Keeping clients bought

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					Keeping the Clients You’ve Bought
You’ve won the bid for the practice you wanted... now what
do you do? How do you successfully transition client relationships to maintain the maximum possible client retention rate?
Written by: David J. Drucker; 3rd of a Three-Part Series

In the first part of this series, we discussed those preparations a successful buyer makes before entering the marketplace to bid on a practice. We looked at the practice of Kristofor Behn, president of Fieldstone Financial Management Group, LLC, who bought 90 percent of my client base in 2001. In the second installment, we looked at the ways in which Behn promoted himself to the top of my list of would-be buyers. Now let’s find out what he did to retain the vast majority of the clients he bought. And before we address that question, let’s understand why we’re focusing primarily on client relationships: because they’re the most valuable piece of the business. Some buyers just buy the client relationships; others buy equipment and leases, and continue to employ seller staff persons. But the greatest value comes from the clients. The present value of their expected fee income, which hopefully will continue well into the future, is far greater than the market value of any other company asset the buyer has purchased. So the first thing the buyer must do is familiarize himself with his new clients. Sure, he’s studied the overviews given to him by the seller during their negotiations. But, now that he actually owns the clients, there are many details about their relationship with the seller that need to be absorbed, depending upon how long they were clients of the seller prior to their purchase, of course. Ideally, this information exists not in multiple paper files but in computer records. The modern ad-

The New Way to Growth: Keeping the Clients You’ve Bought

“Close personal contact as much as competent
Human nature being what it is, a buyer will find it difficult to accelerate this process much, except for one factor: he’s been heavily endorsed by the seller. The seller has said to his clients, in so many words, I think so highly of this individual (i.e., the buyer) that I want to be his partner.“What,” you say,“the seller’s going to be my partner? I thought I was buying his clients!” You are, but you’re going to be partners during the transition process. Ideally, you are going to work closely together for at least a year, maybe two, as you meet these new clients together, as some of their trust for the seller rubs off on you, and as they eventually get the same warm feeling about you they already have for the seller. “Can’t we just tell these clients I’m buying this guy’s practice and that they’re now going to work with me instead of him?” you ask further. Not if you want to keep the vast majority of them, that is, at least 90 percent, for the long haul, according to David Grau, president of Business Transitions. If you think or your seller believes the hard work is done once you close your transaction, you’re being naive. Client retention will depend almost entirely on what happens one year out from that date. So plan to get in front of these clients frequently. If the seller has a meeting scheduled with his clients that is any less frequent than once per quarter, find reasons to meet more frequently with the clients during this critical phase. Every in-person meeting is a chance to advance the bonding process between client and buyer. As time goes on during that first year, use every opportunity to have the buyer insert himself in the process. When you, the buyer, the clients, and your seller join together in meetings, both seller and buyer should be sharing the meeting, that is, leading the discussion and answering questions. Later in the first year, the buyer should be playing an even more prominent role, with the seller sitting by quietly and speaking up merely to clarify points or assist occasionally with an answer that the buyer may be struggling with. You are a team. The clients see you as such and are developing ever-greater confidence in the buyer. And they like him personally, too, because after several meetings they’ve learned things about his family or his hobbies -- things not directly related to his competency as an advisor. The counterpart to frequent meetings during the relationship-building phase of the transition is a rapid response system. If the buyer doesn’t already have such a system, he should implement one that allows all of his clients to find him easily. Nothing builds relationships faster than frequent contact, and ease of access is a prerequisite. Therefore, the buyer should consider having a toll-free phone number, an easyto-remember e-mail address, and a “find me” phone service. The latter is a service, such as Freedom Voice Systems ( or EasyTel (www., that essentially follows you wherever you go, trying your office phone, cell phone, and home phone sequentially, with total flexibility as to how you program the system.You can also preview callers to determine whether calls are clients or solicitors. Other kinds of “virtual” systems can improve your accessibility and response time as well, which becomes particularly important if the client base you are buying is geographically widespread. In the case of my own 2001 practice sale, alluded to in the first two installments of this series, my clients were located in the Washington, D.C. metropolitan area and in New Mexico, and a handful had scattered themselves about the country (e.g., California, Pennsylvania) as long-term clients often do, moving to the sites of new jobs or to retirement communities. It’s necessary to meet and stay in touch with these clients as well, even though a lack of geographic concentration makes it more difficult. Although it is advisable to make the investment in traveling to meet these clients in person once or twice early on in the transition, as Kristofor Behn (my buyer) and I did, staying in touch thereafter will depend more upon e-mail and phone contact than it will with other clients. If these widespread clients, and other new clients as well, are computer literate, the buyer can increase their feeling of connectedness by setting up a client-access web site in which clients can find continuously-changing communications from the buyer-seller team, communications that -- like inperson meetings -- eventually shift to being signed by the buyer alone. In my own transition, wherein Behn bought 90 percent of my clients and transferred them to his Massachusetts firm, Fieldstone Financial Management Group, LLC, I remain listed on his site as an officer of

