Ep 424: Executing A Successful Internal Succession Plan In The Private Equity Era Of Advisor M&A with David Grau Jr.

Summary

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Financial Advisor Success Ep. 424

Executing A Successful Internal Succession Plan In The Private Equity Era Of Advisor M&A

Host: Michael Kitces
Guest: David Grau Jr., President of Succession Resource Group
Date: February 11, 2025

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Main Theme & Purpose

Michael Kitces welcomes David Grau Jr., President of Succession Resource Group, to discuss the evolving landscape of succession planning for financial advisory firms, particularly the tension between internal succession strategies and the influx of private equity (PE) acquirers offering high deal multiples. The episode explores best practices for building sustainable internal succession plans, how founders and successors should prepare, and offers a nuanced look at PE deals—moving beyond headline valuations to the realities of terms, risks, and the value of legacy.

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Key Discussion Points & Insights

1. The Evolution of Succession Planning (05:54–08:23)

• Succession planning cycles have shifted significantly: from lifestyle solo practices to ensemble firms, and now to more complex team-based organizations influenced by PE money.
• Firms are now growing to a scale where internal successors may struggle to afford them, but at the same time, PE aggregators have introduced a new set of choices and challenges.

“They usually end up being, you know, a little siloed at first. Eventually they'll shift gears and become more of an integrated ensemble … then they outgrow their successor’s ability to afford them.” – David Grau Jr. (05:54)

2. Understanding the Affordability Challenge (08:23–11:39)

• Historically, a practice selling for 2–2.5x revenue (or 7x earnings) was affordable if amortized over 7–10 years; successors balked less at the math and more at the size of personal risk.
• The main barrier is often risk aversion, not true unaffordability.

“What they really meant was ‘I just don’t want to take the risk of having a seven figure loan to buy a seven figure business.’…it was more of a risk tolerance issue than an actual ‘there’s no way to buy this’…” – Michael Kitces (08:23)

3. The Private Equity Effect (11:39–14:47)

• PE firms, with access to large pools of capital, pay higher multiples and can afford negative short-term cash flow for future rewards.
• But headline numbers hide complex (and sometimes onerous) terms regarding structure, tax outcomes, timelines, and contingent (future) payments.

“It isn’t the only thing in the top five… Even if it's number one, number two has got to be a close second is the terms. You've got the taxes, you've got the compensation, you've got the timeline…” – David Grau Jr. (12:30)

4. How PE Valuations Really Work (15:34–20:34)

• PE-backed deals often feature a low up-front cash payment (20–30%).
• The rest comes as stock in the acquiring firm, often valued at an inflated future multiple, plus significant earnout/contingent payments pegged to aggressive growth goals (15–20%+ per year).
• The actual “headline” valuation reported is seldom realized in cash.

“The only way you can make the values work that you’re seeing talked about out there with these outside aggregators and investors is to manipulate something else. And it generally is the terms.” – David Grau Jr. (12:30)

• On those deal terms:

  “The final... sometimes 20%... is kind of that earnout structure... where there’s growth targets... Relatively aggressive growth targets.” (18:25–20:34)

5. The Impact of PE Multiples on Internal Succession (22:14–25:18)

• High PE multiples create unrealistic expectations for internal succession candidates and founders, often derailing practical internal plans.
• Internal succession planning gives founders the chance to mentor, build legacy, and enjoy a steady transition—and can be financially comparable or better over time, especially across multiple tranches.

“It’s sabotaging a lot of firms’ ability to do internal succession planning by creating these unreasonable expectations…” – David Grau Jr. (22:14)

6. Adjusted Earnings in PE Deals (25:18–30:01)

• PE acquirers “normalize” (reduce) reported earnings by projecting required business investments post-acquisition—staffing, tech, compliance, etc.—shrinking the true EBITDA multiple being paid.
• Sellers often expect the buyer to adjust earnings up (removing owner perks), but PE buyers adjust them down for anticipated expenses.

