

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David Grau: They’re seeing the stuff that we publish every year, and they’re thinking, well, practices are selling it 3 times, so…

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David Grau: 10 times 3 is not complicated, right?

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David Grau: ballpark value is probably $30 million. Problem is, that firm

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David Grau: Was generating about a million dollars in earnings.

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David Grau: And I’m rounding up to get to the million, not down.

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David Grau: Right, so if we’re doing a million in profits.

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David Grau: On 10 million in revenue, and the owner’s expectation is $30 million, but we’ve got a million coming out in profits.

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David Grau: That’s 30 times EBITDA.

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David Grau: Like, unless this is a secret tech startup I’ve never heard of, that just… the math isn’t gonna work, right? And it didn’t work in that case, but we see it happen a lot, where

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David Grau: The industry has used revenue multiples for a long time to sort of benchmark values, and generally, it works. 3 times top-time revenue is about the same as 9 or 10 times earnings, but not always.

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David Grau: So, do the valuation for your firm, you know, hopefully you seem like a bunch of smart people, you’ll work with us on this and do it annually, but regardless, track your value periodically, and just avoid any surprises, because I can assure you, that founder, $10 million in revenue, that is no small accomplishment.

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David Grau: But when he got a valuation back from us that was $10 million.

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David Grau: That’s a far cry from 30. He was not excited.

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David Grau: Next gen team isn’t ready kind of ties into the last one I’ll mention here, and that is too few successors. Well.

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David Grau: When I say the next-gen team isn’t ready, that is sometimes because we’ve just started a little bit too late. It’s oftentimes because we just don’t have enough bodies.

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David Grau: Right, I would say your typical ratio, like, when we see succession plans work really, really well, it’s usually 3 or 4 successors for every founder who’s exiting.

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David Grau: And the reason you have that, I think, mostly, is because, as founders.

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David Grau: You think when you first started out, phone rang, you answered it. Might not have been great at it, but you answered it.

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David Grau: RMD request comes in from a current client, you took care of it. Prospect meeting and getting scheduled, you took care of it. Closing that prospect, you took care of it. Onboarding the client. Right, you know where I’m going with this.

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David Grau: You may not have been the best receptionist, or the best at rebalancing the accounts, but you were pretty good and could do everything, and you had to. Well, the problem is, by the time you retire, you’ve been doing this for 20 or 30 years, you’re really good at juggling, like, 20 or 30 balls. Problem is, you can’t hand 20 or 30 balls off

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David Grau: to one or two people, right? Because when you started, you didn’t start with 20 or 30 balls. You started with one.

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David Grau: Right? It’s pretty easy to toss one ball up in the air and catch it, and then you thought two.

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David Grau: Over the years, you get to a point where you can handle juggling 20 or 30 balls, but we got there gradually. The next generation, we need to do the same thing and be gradual, but we need to hand them off, like, 4 or 5 balls max.

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David Grau: So, generally speaking, we’re seeing, as firms have grown, they need

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David Grau: more bodies that are specialists, and then that old saying, what got you here won’t get you there.

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David Grau: We don’t need another mini-me like you that’s a generalist, pretty good at everything. We’ll take it if we can get it. What we really need is somebody who’s amazing at operations, because your firm now does $10 million a year in revenue.

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David Grau: I mean, somebody who’s amazing at the investments. So, 3 or 4 to 1 is your typical ratio

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David Grau: Of successors to founders.

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David Grau: And also, just acknowledge your next-gen team isn’t ready? No kidding.

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David Grau: They’re W-2 employees. You can mentor, you can train, you can try to show them what it is to be an entrepreneur and business owner.

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David Grau: But none of us were ready when we started our firms. Yet, here we are. You figure it out. And so…

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David Grau: Just tried to, again, going back to starting too late, my first bubble there.

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David Grau: Is put him in the driver’s seat.

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David Grau: But don’t jump out of the car. Stay in the car with them, maybe eventually you get in the backseat, and you’re the annoying backseat driver, but on occasion, you have to grab the wheel and keep things on the road.

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David Grau: But mostly, they’re gonna get pretty good at driving, if you give them a chance while you’re still in the car.

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David Grau: So…

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David Grau: Let me get this poll question out of the way, and we are going to head to the last of my slides here, and then hand it off to Julia. So the missing link, tying this back to the human capital component.

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David Grau: Right? To grow and scale a professional service business. Ours, yours, we need people, right? There’s just no two ways about it.

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David Grau: you’re gonna grow, bring in more clients, more assets, you’re going to need more advisors. Even with AI, I don’t care if you use them all, you’re still gonna need more bodies to sit in front of those clients and take care of them, especially when the markets are crazy.