visor collects critical client information in a client relationship management (CRM) program like Junxure-i or ProTracker, including scanned images of client documents (e.g., tax returns, estate plans) and client correspondence, as well as e-mail back and forth between the client and advisor. This level of organization and ease of retrieval makes your job, as the buyer, far easier than plowing through volumes of paper that may be improperly filed, missing, or illegible, in the case of handwritten notes. In fact, the form in which client records were kept by the seller and will be transferred to the buyer is a major negotiating point often overlooked by buyers. Do not fail to estimate the additional work involved in dealing with paper versus digital records, and the cost thereof, when bidding on a practice. Also, carefully assess the amount of detail the seller has available. When we buy a used car, we want a copy of every maintenance receipt so we know not only what specific repairs were made, but also, more generally, how the car was cared for. It’s the same process with clients; records are ideally detailed enough to give us a feel for the personal nature of the relationship, not just what transactions the seller executed for the client. By digesting this information, you’ll know more about your new clients than just their net worth as you meet them for the first time. You should have a broad knowledge of them -- how long they worked with the seller, what have been his major accomplishments for them, what have they valued most about the relationship, what is their family makeup and how far down and across the family tree has the seller’s influence spread, what are their current issues and goals, and so on. The familiarity you’ll gain by reading your clients’ files will be your foundation for establishing your own relationship with them, a process that must occur as a series of in-person meetings. If you have clients who trust you and value your advice enough to pay you a fee each quarter to be their financial advisor, you know what it took to develop each of those client relationships. For most of us, the average developmental stage is about one year. Through meetings, particularly the more intensive and frequent planning sessions most of us engage in with a new client, everyone usually feels pretty comfortable with each other after about 12 months, on average.

advice is what binds all clients to us, so you can’t go wrong in following this same formula for newly-acquired clients.


the company, but ex-clients now understand I’m doing behind-the-scenes marketing for the firm via my writing.They’ve all formed close relationships, first with Behn, and later with the employees he retained from his second advisory firm purchase in 2002, such that my old clients seldom ask for me anymore. If they do, I will occasionally call one to say hello. Does the seller really want to be involved, even peripherally, three years after the sale? If he has financial incentives, he does, but that’s another article. The last piece of the relationship-building puzzle to consider if you have far-flung clients, as Behn did, is to set up a local presence, or office, where those clients are concentrated. Behn maintained a Washington, D.C. office in an executive office suite center for one to two years following our transaction, so clients could take comfort from the commitment made to an office right in their midst, in spite of his company being headquartered in another state. Remember, close personal contact as much as competent advice is what binds all clients to us, so you can’t go wrong in following this same formula for newly-acquired clients. The only difference is that you’re trying to accelerate the bonding process to coincide with the date when the seller is contractually allowed to disassociate from the buyer’s firm completely. All of the above strategies will help you accomplish that. * * * * * Publish your writings in the next edition of the Business Transitions Report: If you have authored or would like to submit a paper on the topics of transition planning, succession planning, practice valuations, or your experience in buying, selling, or merging your practice, please send to:, or call us at 800.934.3303 to discuss this opportunity in more detail.



The Comet Clause
Written by: David Grau, Esq.

