Succession Planning and Expanding Ownership

Last week, Amazon founder Jeff Bezos announced that he will step down as chief executive.  Amazon has come a long way in 30 years; from an upstart online bookseller into one of the world’s most popular internet marketplaces.  Most of their customers probably aren’t too concerned about Amazon’s succession plan.  With sales of $400 billion annually and about 1 million employees, Amazon appears to be well-positioned to serve its customers whether or not Mr. Bezos is CEO.

But what about the succession plans for smaller companies that provide services and products to you and others? Think of all the professional firms; like physicians, attorneys, CPAs, insurance agencies, real estate agencies, architects, financial advisers and other organizations. While every profession is different, when it comes to succession planning and expanding ownership, many of the reasons for and much of the planning involved is similar.  

In each case, it is reasonable for a client/customer/patient, an employee, or a supplier to ask whether or not the business owners have prepared for the future? Do they have a plan to expand ownership? It’s extremely important for all the stakeholders of the business that they do. Consider the following rewards to expanding ownership:

1. Securing the firm’s future improves the client/customer/patient experience.  Who wants to have their health, finances, insurance coverage and other necessary services thrown into chaos when an unprepared owner dies, leaves or sells out?
2. Expanding ownership can support long-term succession planning goals. Expanding ownership starts to build a foundation for internal succession and this transition planning demonstrates both internally and externally that leaders are looking to the future.
3. Equity helps attract and retain talent. Offering equity is a strategic way to acquire, develop, and retain key talent.
4. An ownership mindset enhances the firm’s culture. Owning a share of the equity in a small firm promotes a team member’s entrepreneurial spirit and loyalty and therefore enhances the firm’s culture.
5. Offering access to equity grows a firm’s value. Statistics show that firms with expanding ownership grow faster because more people are involved in and accountable for the success and growth of the firm.

I’d like to now focus on our industry, Registered Investment Advisory (“RIA”) firms, and review what is happening with succession planning and expanding ownership with RIAs. Charles Schwab works with almost 10,000 RIAs and provided most of this information. While this is based on RIAs, it is generally appropriate to most professional firms.

Schwab reports that the smallest RIA firms often only have founders as owners.  In the largest RIA firms, 83% of them share equity with non-founders.  About 65% of the mid-range firms (like DWM) who manage assets between $250 million and $1 billion share equity with non-founders.

Each firm creates its own custom approach to succession planning and expanding ownership.  However, in each case, there is a need to clarify, strategize, formalize and implement:

• Articulate the vision for your organization.  Identify your ownership goals.
• Decide what ownership means.  Identify who should be eligible to own shares.  Define your own program structure.
• Obtain a valuation of your firm and a method to update the valuation annually.  Determine how financing will work.  Document policies regarding ownership.
• Communicate with your team and stakeholders.  Maintain, evaluate and adjust.

This process works. Eighteen months ago, Brett and I concluded, for all the reasons above, that it was time to expand ownership and share equity with non-founders at DWM.  Our vision for our stakeholders: clients, team members and our collaborative professionals, is to keep DWM as a small boutique providing exceptional services and very close personal attention to wonderful clients for decades to come.  Our ownership goals are to add shareholders who will be the leaders of the future and provide a mechanism and structure so all shareholders can prosper, the founders can some day retire seamlessly, and DWM can continue its mission for decades to come.

Expanding ownership in DWM means a number of things; a statement to our clients and the world that an individual has been selected by the founders to help carry on the mission of DWM. It also means an enhanced accountability that the new shareholder now has to the clients, founders and team. Brett and I decided that it was better to have a new shareholder have an opportunity earlier rather than later for many reasons.

In our industry, there is an organization called FP Transitions, which does two things.  It provides annual valuations of firms and it provides a networking mechanism when firms are looking to acquire or sell.  It was easy for us to provide our information to FP and get the initial valuation- a process we will continue to do each year.  We didn’t see the need to get bank financing or ask a shareholder candidate to go to the bank to borrow the money to buy shares.  We set up a note with a fair interest rate and monthly payments. We are an S Corporation and therefore, all distributions of income must be made ratably among shareholders-equal to the percentage of stock owned.  We do monthly distributions and the monthly distribution to the new shareholder is approximately the amount of the note payment.  Of course, all of this was outlined, agreed upon and documented.

And, now, (drum roll, please) Brett and I are pleased to announce that Grant Maddox, CFP®, became a shareholder in DWM as of January 1, 2021 using the format described above. Grant has been with us for five years and has grown tremendously. He has done a great job with our clients and is becoming a leader in our firm. Grant has and will continue to help us meet our mission and grow our firm using his entrepreneurial skills. We expect other new shareholders in the future.

We highly recommend that professional firms look at their succession plan and the possibilities of expanding ownership.  We’ve helped dozens of firms with these plans and I’ve personally done two of them- our Chicago CPA firm 23 years ago and now, with Brett, for DWM. The objective is a win-win-win for everyone- particularly for clients, customers and patients. Let us know if we can help.