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David Grau: So, I mean, talent ultimately is your multiplier. It’s how you, as a founder, get to a point where you’re not client-facing anymore, you’re focused on organic growth engines for your firm, inorganic growth opportunities, mentoring and training the next generation of talents.

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David Grau: because you’ve been so successful with that, you get to manage HR, or manage the HR people who manage the HR stuff, right? Talent is your multiplier. It can also be a constraint, because it’s… it’s A hard to find, and B, takes a long time to grow your own talent. But if you start early.

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David Grau: It is viable, and you can actually do so a lot more cost-effective

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David Grau: Then trying to solve these problems through recruiting.

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David Grau: So… As useful as the talent component is.

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David Grau: I feel like it’s a delicate balancing act, right? Like, these succession plans don’t fail because, oh, we couldn’t find the capital.

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David Grau: Or we couldn’t figure out the tax strategy, right? They fail because we… we don’t have the right people, we didn’t… we weren’t able to keep the right people.

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David Grau: And Julia, that’s what you and your team eat, sleep, and breathe with these clients. I’m gonna shut up and hand the mic over to you.

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Julia Sexton: Perfect. I’m gonna build right off of that then, because it is…

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Julia Sexton: Really common to jump directly to the transaction details when we start to talk about or think about succession planning, because…

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Julia Sexton: I know I’m talking to a group of numbers peoples, that’s what we care about. It’s also a matter of you offloading your most valuable asset that you’ve spent 20, 30 years plus building. So those things do matter, but the reality is, to Dave’s point that he just made, most of the succession plans, when we say

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Julia Sexton: how do they fail, or when they fail. They’re not failing necessarily because of these transaction terms, or because the math wasn’t possible, or we couldn’t figure out

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Julia Sexton: figure out a way to make the math work. They fail, or they don’t work to the greatest success that they could, because the people strategy wasn’t ultimately ready to support the math.

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Julia Sexton: So, on screen here, I’m highlighting

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Julia Sexton: three of what I could summarize, two, of the most common

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Julia Sexton: Categories of risks that we… we do see and we hear over and over again as they relate to building your succession plan.

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Julia Sexton: The first is talent loss, meaning when employees don’t understand where they fit in your team, or what their future looks like with the company, or ultimately how they get to participate, potentially, in the long-term success and growth of the firm, your strongest people start looking elsewhere.

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Julia Sexton: with someone who has those answers. In an advisory business, when your top performers leave, they don’t just take the capacity with them and the time and energy that you’ve spent

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Julia Sexton: pouring into their development, they actually may take client relationships, and that’s the risk that I know all of you listening today know exists. They may take institutional knowledge. They’re certainly going to take future leadership potential.

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Julia Sexton: So we want to definitely consider what are areas or ways that we can prioritize retention and be open and honest with communication of your plans.

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Julia Sexton: The second is really just a true misalignment of your incentives. So, having tools, but not being strategic or honest with yourself in terms of how your tools are

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Julia Sexton: working together, or maybe against each other. A lot of firms are still using compensation plans that were built for the way that the business used to operate. So to tie into

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Julia Sexton: What Dave mentioned earlier, you know, when you started out, and you started to juggle a couple of those balls, and you…

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Julia Sexton: brought on the first employee on your team, or the first couple, who were also advisors as your next… we’ll call them next gen. You realistically were all probably trying to juggle similar balls and, you know, grow the business, because growth was your primary focus. But…

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Julia Sexton: What that structure used to look like, being a production base or a revenue split model.

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Julia Sexton: The models are designed to reward individual bookbuilding. Again, what maybe a priority was in your past.

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Julia Sexton: But they’re not rewarding the important things that we need to make sure you are fostering on your team, which is collaboration, delegation, certainly profitability for reasons that Dave just talked about, and of course, having an ownership mindset.

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Julia Sexton: We’ll talk a little bit more about this, too, in the next couple of slides. The third is ultimately not having a leadership pipeline. A lot of founders wait until retirement is close, because

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Julia Sexton: Again, maybe you don’t know or can’t identify your timeline or what period you’re working towards, if it’s a 5-year or 10-year period.

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Julia Sexton: Therefore, you’d try to make some Hail Mary hire at the end who can fill your shoes, but as Dave mentioned, successors aren’t built in that final year, or even final couple of years. They have to be, and they are developed over time.

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Julia Sexton: So, the problem isn’t just, do I have someone to buy me out? The real question in the context of succession planning is, have I built a team that can run, grow, and protect the business without me?