At some point, every buyer and seller has to put
his or her deal on paper, with the help of attorneys. When you get to this critical juncture, don’t forget who’s in charge.
The lawyer looked over the top of his reading glasses across the table at his client, a young man who was about to buy a financial advisory practice.“Well,” he said, “you seem to know what you’re doing, the down payment is reasonable, you don’t have to pay the full price unless the clients transfer and stay with you. That all looks good, but what if….” And therein lies the dilemma. There is no end to the “what if” scenarios and their ability to destroy or terminably delay a deal.

Yes, it is possible that a comet will come crashing down on Wall Street and wreak havoc in the markets, among other things. But do you really need to have a clause for this in your sales agreement? Ultimately, that decision is up to you and your attorney. When buying or selling a financial advisory practice, the time will come when you need to have the deal documents reviewed or prepared by an attorney. That means the other side has to get an attorney, too. During this period of the acquisition process, both buyer and seller should have a common goal: obtain good, practical legal advice in an established time frame at a reasonable cost. It’s harder than most people realize. Here’s some insight on how to get the legal help you need at a price you can afford.



“If all the legal “what ifs” came true or were
even plausible, no business would ever be conducted outside of a courthouse.


Attorneys generally come in two basic varieties – the Pit Bull and the Golden Retriever. The Pit Bull will protect you from potential risks and treat the other side with a healthy dose of skepticism bordering on outright hostility. Sometimes they bite just for the sheer joy of it. A Golden Retriever, on the other hand, finds a way to please you and get you what you want. This variety will leap over small hurdles for you, swim through rapid currents, and get around barriers to help you reach your goal. No matter how difficult the deal, you always get a smile. In the world of attorneys, one is no better than the other. Too much Pit Bull and no deal will survive to the finish. You’ll waste a lot of time and money. Too much Retriever and legitimate risks get overlooked. I used to be a practicing attorney and did a lot of merger and acquisitions work with RIA practices. I sold my law practice when Business Transitions came along, but I now spend more time dealing with attorneys than when law was my career. In every deal we do, we require the buyer and the seller to speak to their attorneys and CPAs about their form contracts. As a result, I work with, or observe the work of, hundreds of attorneys every year. The methods shared in this column for working with an attorney come not only from a first-hand understanding of how attorneys work and bill for their services, but also from a businessman working with independent financial advisors who want only to successfully buy or sell a practice. The first thing to understand is that most attorneys don’t think like businesspeople and, unless their name is on the letterhead, have never started up or run their own business before. And that’s OK. An independent businessperson sees an opportunity, weighs the costs and risks, makes a decision, and moves forward or not. It’s called risk management. Attorneys are about risk avoidance, or preferably, elimination of risk altogether. That’s their job. Their goal is different than yours. See Rule No. 5 below. When asking an attorney for help on your sale or acquisition (or even on an estate planning issue or

other legal matter), the goal should be to obtain good advice in a reasonable time frame at a reasonable cost. To do that, you have to take control of the situation, just like you tell your clients to do. So how do you get what you want from the legal world with no surprises? Here are five time-tested rules to guide your legal forays: 1) Work with an experienced merger and acquisitions attorney. Just ask your attorney, “How long have you been practicing law and how long in this field?” An attorney really needs at least ten years of practice in one field to be considered experienced. Don’t pay for someone else’s education; that’s what your kids are for. Be wary of indirect answers - associates that say that the partner they work for has been practicing for twenty years and that they work together, really means the person you’re talking to isn’t an expert at anything. 2) Do not call the state bar association for a referral – they will just refer the next person in line. Most attorneys pay to get in that line. In most states, quality has nothing to do with the state bar referral process. Select a lawyer like you’d select a doctor: Ask friends and peers for a referral. The first time you have two or three peers refer the same person, that’s the one you’re looking for. Until you get to that point, you haven’t looked enough. 3) Experienced attorneys familiar with merger and acquisition work who know something about SEC/NASD and securities regulations don’t come cheap. Pay them their fee and pay it on time. Yes, expensive can still be reasonable, if it’s good, but see Rule No. 4. 4) Be clear about how much billable time you want your attorney to spend on your deal. Problems have a funny way of expanding to fit the time allowed. Most of the competent attorneys we see are able to do a great job from start to finish in four to six weeks. A review of form contracts should take less than one week. The longer it takes (we’ve seen high-caliber law firms take three to four months just to draft a nonbinding letter of intent), the more money you lose, not only to the attorney, but also from the acquired income streams staying in the seller’s hands.