“I’ve just never seen these firms do the normalization and have the profit figure go up. It always seems to go down…” – David Grau Jr. (28:31)

7. Economics of PE-Backed Acquisitions & Why They “Work” (30:55–34:13)

• By putting down low cash at closing and using stock/earnouts, PE firms leverage their money to acquire more firms, spread risk, and benefit from scale/synergies.
• The entire system is predicated on ongoing rapid growth—if growth stalls, payouts often don’t fully materialize for sellers.

8. Attrition as an Exit Strategy (38:18–44:36)

• Many advisors informally “retire through attrition,” gradually working less, retaining a shrinking book, and eventually selling what's left—often netting strong lifetime value.
• Founders can proactively “prune” books by selling C/D clients to newer advisors (who see them as ‘A’ clients), creating win-wins.

“Retirement through attrition is the leading exit strategy for an industry full of professional planners. And it kills me, it hurts my heart.” – David Grau Jr. (40:41)

9. Who Should Choose an Internal Succession (45:13–47:21)

• Ideal for founders who want to develop and reward their team, preserve legacy, ensure continuity of client service, and potentially remain involved longer.
• Internal succession planning requires deliberate early planning—with defined job tracks, compensation models, and gradually increasing equity opportunities (phantom/shared/equity tranches).

10. Mechanics of Internal Succession Planning (48:44–58:06)

• Career Tracks: Formalize job descriptions/pay bands to enable predictable paths to partnership.
• First Tranches: Successors buy in at 1–5% (sometimes 10%), often company or seller-financed at first, then larger tranches with bank financing.
• Timeline: Full transition may take 7–10+ years via multiple tranches, with both founder and successors benefiting from firm growth between transactions.

“We have to approach these things—succession planning—as a series of events. I mean, frankly, almost as a mindset. It’s not a singular transaction…” – David Grau Jr. (55:14)

11. Valuing Internal Successions (58:06–69:12)

• Valuation Process: Get third-party formal valuations early and regularly.
• Discounts: Minority stakes usually get a 10–30% discount for lack of marketability/control, unless seller/company-financed (then likely not applied).
• Multiples: Internal deals typically transact at 6–12x EBITDA (average ~9x), depending on growth, team, scalability, and firm health.

“Internal succession should always be focused on earnings … buying in, the way that I’m going to service this debt is from the profitability that I will hopefully be receiving.” – David Grau Jr. (65:21)

12. Protecting Buyers & Practical Structures (70:09–73:32)

• Stretch notes tie successor payments to a % of distributed profits, buffering buyers in downturns.
• Bank financing increasingly common for larger tranches; banks require founder/company guarantees, ensuring continued operational and financial discipline.

13. What Makes Firms Attractive to Buyers (including PE) (67:08–69:12)

• Strong growth (>10–12%), scalable team, and investments in technology/process result in premium multiples—these factors benefit both internal and external exits.
• Founders who invest in business building, even if internal succession fails, net higher values from external buyers due to organizational maturity.

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Notable Quotes & Memorable Moments

• On PE Terms & Valuations:

  "You are literally giving me the next 14 years of income… but once the adjustment is done, you’re not delivering to me a duffel bag full of cash…”
  – David Grau Jr. (17:48)

• On Internal Succession Mindset:

  “It’s more of an emphasis on the planning part of succession planning, as opposed to a singular transaction.”
  – David Grau Jr. (53:49)

• On Advising Successors:

  “For the successor—know you’re not ready. For the founder—know that they will never be ready! None of us are ready until we do it.”
  – David Grau Jr. (86:16)

• On Founders Deciding Not to Succession-Plan:

  "If you made the decision of how you want to exit purely based on financial motives as an Advisor listening. You should just work less each year, retire through attrition and ride this thing into the ground."
  – David Grau Jr. (38:18)

• On Timing:

  “If I’m hoping to exit in my early 60s and I’m not already starting the process in my early 40s, I may be behind.”
  – Michael Kitces (84:00)