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David Grau: Well, to your point, Julie, on that misaligned incentives, I think about all those firms that I used to work with that had great team members, they brought them on, they gave them a 40% payout, I assigned to some clients.

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David Grau: mentored and trained, then you gotta go build your own book. Turns out they weren’t great at building their own book, but I am, so I just keep assigning clients. The problem is, I assign up clients where I keep them busy, it frees me up, so this is great, right? Like…

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David Grau: It works.

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David Grau: And then 5 or 6 years go by, and all of a sudden, the book that I’ve assigned them, right, they didn’t build it. I assigned it to them, and that book then doubles in assets, because we’re pretty good asset managers, right? And all of a sudden, they’re getting paid twice as much for doing the same work, and you start running that out in the spreadsheets, and all of a sudden.

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David Grau: That map doesn’t act.

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David Grau: And then you hand it off to Parker and our internal succession team, and you think about, okay, so how do I convert this person who gets a percentage of the top-line revenue with no headaches.

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David Grau: And how do I convince you to trade your top-line revenue with no headaches in exchange for a percentage of the profits that’s much smaller.

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David Grau: It has a lot of funny math to get from point A to point B. It just makes succession planning so hard. And you keep… I mean, you mess with it all the time, but you know messing with people’s compensation…

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David Grau: It’s not easy.

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Julia Sexton: Yeah, you’re gonna steal my thunder here, because we’re gonna get into that in just a second on the comp side and those considerations. At SRG, we do… we think about this in three pillars, essentially. The first is comp design. The second is…

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Julia Sexton: Documentation, through employment agreements, ultimately, as I’m talking about, or contracts around long-term incentive plans, and then talent development.

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Julia Sexton: Compensation helps answer the question of what behaviors are we rewarding.

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Julia Sexton: Employment agreements or contracts help answer what are the expectations, what are the protections, the transition terms that all need to be documented and understood.

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Julia Sexton: And then the talent development side, or pillar, helps us answer who is being prepared to lead, to manage, to service clients and take over from a Gen 1, and then eventually own or be the primary owners.

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Julia Sexton: These three pieces, or pillars, they have to work together, though, because a compensation plan without clear roles or role definition, just creates confusion. An employment agreement without then a defined or communicated career path just feels like paperwork.

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Julia Sexton: A career path without an economic alignment then can feel kind of like an empty promise. So, when these three pieces do actually work together and are integrated into your succession plan, they create the foundation for a team that’s not just a group of employees of the firm, but they’re actually invested truly in the future.

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Julia Sexton: So we’ll start with the compensation design, because this is often one of the biggest disconnects that shows up.

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Julia Sexton: The issue that we see is what Dave and I just mentioned. It’s that firms are paying advisors through revenue splits. So now you’ve heard that three times. I’m sure a lot of you can resonate with that, or maybe you’ve, you know, made that switch, but it feels pretty recent that that was a hurdle that you overcame, or a shift that you’ve made in your compensation, but we’re talking about grid-style compensation.

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Julia Sexton: On the surface.

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Julia Sexton: This feels simple. It’s certainly familiar in the industry, but what we’re trying to highlight is how difficult it is to build into a succession plan.

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Julia Sexton: Why?

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Julia Sexton: It’s because the revenue split compensation creates, essentially, what Dave was just describing, which is perceived equity. The advisor may not legally own the business, or their

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Julia Sexton: there, I’ll put in quotations, clients. But economically, they’re already receiving a meaningful portion of the revenue tied to their clients, so when the owner does ask you to later buy into the firm.

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Julia Sexton: and not directly pay for those clients, but have a stake in the company’s clients. I’ve heard it time and time again, whether it’s live on a call because they brought the next gen into the calls, or it’s feedback that’s passed over to me, or to the Gen 1 owner that’s then passed to me is.

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Julia Sexton: why am I paying for something when I already am receiving, essentially, the economic benefit? And they won’t add this on, but without the risk, the debt, or the responsibility of ownership, you’re already getting the economic value that you would be

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Julia Sexton: striving to receive by buying in and owning, equity in the first place, and that is the problem.

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Julia Sexton: So we have to shift the compensation conversation away from individual production alone.

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Julia Sexton: And replace this with a model, a strategy that rewards

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Julia Sexton: the correct behaviors at the right stage for that role. And that’s where we…

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Julia Sexton: Start to think about this from a structured base compensation, a bonus, and then a share of the economics, or the profits, generally at a, you know, stage or introductory approach, until we get to true equity ownership.

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Julia Sexton: So what I’m describing is what we’re calling, super fancy, get ready, the BBP framework. You haven’t heard us talk about it yet.