The Comet Clause

5) Separate the business decisions from the legal decisions. You will pay a fair amount of money for good legal advice, but what you do with it is up to you. Make your own business decisions, taking into account the benefits, risks, and legal issues. Your attorney doesn’t know your business. Attorneys are schooled to think that the legal issues are the paramount issues. I agree that they can be, but most of the time they aren’t. If all the legal “what ifs” came true or were even plausible, no business would ever be conducted outside of a courthouse. Understand the basics of what you are asking your attorney to do. In most cases, you will need the following documents to complete your deal: a) an asset purchase agreement; b) a non-competition/ nonsolicitation agreement; c) a consulting agreement (for the post-closing phase); d) a promissory note; e) a bill of sale; and f ) a personal guaranty (if the buyer is an entity or LLC). That’s it. The same documents are used virtually every time and, in most cases, only the names and numbers change. It is hard to say how much things should cost, since an attorney in Evansville, Indiana will charge a much lower rate than an attorney in San Francisco for the same document and caliber of work. However, here are some time guidelines. A letter of intent should take about one to three hours to draft (remember, it’s non-binding in most respects anyway); a non-compete agreement should take about the same time (there isn’t much difference from one agreement to another); and an asset purchase agreement should take about six to ten hours to create a customized draft. Understand what “customized” really means in terms of document drafting in the legal community. Experienced attorneys rarely, if ever, create transaction documents from scratch, and certainly not those listed above. Asset purchase agreements, non-competition agreements, and so on have been used many, many times before you asked for one. They are, in fact, form contracts that are typically handed off to a junior associate who fills in your deal’s specifics. The partner (hopefully your lawyer!) goes over this rough draft and adds his or her knowledge or experiences to the draft to the extent that such aren’t already included in the form documents (that were likely used yesterday and the day before that in a busy law firm).

In all fairness, attorneys are very smart people and they are aggressive. That’s one reason why they’re attorneys. When you need one, he or she is your best friend. Conventional wisdom has it that if you’re in a tough deal, or treading into dangerous territory, you want a smart, aggressive lawyer on your side. I don’t agree when it comes to financial advisory practices, or most service-based practices for that matter. If you’re buying or selling a financial advisory practice in which you have to keep working with the other side for a time after closing, you shouldn’t have to fight your way through a tough, dangerous deal. Pass on it. There will be others. The good news is that the most important element in these deals doesn’t involve the documents or the attorneys, or even the buyer or the seller. In these deals, the clients being transferred are going to sit like a judge and jury for the next three to five years (however long the payoff period runs).They don’t care about what the deal documents look like, the size of the down payment, or the amount of collateral the buyer put up. As you and your attorney work your way through the deal documents, never lose sight of this point. If you’ve ever woken up in a cold sweat at 3:00 a.m. after a bad day at work and wondered why you are self-employed, you’re not alone. In the dark of the night, a lot of problems and threats can creep into the imagination and truly look like nightmares. But with the light of day and some rational thought, these problems have a funny way of working themselves out. It’s kind of like that with attorneys, except most are stuck on the 3:00 a.m. “what if” way of thinking and they never actually get to see problems work themselves out – you only call a lawyer when the problem doesn’t work itself out. Business comes with risks.You get paid for running a business and sorting out what is a real risk and what is not. If you run your own business, I’m not telling you anything you don’t know. If you haven’t bought or sold a financial advisory practice before, you should know that it comes with risks too. Work with a professional, every time, but remember who’s in charge.That’s how to push a business over the top. * * * * *