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Segment Timestamps

• [05:54] Succession planning cycles and the PE effect
• [08:23] Why affordability is more about risk tolerance
• [12:30] Headline PE multiples vs. the true deal terms
• [15:34] How typical PE-backed deal splits actually work
• [20:54] Growth expectations and their impact on contingency payments
• [25:37] The mechanics of “normalized" or adjusted earnings in PE deals
• [30:55] Why these high-multiple deals don’t blow up for PE acquirers
• [38:18] The “retire through attrition" phenomenon
• [45:13] The archetype of advisors who pursue internal successions
• [48:44] Practical steps for preparing an internal succession plan
• [58:06] How to value and structure internal equity tranches
• [65:21] Comparison of internal vs. external deal valuation metrics
• [70:09] Ways successors can protect themselves in early tranches
• [84:00] Backward-calculating the real timeline: why you need to start internal succession early
• [86:16] Advice for successors: "You're never ready, but be a sponge and work hard."

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Takeaways & Action Steps

• Start Early: Begin succession planning and owner-track development at least 10–15 years ahead of your target exit.
• Valuation is Key: Obtain third-party valuations before any equity transactions; track value drivers and detractors as you go.
• Iterative Tranches: Structure internal successions as a series of gradual buy-ins (tranches), not a single transaction.
• Transparency for Successors: Offer clear job tracks and compensation models; introduce phantom equity before real equity.
• Don’t be Lured by Headlines: PE multiples may overstate realized value; examine terms and contingencies rigorously.

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Closing Reflection

David Grau Jr. underscores that internal succession is both more challenging and more rewarding than most founders expect—offering the potential for greater total value, legacy, and satisfaction, if planned early and executed iteratively. The “easy button” of PE or attrition exists, but internal succession preserves continuity and culture in a way that's hard to value, but easy to regret losing if neglected.

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For more podcast episodes and resources: www.kitces.com

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Transcript

[A]

Welcome to the Financial Advisor Success Podcast where you go behind the scenes with financial planner speaker and consultant Michael Kitces to hear stories of how leading financial advisors navigated the inevitable challenges that arise on the path to success and get insight from leading industry consultants about how to break through to the next level in your advisory business. And now, here's your host, Michael Kitces.

[B]

Welcome everyone. Welcome to the 424th episode of the Financial Financial Advisor Success Podcast. My guest on today's podcast is David Grau Jr. David is the President of Succession Resource Group, an advisory consulting and valuation business based in Portland, Oregon that serves independent financial advisors with both RIAs and broker dealers. What's unique about David, though, is how his two decades of experience supporting advisory firms has helped him uncover best practices for founders and their successors looking to execute internal succession plans, even as those succession plans have become more challenging in a time when founders so regularly field a steady flow of inbound inquiries from private equity backed acquirers, often headlining high valuation multiples. In this episode, we talk in depth about the best practices that David recommends to firms to start preparing in advance for internal succession, including creating more defined career tracks and compensation structures, as well as getting the firm's business metrics in order and even getting their first third party valuation. How David advocates for breaking up an internal succession plan into gradual tranches, for example, starting out by initially selling an internal successor a 1 to 5% ownership stake, and then ramping the percentage up with each subsequent tranche over time in order to make the financial commitment of doing so more palatable and financially feasible for successors. And why David recommends that firm founders start early when it comes to internal succession plan to get the ball rolling is if it can take five years to develop a potential successor and 10 more years to execute the transaction, a series of tranches an advisor who plans to retire in the early 60s would ideally already be starting to lay the groundwork for succession by their late 40s. We also talk about why David thinks that internal successions do remain viable at a time when private equity backed aggregators are willing to buy small firms quickly and often lofty headline valuations, in part because the multiples often come with less attractive terms buried in the fine print of the deals. How David further finds that the publicly announced valuation of PE acquisitions are often somewhat misleading because the media only talks about the multiple of revenue or earnings and not the adjustments that the buyer made to the firm's projected earnings before striking the deal. And why David suggests that some firms who sell to PE backed buyers might find it hard to meet the annual growth targets, often 15 and 20% per year and sometimes much higher that they have to achieve to actually get the full compensation originally outlined in the deal. And be certain to listen to the end Where David shares why advisors might consider doing a partial sale if they are no longer as profitable clients to give them lifestyle flexibility while monetizing at least part of their business and then continue to serve the smaller group of remaining higher value clients with better profitability and fewer working hours. How David suggests that preparing a firm for an internal succession, for instance by investing in a staff to build a tenured advisor cadre, can end up benefiting the founder even if they do decide to do an external sale in the form of getting a premium valuation for having a well established team to handle clients when the buyer comes in. And why David believes that while internal successions can involve more work than an external sale, they can often end up being more satisfying for the founder by allowing them to leave a well defined legacy for themselves through the firm. And so with that introduction, I hope you enjoy this episode of the Financial Advisor Success Podcast with David Grau Jr. Welcome David Grau Jr. To the Financial Advisor Success Podcast.