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Julia Sexton: BBP, it stands for base bonds profits, what I just mentioned, these three buckets. Each letter, of course, or category, represents a distinct and important bucket of compensation that

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Julia Sexton: are important lenses to wear when you’re considering this employee’s overall performance and their behaviors that you, again, should be incentivizing, especially as you’re thinking about building your succession roster.

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Julia Sexton: So, a base is easy. It’s salary. It provides predictability. It should reflect, essentially, the employee’s role, their responsibilities, certainly their experience, and ultimately the value of the seat that they occupy on your team.

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Julia Sexton: That second bucket being the bonus reward, that is rewarding for behavior. This is where we can start to tie incentives to the activities that actually drive the business forward and help them progress in their own career track.

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Julia Sexton: Again, based on their unique role. So think about incentivizing behaviors and rewarding them for behaviors, like contributions to the company net flows.

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Julia Sexton: Client retention, so obviously a consideration of net flows, new business, again, basically breaking down the net flows, but this is all going to be role-dependent. Certain leadership goals or operational improvements, or even maybe, you know, a consideration of the achievement of firm-level goals.

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Julia Sexton: The third bucket being the profits, this is the reward that creates that ownership mindset. So this can be through…

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Julia Sexton: Generally speaking, I’ll say long-term incentive plans, but I think phantom equity, maybe some, you know, more formal profit-sharing plans, and then ultimately, of course, we’re talking about real equity and the real profits that you would receive as distributions as an owner.

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Julia Sexton: Each of these buckets, though, should be, as I mentioned, designed uniquely to the individual role on your team. So, for example, if we think about your advisors on the team, who are likely some of your next-gen owners.

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Julia Sexton: Your service-focused advisors, or your farmers, they’re gonna be rewarded, or should be rewarded, for providing great client service. Retention, and again, consideration of the net flows. You’re paying them for what they are doing really well, and ultimately what you want them to do really well at.

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Julia Sexton: your, maybe, hunter advisors, or your business development-focused advisors.

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Julia Sexton: they generally are going to have more variable compensation that’s tied directly to bringing in or sourcing new revenue and new growth for the firm. Again, that’s ideally as you start to specialize in these roles, even within a singular role, like an advisor.

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Julia Sexton: what they’re doing really well at is bringing in new business. If that’s what you want them to focus on, that’s how they’re…

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Julia Sexton: significantly contributing to the company’s success. That’s how we want to structure their compensation.

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Julia Sexton: And then a partner.

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Julia Sexton: This one, we want to make sure that we’re delineating or differentiating the buckets of compensation as an owner, and an owner should still be receiving not just a salary that maxes out the Social Security, but an actual salary that represents

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Julia Sexton: Their responsibilities and their role working on the business, and separate from what their return on their ownership is.

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Julia Sexton: That distinction is critical, and we still don’t see a lot of it. Compensation, again, is what you… what you earn for the job that you do, even as an owner. Unless you are a passive owner, you are helping move the business forward in some way, so that’s what we want salary to be tied to.

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Julia Sexton: Ownership, on the other hand, this is…

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Julia Sexton: what you earn because… or that form of compensation is what you own as a form of enterprise value. So we want to make sure that we have a system in place to separate the two, and acknowledge that there is a difference, and that that is ultimately critical to the long-term success of, again, building your roster.

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Julia Sexton: This next slide helps illustrate why role clarity matters so much, because I’ve just highlighted that a few times in the last slide.

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Julia Sexton: If someone, for example, is in maybe a managerial or administrative role, their compensation should reward for operational excellence, for creating great efficiencies for the team, helping the overall firm infrastructure.

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Julia Sexton: However, if someone’s in a client service role, their compensation plan should reward, again, retention, client experience, growth, from new and existing relationships. However, if someone’s on more of the business development side, again, we want their plan to focus on

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Julia Sexton: bringing in new relationships and then being rewarded for that behavior, any COI activity, but in general, new AUM, new revenue growth.

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Julia Sexton: And then if someone’s being…

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Julia Sexton: groomed for company performance or ownership. We want to make sure that their plan starts to tie the

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Julia Sexton: To profitability and enterprise value of the firm through those long-term outcomes.

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Julia Sexton: The common mistake is essentially paying everyone like they’re a rainmaker, or paying everyone like they are purely support, when in fact the behaviors that you need from them are different. So we need to make sure that we are approaching compensation as a strategy to align with the differences in your roles.

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Julia Sexton: And again, tie here is that compensation drives behavior. Behavior drives culture, and culture drives value. So strategic alignment in your compensation design is really critical because, again, we’re talking about the concept of internal succession here, but your compensation model

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Julia Sexton: It’s going to win every time if you’re rewarding someone or your team for siloed production.