Due Diligence
Due diligence is more than just a part of the process
of buying or selling a financial advisory practice; it can be the most important thing you do before signing on the dotted line.
Due diligence is the process of acquiring objective and reliable information, generally on a person or company prior to an acquisition or sale. It is about finding those “red flags” that exist in everyone’s practice. Due diligence is the name we give to the function of kicking the tires and looking under the hood. The purpose of due diligence is to help the buyer determine the benefits and liabilities of a practice for sale by inquiring into all relevant aspects of the past, present, and predictable future of the business. Due diligence helps a buyer, and even the seller, decide whether they want to go forward with the transaction or whether they want to renegotiate the price and terms of the deal based on the results of the review. First, let’s correct a few myths and misconceptions about the process. Due diligence is not about finding a reason to abandon the acquisition or sale. People are often afraid that finding problems will kill the deal. That’s wrong. Finding problems is common – certainly your practice has its problems and challenges, and so does everyone else’s. During the review

process, a buyer’s job is to find the problems and deal with them, either by planning ahead or by adjusting the price and terms to offset the perceived risk. Below, we’ll list some of the key issues to watch out for. Most people incorrectly think due diligence is the process a buyer conducts on a seller before an acquisition. In the sale of financial advisory practices below $150 million AUM (or a sales price of less than $3 million), sellers tend to provide a significant



Due Diligence

Due Diligence

part of the financing (bank financing at this level is still hard to come by). As a result, sellers also need to conduct due diligence on the buyer, to whom they will be “lending” money until the practice is paid in full. In this column, we’ll examine both perspectives. Due diligence begins from the very first contact between buyer and seller – the first handshake, the first voice over the telephone, the first typo, the first slip of the tongue; it all counts. Due diligence involves not only checking files, facts, and figures, but also listening and observing the other party during the process. It starts before you realize it, and it can be over just as quickly if you’re not prepared and thinking about it.

process is completed before the written offer is made, and this can involve as many as 5 or 6 potential buyers. The number of buyers quickly drops when an offer and a backup offer is accepted. Most offers, or letters of intent, involve an earnest money deposit. The refundability of this deposit is tied to a limited and specific due diligence period of 15 to 30 days. Only one or two buyers at a time, those with an accepted offer and earnest money deposit, should be allowed to conduct onsite due diligence in the seller’s office.

Typically, a seller’s clients are never contacted by the buyer during the due diligence review process. The one exception is when the seller has a large concentration of assets with one client or one group of clients. In such a case, the buyer may be allowed to meet this special client(s) as a final step in the due diligence process. Alternatively, some sellers choose to build in a contingency to the purchase agreement rather than introduce a very large or lucrative client to more than one prospective suitor before the transaction is completed. In a practice that sells for less than $200,000, most buyers spend about 1 or 2 full days in the seller’s office after reviewing materials in advance. In acquisitions of around $1 million (sales price), a buyer or team of buyers may spend 5 to 7 days in the seller’s office. If you are a buyer who is not familiar with the practice you’re reviewing, obviously more time is needed. If you are offering a large down payment or taking more risk than you are comfortable with, continue the review process until you are fully satisfied. Solid preparation and organization by the seller can greatly reduce the amount of on-site review, as well as enhance a favorable and positive perspective of the seller’s practice. Both sides should start with a good checklist (we’ll give you a free copy for the asking). Sellers should prepare 3 or 4 sets of all due diligence materials to be furnished to a prospective buyer. Preparation not only shortens the amount of time a buyer spends on due diligence, but also can reduce the amount of due diligence if it causes the buyer to feel comfortable and confident that the seller is on top of things. The amount of time spent on the review process also depends in large part on what is being bought – stock or assets. Most advisory practices involve the sale of assets, not liabilities, and at terms of approximately 30% down with the balance contingent on success. If you’re a buyer in the process of acquiring a practice similar to your own, you will likely perceive this as a lower-risk situation, and the due diligence process can be fairly forgiving. Contrast this to an allcash sale or a stock acquisition. When you buy stock, a relatively rare event in acquisitions of under $2 million (sales price), you acquire the history of the company you’re buying, including contracts and liabilities. This

