I’ve been reading and thinking about the average wealth management business a lot recently. It appears that according to FP Transitions the average transaction is 20% in cash with 80% paid over time, usually five years.
To my way of thinking this is not a sale of a business, but a salary continuation program where you are putting your continued income stream in the hands of someone you probably don’t know very well. In fact, I would say the only part of the sale that is a real sale is the cash that you get up front. Even then it might be clawed back with a guarantee that you give the buyer around client retention.
I think if you’re about to sell your business under this methodology you might as well not sell and keep your business, run it with a junior partner, and slowly fade out. You should also think about pre-funding your buyout by using the bonus to your junior partner to fund a qualified plan that would benefit you and put real money aside for when you retire.
Pre-funding a buyout of your business can be accomplished in some of the following ways:
Establish a qualified plan where you contribution comes from a junior member’s bonus. For example, your junior planner might have a salary of $100,000 per year and the ability to earn $40,000 in bonus payments. Instead of paying your junior partner the $40,000 bonus, the junior partner agrees to forgo a portion of their bonus. You would use this money to fund your qualified plan with the agreement that you would sell stock for a reduced price at a later date.
The junior partner puts a portion of his bonus in a sinking fund. In this scenario, the junior partner takes a portion of their bonus and puts it into a side fund. This side fund is put aside so when it’s time for you to sell your business, there is real cash that can be paid for your book of business.
You sell a portion of your stock on an annual basis. You take the $40,000 bonus from your junior partner and have them annually purchase a portion of your stock. This would immediately give the junior partner equity in the business and you would receive cash for a portion of your stock. If the value of the firm increases or decreases you will get the right value for your stock annually.
Using these techniques might help you improve your upfront cash portion of your sale from 20% to 50% or more. The key in making any of this work is starting early and recruiting a junior partner that is willing to forgo income today for a larger payoff tomorrow. Or, even better yet, find ways to develop an ensemble firm where real value can be created.
As always, I’m interested in hearing your thoughts. Please let me know what you think.
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