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Julia Sexton: but your goal is internal succession planning, that comp design’s winning the fight every time, I promise.

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David Grau: which sounds obvious when you say it, Julia, right? But in practice, it seems a lot less obvious, right? But if I paid… if SRG paid you 60% for new business that you brought in, and then a small salary to take care of the actual clients.

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David Grau: We can’t be super surprised when you’re not taking care of the clients, and you’re out there trying to bring in new business, because we paid you like a business development person. But I literally had a conversation with a great advisor team yesterday.

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David Grau: that when they said that out loud, and I just kind of stared at them.

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David Grau: waiting for them to sort of pick up what they just said out loud. They’re like, yeah, we know when we say it, but like…

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David Grau: Their core duties are to take care of the clients, and we wanted this additional stipend

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David Grau: to help give them some incentive to go build a book, and it’s like, well.

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David Grau: Yeah, but they don’t have the skill set to do that, but you put the carrot out there, and then you’re surprised when they run after it. So, some of this stuff is just, as the owner-founders, you can’t see the forest through the trees.

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Julia Sexton: The next one is around the documentation. Compensation design, while important, is… is only one piece.

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Julia Sexton: Before we even start to talk about, you know, what’s important to capture in these agreements or these contracts, we need to address the most basic question, which is, are the people on your team

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Julia Sexton: Actually, on your team.

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Julia Sexton: If you are building a firm for internal succession, or that’s your hope, but your future roster

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Julia Sexton: are independent contractors. They have to be employees. They have to be full-time. They need to be doing things your way, using your systems, following your processes.

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Julia Sexton: By definition, 1099 contractors, they control how and when they work. So you can’t build a successor out of someone who isn’t integrated in how the business is run on a day-to-day.

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Julia Sexton: And then, even just the practicality side, even from a legal and tax perspective, you misclassifying employees as 1099 is one of the easier ways to create a real liability for the firm. So, step one is making sure the people that you’re building

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Julia Sexton: around your succession plan are actually W2 employees.

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Julia Sexton: Once that’s right, or at least the identification is, and maybe any shift in how they’re actually operating then, aside from the contracts, we can actually move to the importance of the agreements themselves, and how do we structure these?

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Julia Sexton: the employment agreement matter most when things go wrong, as do any contract, not when everything’s going well. So, when everyone’s happy and the firm’s growing, you’re on track, no one’s gonna pull out this agreement from the back of your filing cabinet. It’s going to be used or referenced and matters when someone decides to leave, or a relationship breaks down, or sitting across from a buyer during diligence.

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Julia Sexton: That’s when you’re going to find out whether the document’s actually gonna protect you or expose you, so it’s important to make sure that you are building these

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Julia Sexton: Intentionally to protect and mitigate your risks, because your plan

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Julia Sexton: whether that, again, be… to Dave’s earlier point, maybe it starts out with a succession plan in mind, and you get through the first couple of tranches, and then maybe decide to change your mind. Your successors may not be on board with that change, so it’s really important that now you know you have the contracts in place.

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Julia Sexton: to cover the worst-case scenario happening. None of us want to set out and create a plan assuming that

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Julia Sexton: the successors that you have in mind are going to do you wrong, ever, but certainly in a moment of you deciding to change your mind, which you have the prerogative to, we just want to make sure that

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Julia Sexton: You are protecting…

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Julia Sexton: So, for the rest of your team, if something were to go sideways. So, it’s really important to have the contracts in place, not only on the employment side, but also when we talk about, and I’ve mentioned a couple times, but we’ll get to the talent development side, when you start to build in these other

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Julia Sexton: Equity and compensation sharing strategies being the third bucket, that profits category.

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Julia Sexton: those agreements and those plans, they need and deserve their own separate agreements. We can’t have the terms of

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Julia Sexton: phantom equity awards, or other long-term incentive plans that are built or baked into an employment agreement, or an initial offer letter. We have vesting criteria to consider. We have rights of forfeiture to consider. What happens, again, if someone leaves, what rights do they still have or not? We need to be able to separate these as two individual considerations, or multiple individual considerations.

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Julia Sexton: To maximize, again, validity and protection for your sake at the end of the day.

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Julia Sexton: And that leaves the third pillar, that is the talent development. And this is really where succession becomes real, because, again, you can’t wait until the founder, you, the founder maybe, are 2 years from retirement to ask, who’s gonna run the business. You have to hire with succession in mind. It does not mean that

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Julia Sexton: Every hire needs to be a future owner, or would likely be a future owner, but it does mean that you should be looking for people who could grow into higher levels of responsibility.