creates a situation where due diligence must be razor sharp, with extra time invested. Due diligence is usually performed by the participants in the transaction themselves – the buyer and the seller, and sometimes their staff. For the most part, registered reps and investment advisors are trained to evaluate risk and spot problems on the horizon. Just do what you do. In most practice acquisitions, buyers acquire a client base and income stream very similar to their own. One of the points of due diligence is to determine just how closely aligned the investment strategies and administrative functions really are. The buyer should see things that he or she is very familiar with and does every day. Here are some basic items that you always want to review as a buyer buyer:  Seller’s tax returns – at least three years  Detailed financial statements showing income and expenses  Third-party verification of cash flow (such as from a BD or custodian)  Regulatory history including the IAPD and NASD on-line databases  Any liabilities you choose to acquire (office lease, for example)  Sample client file and computer records for this client  Client demographics  Advertising records, referral sources  Seller’s business bank statements  Complaint file and closed accounts In contrast, sellers tend to focus on whether a buyer has the skill, experience, motivation, and integrity that it will take for them to succeed in transferring and retaining the acquired clients. But keep one thing in mind. If you’re in your sixties, don’t expect your buyer to match up to you in terms of experience – it won’t

“If the buyer is somewhere close to the
seller in size, it doesn’t have to be a deal killer that they got there by going down a different path than the sellers. There are job done.

The first step is to sign a confidentiality many ways to get the agreement. We have experienced few problems with the honesty and integrity of buyers in the due diligence process, but it only takes one. Most transactions have a buyer signing a seller’s form confidentiality agreement, but there is no reason that the process should not be reciprocal. Due diligence typically occurs both before and after a letter of intent is signed by a buyer and accepted by the seller. About one-fourth of the due diligence


Once due diligence begins, it continues to the moment of closing. Whether you are a buyer or a seller, be aware that you are always on audition – every word, every action, every business letter, every single e-mail matters until the transaction is completed.

We h a v e s e e n many buyers rejected because they did not take the time to spell-check their letters or e-mails. Sellers always ask themselves, “if a buyer presents himself or herself this way to me, what will my clients think when they do it later on?” Use salutations and punctuation in all communications. With today’s technology, there is no excuse for sloppiness or spelling mistakes, and with 30 or more buyers from which to choose, sellers move on quickly.



Due Diligence

happen. Give full credit to the buyer’s past success in business and his or her education. If the buyer is close to the seller in size, it doesn’t have to be a deal killer that they got there by going down a different path than the seller. There are many ways to get the job done. Sellers should ask to speak to the buyer’s clients, especially those who have been with the buyer for more than 5 years. They can tell you from experience why their loyalty was earned. As a seller, you’ll learn far more about the integrity of your buyer by looking through the eyes of their clients than from the buyer’s resumé or number of acronyms following their name. Even if the buyer offers a full-cash deal – investigate your buyer. Your clients deserve it. Here are some basic items that you always want to consider as a seller:  Buyer’s tax returns – at least three years  Buyer’s credit history  The last three monthly bank statements  References, especially buyer’s clients in the age range of seller’s clients  Buyer’s career resume  Detailed financial statements showing income and expenses  Regulatory history including the IAPD and NASD on-line databases  Insurability in the event the seller financing is over $200,000 If the buyer is a much larger company than your own, your evaluation may be quick and easy. Such companies tend to offer high down payments and audited financial returns. While it is always flattering to sell to an “up-and-coming” financial planner whom you can mentor, set the ego aside and always try to sell to someone who is bigger and better than you are. In these days of seller financing, such a course of action will reduce your long-term risk. One of the few advantages of being highly regulated is the large amount of public information avail-