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Julia Sexton: Then, bringing it back to where we started this conversation, you have to be intentional with mentorship, because successors need to move from passenger seat, to the co-pilot seat, to the driver’s seat over a period of years. It’s not going to happen quickly, you can’t throw, as Dave mentioned, likely more than 4 balls at them at a time.

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Julia Sexton: So building a career path for roles on your team is really important, because they need the opportunity to practice

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Julia Sexton: And that includes client exposure, decision-making authority, management responsibilities, maybe even some business development expectations and responsibilities, and then, of course.

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Julia Sexton: Financial literacy around how the firm’s actually making money and how you are operating that they are eventually going to be intimately aware of if ownership is in their future.

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Julia Sexton: And then, of course, we want to make sure that you’re making ownership earnable, not implied. Employees on your team have to understand what it takes to move forward, whether that be credentials, tenure.

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Julia Sexton: AUM, or revenue growth over years, or a combination of,

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Julia Sexton: you know, the list goes on in terms of what you might be setting, depending on the role for criteria to earn those rights. But generally, again, this may look like a staged approach throughout their career development, but the important thing here is that transparency

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Julia Sexton: It’s really important to make sure that your team knows that you have their future in mind.

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Julia Sexton: So I wanted to share on the topic of talent development, an example career path.

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Julia Sexton: This is, as you can see, across potentially a producer, service, operations, or investment role. As you can see, a lot of firms.

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Julia Sexton: that earlier stage incentive. This could be any other variation of a long-term incentive plan, but using this as a prerequisite to introducing real ownership opportunities later in someone’s career progression. This is going to help you communicate more directly and confidently with your employees.

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Julia Sexton: Again, about their long-term career progression, because whether they’ve asked you yet or not, they definitely want to know what not only success looks like for them, so that they can earn more for themselves, for their family.

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Julia Sexton: But also, how do I advance in the long term? What does potentially, if I were to continue to succeed, the next 5 to 10 years, look like? If you have them ideally written into your succession plan.

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Julia Sexton: doesn’t mean that you need to feel locked into that, but communicating that this is ideally what I see for you, if you can continue to contribute and win on the team, that’s really important so they know exactly

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Julia Sexton: What level of investment you have in them.

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Julia Sexton: So, we’re running out of time here. Let’s bring these past, pieces back into the broader, you know, conversation of succession planning.

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Julia Sexton: Ultimately, your human capital and your team, they can’t sit off to the side, or by any means on a back burner. They have to be prioritized in the strategies around structuring their role on your team. They need to be built with intention, and then integrated, of course, into your succession plan.

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Julia Sexton: Your org chart should show who does what today, of course. Your career paths should show how people progress over time from an employee to a leader to an owner. Your compensation track has to align pay with the behaviors that will help them get through that career path.

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Julia Sexton: And then an equity sharing strategy will help you define ownership.

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Julia Sexton: Phantom Equity, or again, other long-term incentive plans when they become appropriate, and then great tools to

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Julia Sexton: as I like to call it, kind of test them and put them through trial runs of how do you respond with this additional benefit that now is a share or a participation in the value of the firm versus just a reward for my responsibility.

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Julia Sexton: So, a succession-ready firm, I’ll just summarize briefly here, typically, we would say, has these five building blocks. Again, an org chart that can survive the founder, career path that shows people how they grow into these leadership positions.

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Julia Sexton: A comp model that uses, again, activities, performance-based metrics to align their role to rewarding in the right behaviors. An equity or long-term incentive strategy that helps create alignment with enterprise value, and then

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Julia Sexton: Ongoing dialogue, so no one’s guessing about the future.

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Julia Sexton: So once we have the machine in place, being your people, to help support the option of an internal succession plan, from a succession planning lens, Dave, I’ll just hand it back to you to land the plane and tie this back to key considerations.

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David Grau: Perfect, appreciate it. So, yeah, to your point, just piling on with what you had just talked about, on the succession-ready team.

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David Grau: this is bringing back things we’ve already talked about, so I’ll hit it quickly. Number one.

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David Grau: If you have the next-gen advisors, then you’re gonna generally end up

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David Grau: having a multi-generational client base, right? Multi-generational teams, multi-generational client base means, generally, also sustained growth. You eventually start working less.

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David Grau: Well, you’re not poor cispus pushing the rock up the hill by yourself, you’ve got other people there to help you.

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David Grau: Documented workflows and client experience, again, for you to get to that third one on my list here, a team that operates Monday through Friday without the founder, we need the second one, so we need documented workflows.