able. A good place to start is the NASD’s web site. Go to and then to the “Investor Information” tab. Under this tab you will find a wealth of information access points. Start with the column labeled “Investor Services.” Once on the “Investor Services” page, you will be able to click on the link “Check Out Brokers and Advisers” where you can discover registration and other background information on investment professionals and firms. The Investment Adviser Public Disclosure (IAPD) web site, which can be accessed through the NASD’s web site, allows you to search for information about Investment Adviser firms regulated by and electronically registered with the Securities and Exchange Commission (SEC) or state regulators. A personal discussion with the State regulators where the individual or firm is based is recommended as well. Remember that avoiding risk isn’t the goal; verifying the seller’s representations, confirming the cash flow, and finding the problems are what due diligence is all about. Don’t get caught up in looking for any one big problem to make or break the deal. An accumulation of smaller problems is more likely. Once the facts are known and you’re comfortable with the other party, adjustments can be made to the deal terms for anything that is different than expected. Due diligence should be a straightforward exercise, since most financial advisory practices have many similarities, and buyers tend to be mirror-images of the sellers in terms of personality, business model, and investment philosophy. The acquisition of a financial advisory practice, or the sale of such a practice, depending on your point of view, is very much about what happens after the transaction is completed. The point of due diligence is that both buyer and seller are betting on the future, in the hands of someone else. They are gambling that they are replaceable, or can replace someone very much their senior, and often betting a small fortune. Good due diligence brings the gamble closer to a certainty. It’s just a matter of knowing the rules and following them. * * * * *

Practice Continuity

Advisors make a living by helping their clients
For advisory firms with more than one owner, a buy-sell agreement details how ownership transplan for life’s uncertainties. One of the uncertainties fers if an owner dies, retires, or becomes disabled. It is an agreement between partners of a partnership, or your clients should not have to worry about is who between shareholders and their corporation, wheretakes over for their advisor in the event of death or by the parties agree to the terms and conditions of a future sale of the partner’s or shareholder’s interest. It also addresses what happens if an owner divorces or incapacity. wishes to sell his or her interest in the business. A good buy-sell agreement limits whom the business can be If you were to make a list of “life’s uncertainties,” sold to, so that remaining co-owners are not suddenly it would likely include a host of things that none of us in business with an unsuitable new owner. It also enwould have thought of even 10 years ago. Today, we sures that sellers or their beneficiaries get a fair price have to include things like buildings blowing up, car for their interests. bombs, shoe bombs, and people next door with AK47 rifles. The more certain things, like death and taxes, For advisory firms with only one owner, a pracalmost seem like the good old days. tice continuity agreement is the sole practitioner’s equivalent of a buy-sell agreement. A continuity agreeIf you have a partner or you are one of severment provides that in the event of an owner’s incapacal principals in your advisory firm, you probably have, ity, death, or retirement, another advisor or advisory or are considering, a buy-sell agreement. That’s smart firm will step in and run the distressed practice during business planning – more on this below. If you are a the period of incapacity, or, in the event of death, console practitioner, you probably do not have, and have duct an orderly sale, or possibly acquire the practice for not given serious consideration to, a practice contithemselves. A continuity agreement typically provides nuity agreement. We have now worked with thoufor a means of determining the fair market value of the sands of sellers and buyers, and less than 1% of the seller’s business and, in certain instances, to provide the people we speak to have a written, practice continufunds necessary to carry the purchase. ation plan. Why don’t more sole practitioners have a continuity plan? The important difference between a buy-sell agreement and a continuity agreement, at least in the Let’s begin with a clear understanding of what case of a financial advisory practice, is that in the first these agreements are, and who they serve. instance, the sale is to an insider who is usually involved



Practice Continuity Agreements

Practice Continuity Agreements

in the business on a daily basis. In the latter instance, the sale or continuation services are provided by an outsider who probably has little day-to-day working knowledge of the client base he or she is going to take over, and take responsibility and liability for. Conventional wisdom has it that continuity agreements are for the clients’ protection, and are used to ensure that the clients’ needs will be addressed in an orderly fashion on a temporary or permanent basis. Clearly the clients’ needs form the foundation for the use of such an arrangement. But there is far more to it than that, and these closely related issues help us to understand why the vast majority of sole practitioners have not yet embraced the use of continuity agreements. For the sole practitioner, a practice continuity agreement is, in effect, a succession plan with a carefully chosen friend or colleague who is contractually made an “insider.” This is as close as most sole practitioners are likely to get to actually having a legitimate succession plan. (This differs from a transition plan, which involves a sale on the open market to the best qualified advisor/buyer.) Although there may be a few instances where a practitioner has advance warning of the disabling event (a scheduled major surgery, for example), the real purpose of a continuity agreement is for unplanned, unanticipated catastrophic events. And that’s why continuity agreements are so essential and so hard to work with. There are two main types of continuation agreements: The one-to-one agreement, undertaken with another advisory practice (such an agreement may or may not be reciprocal); and the group agreement, under which several different advisors may act as successors to each other’s firms, and clients are given the choice of several surviving firms to choose from. A practice continuity agreement should provide for these basic elements:  Define the triggering events (death, disability, retirement)  Provide for the continuation of the seller’s business with assistance from buyer in the event of seller’s temporary disability

 Provide for the sale of seller’s business in the event of seller’s death, retirement, or disability  Provide a formula for determining the fair market value of the seller’s business  Establish the compensation to the continuity provider during seller’s period of disability  Provide for appropriate non-competition and non-solicitation protections for both buyer and seller, and  Contain indemnification and hold-harmless protections for an incoming, unprepared buyer The seller should provide a manual with a complete set of operating documents, including a list of the types of services offered, key employees and their salaries, payroll processing information, location of accounting records, bank account information, contracts and lease agreements, a client list, including key contacts, services provided, and important deadlines, procedures used to monitor work in progress (so the standby firm can easily determine the status of uncompleted work), location of work papers, description of the filing system, and a complete guide to the office procedures. The staff should also get to know the continuity provider(s), since ultimately the provider will be the new boss. Don’t forget about including your employees’ thoughts and participation in the development and implementation of the continuity plan. From the clients’ perspective, the assistance of the disabled or deceased advisor’s staff during and after the transition phase can make or break the entire process. If you have a licensed staff member, they may be the best continuity provider you could hope to find, especially if what you need is a temporary fill-in rather than someone to buy and operate the practice. A continuity agreement, like a buy-sell agreement, has significant repercussions. A spouse and/or heirs as well as estate executors should be made aware of this agreement. It is also a good idea for the advisor to inform his or her clients, to be sure it is acceptable to them. The circumstances under which such an agreement will actually be implemented are always difficult, so having well-informed and supportive clients is essential. This is a chance to show your clients

what planning for the future of their businesses actually looks like. So why do so few practitioners have practice continuity agreements? Here are the practical challenges that require you to fill in the blanks, or develop a high level of tolerance. Let’s say, for instance, that you are in a car accident, in a coma for six months and unable to work at all for a total of twelve months. Your continuity provider needs to be able to step in with just a few days notice and do your job, in addition to their own. This means that they will be meeting with your clients and answering their questions, taking on the responsibilities and liabilities of giving the proper financial advice, and not losing your clients; they will need to operate your bank accounts and write checks to pay the rent and keep the lights on; they will need to get to know your clients well, and vice versa, and then step out gracefully, and completely, when you return to work. Now that is indeed a friend. But friend or not, they need to be compensated and you need to be assured that they won’t take your clients, or that your clients won’t decide they prefer your replacement. We’ve heard from some folks that the disability mechanism is too hard to successfully implement, and that continuity agreements should be limited to permanent disability and death. That certainly makes things easier, but it also dilutes the purpose of a continuity agreement. It may, however, be enough to satisfy

In concept, a practice continuity agreement makes all the sense in the world. It is about planning for the future and the uncertainties that create the impetus for advisory clients to utilize professional advisors in the first place. Continuity agreements embody the basic elements of preparedness and risk diversification that are the foundations of sound investment advice. * * * * *

your clients that you have taken some steps to protect their interests if you’re not around. It certainly is worth considering as a workable alternative. Finally, you need to keep your continuity agreement up to date. Calendar an annual meeting with your continuity provider to discuss the plan and the steps needed to successfully implement it. Practices evolve and change, and the provider of continuity services in the early years of a practice may not be a good fit in the middle to later years. It also helps to have the continuity provider be a larger firm with a qualified staff. If services are needed in short order, as is usually the case with these agreements, it is virtually impossible for one person to address the needs of, say, 150 to 200 clients in the first month after the disability or death. A qualified staff can get the job done and foster an open line of communication at a time when it is most needed.



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