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David Grau: documented process. We need this stuff to be as automated as possible, so that eventually.

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David Grau: You can hand that client service work off, and know that your team is going to continue to execute on it, and you can then work on refining the client experience that they implement.

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David Grau: We also need, and Julia talked about this, so I won’t belabor the point, but that path to partnership, like, we need some way to give them an idea of what it means to be a partner here, and how in the world do you get it? And no different than a law firm. Just because you’ve achieved the eligibility criteria doesn’t mean you become a partner.

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David Grau: But the problem is, for a lot of firms, because we, as owners, haven’t figured out what that criteria is, then we just don’t ever talk about it.

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David Grau: And then you end up with folks who start to worry, like, alright, well.

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David Grau: Is it ever gonna happen? If it does happen.

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David Grau: they’ve been working a lot less, and I’ve been helping drive the growth, so now I’m gonna pay… the harder I work, the more it’s gonna cost me, right? Which is one of the questions we had come in.

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David Grau: So, it’s fair, right? So we need to start thinking about 1.0 version on eligibility criteria for sharing equity, and again, if the only equity that you have to share is your equity, and it has voting rights, profit rights, and value rights, you’re gonna be pretty stingy with it. I get it.

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David Grau: I think it’s why, as an industry, we’ve been so far behind the eight ball.

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David Grau: Around doing succession planning and sharing equity.

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David Grau: Despite it being an industry full of professional planners, I think it’s mostly because we just didn’t know what tools were really out there. But the industry’s grown, and we’ve gotten a little more sophisticated.

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David Grau: Collectively. And the last one is just communication.

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David Grau: Right? We’ve got to be talking about this stuff, it needs to be a two-way street, open dialogue, you’re not going to have all the answers, you’re never going to have them, and there’s never a great time.

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David Grau: To think about sharing equity?

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David Grau: Right? Especially when you’re in growth mode, you don’t want to think about giving away equity. It gets more valuable every year. Why would I sell it right now?

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David Grau: Well, if you wait till that isn’t the case, well, then they’re not going to want to make the investment. So, maintain the dialogue, figure out the time frame, and this stuff will come together.

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David Grau: Tell you, our favorite part of this process is when we can sit on the other side of this, and you’re down to 20% ownership stake in the firm you founded.

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David Grau: you’re 20%,

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David Grau: is now worth more than the 100% you had when you started the succession plan. You’re working part-time, the team loves it, you love it.

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David Grau: you… the team benefits from you being there, but you don’t have to be there. That’s sort of the future end state for a viable succession plan. So, what’s next? What do you actually do? What can you do starting Monday when you come back to the office? Again, number one, start that conversation, start talking to your team, because if you have good people and you think they could be good successors, they’re already thinking about it.

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David Grau: They just maybe have been respectful enough to not ask.

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David Grau: But eventually, they’re either going to ask, and it’s going to be an awkward conversation, or they’re not going to ask, and they’re going to be talking to their new employer about their career track, and that’s not great either. Number two is annual evaluation. If you want to just take the average multiples, we publish them every year, that’s better than nothing.

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David Grau: But just start getting the valuation done periodically, right? Don’t be that firm I was talking about that thought they were worth $30 million, and it came in at $10.

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David Grau: Because even in that case, they would have been fine if they started that process years ago, and could have made some adjustments and recalibrated, and by the time they were going to share equity, they’d already cleaned everything up.

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David Grau: Don’t be that guy. So, start the evaluation process, start tracking that value on a more regular basis. Your business is probably your most valuable asset anyway.

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David Grau: So there’s lots of reasons to do it. Third one is update your agreements and compensation. Julia already talked about this one, but write this stuff down. I mean, especially your employment contracts.

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David Grau: And I get it, if you’re listening here today from California or Washington, probably soon to be Oregon, New York, Oklahoma, I could go on and on.

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David Grau: You’re listening thinking, well, Julia doesn’t know what she’s talking about, because you can’t do non-competes here. There are still solutions. Even if they’re work, you should still write down what their job is, how they get paid, do they own the clients or don’t they own the clients.

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David Grau: But there are actually solutions, even in California, to protect your practice and make things abundantly clear. So write it down, and then dial in that compensation plan. Compensation plan design sucks. It’s not fun to do, you don’t want to have to redo it. It’s no fun messing with people’s pay, you don’t want to overpay them, and they don’t want to get underpaid.

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David Grau: got really good compensation research tools here that doesn’t rely on survey data from a couple hundred respondents. It’s coming from thousands of valuations, so it’s worth digging into and doing it proactively. And last one.

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David Grau: Optimize for equity sharing.

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David Grau: If you have a good team and you’re growing, you’re going to share equity at some point.

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David Grau: Right? You’re either gonna do it intentionally working with Julia, creating a phantom equity or real equity sharing plan.

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David Grau: or you’re not, and your advisors are going to leave, and they’re going to take clients, and they’re going to go from having no equity to having 100% of whatever clients follow them out the door. And that’s not great either. So just be proactive with it.

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David Grau: So that’s all we’ve got. We’ve got the upcoming webinars, our team’s gonna reach out, but I want to wrap up with one question we had come in that I thought was a good question, and I’ll answer the first part of it, but the second one’s going to tee you up, Julia.

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David Grau: It’s an anonymous attendee, so it’s a top-secret question. What are the EBITDA multiples discounted for on internal succession plans?

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David Grau: Knowing that Gen 2, where key people are helping the firm multiple grow.

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David Grau: Their complaint’s gonna be they’re paying for their own work and growth.

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David Grau: So the first part, how much is it discounted? It’s not uncommon to see…

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David Grau: 10-40% minority discounts for their buy-in.

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David Grau: And that, again, it’s not as if every internal succession plan has a minority discount. Sometimes the financing is done more flexibly, and then we don’t have a discount. Sometimes we go get a bank loan, and we do use it. So some variability there, but…

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David Grau: Julia, you got a lot more tools in your bag of tricks. When you think about that complaint over the next generation not having equity and worrying about driving the share price up.

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David Grau: It costs them more later.

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David Grau: What would you say if you were on a sales call?

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Julia Sexton: Yeah, again, common question. I do get it a lot. The biggest thing is knowing that you’ve created

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Julia Sexton: A system of tools or rewards throughout their time in seat, as we’ll call them an employee, as the build-up for ownership.

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Julia Sexton: Because one, we want to make sure that they’re feeling, we’ll say, appropriately compensated for their efforts in the company’s success. Two.

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Julia Sexton: they’re earning the rights, and they’re showing what it takes to have the opportunity placed in front of them by you. You want to make

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Julia Sexton: darn sure that they have what it takes, essentially. And again, as Dave mentioned earlier, they may not be ready immediately. Neither of you might feel that they’re ready to do exactly what you’re doing, but that’s not the point. They have to earn the right to be considered for that role of ownership, so it’s about earning the right through

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Julia Sexton: We’ll call it sweat equity, but showing that they have what it takes to be in that position.

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Julia Sexton: So it’s a combination of making sure that they’re feeling like, to get there, they’re not doing it, quote-unquote, for free, but it’s really a matter of how you’re positioning it, too, to them, that I’ve really appreciated and shown or seen all of the work, the effort, the commitment that you have, and that you have what it takes to be, we’ll call it the next me.

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David Grau: Right, when I think about the conversations, I get to talk to lenders on occasion when I’m out at conferences.

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David Grau: I promise you, if and when your next-gen team ever does want to go take a loan out to buy in some small equity stake, and they show up to the party and say, hey, SRG helped my company create a phantom equity plan, I’ve got, you know, $75,000 worth of equity built up.

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David Grau: and I’m buying in for $500,000, so it’s only gonna cost me $425 for something worth $500, that is music to the banker’s ears, right? That kind of stuff helps all the ratios, it makes your next generation team infinitely more bankable.

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David Grau: Other ancillary benefit, if you share equity with them, it definitely makes your non-competes a heck of a lot more enforceable.

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David Grau: Not a good reason to share equity, but a good cherry on top.

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David Grau: Last one, this is an easy one for you, Julia. Do… do we have job descriptions for those various role models? I guess you’re doing the comp plan design stuff?

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Julia Sexton: Yeah, absolutely. Job descriptions, as well as, of course, a more

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Julia Sexton: broadly used resource or tool for relating those job descriptions to then compensation design, which is our talent strategy report. We’re essentially a compensation and staffing research, again, relating back to Dave’s earlier point, not based on survey data, but based on our evaluation database, so…

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Julia Sexton: What are affirms, your peers in the industry, actually paying?

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Julia Sexton: these positions, these people. But yeah, obviously it’s important to understand if you’re trying to compare, what is the general description or expectation of each of these roles. We definitely have.

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David Grau: Yeah, perfect. All right, folks, that is a wrap. We’re a few minutes over anyway, so you get a little bit of extra content here today. Appreciate you staying with us. Again, upcoming session is on July 8th on getting that PE value without PE.

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David Grau: So we hope you can join us for that one. If not, watch your email for upcoming sessions. Appreciate you carving out the time for us today. Thanks.