[C]

Welcome Michael. Thanks so much for having me. I am an avid listener and very excited to join you here today.

[B]

Well, I'm glad you're willing to join us on the other side of the microphone, as it were, and getting to dig in today to a topic I'm really excited to get to nerd out on with you, which is all things succession planning, because to me it's gone through a really interesting evolution over a relatively fast maybe 10 years or so if I look historically succession planning, the way you exited the business as a financial advisor, like I've built up these clients and now someone can take over my clients. If I was in a broker dealer, I probably had some kind of like split rep code, effectively an earnout style structure. Hey, you take over my clients, I'll hand them off to you. I get a declining percentage over a couple of years off our split rep code and then I'll go away. And then eventually we started moving to RA models and it was cool because you have an entity, you could like literally sell the entity or like the goodwill assets of the of the business and we saw the stability of the revenue eventually start to bring in bank financing and I feel like succession planning really started to heat up and gain momentum and then private equity showed up little under 10 years ago in a big way and we're suddenly willing to buy firms at just much higher valuations than anybody had seen before. And that a lot of next generation owners, like a lot of successors, had been willing to buy, at which to me is now quickly turned into these really challenging questions for a lot of firm owners like do I, do I sell to an internal successor at a quote, discounted price? Or do an external buyer like a PE funded firm at a much higher valuation? And I'm not even sure that's a fair comparison because those are different buyers. And what's going to happen to clients, what's going to happen to team, how likely this transition necessarily even is to succeed, what kind of strings might be attached to the money? So I just, I'm excited to talk about, I don't know even as you'll, you maybe view it like what, what is the current state of succession planning in advisory firms in this private equity era for the business overall?

[C]

The industry in all things seem to go in cycles. I think that's kind of where a lot of firms have started to end up now, or where they have ended up now in that they get to a point where they have shifted from the lifestyle advisor, solo producer, great business model, super efficient. They decide they want to start building a team. They build said team. They usually end up being, you know, a little siloed at first. Eventually they'll shift gears and become more of an integrated ensemble. It's more efficient, helps them grow and scale. And the problem is then they start to have a little bit too much success and they outgrow their successor's ability to afford them. But the key there is to make sure that as they get to that size again, until we recently had private equity starting to enter the space, you got to 10 billion, 20 billion in AUM, you better have built your internal succession team because there weren't a lot of firms that could afford to have bought you anyway. So you're right back to where we were decades ago, where if you didn't build your succession plan internally, you might not have one. And then the white knight rides in private equity in the industry aggregators now, even some of those larger firms that have maybe outgrown their team's ability to acquire, they actually have a solution now. So there are definitely some instances where I'm seeing PE industry aggregators providing real value to the industry.

[B]

So. All right, so I, so I've got some, some questions in that, in that regard. I guess sort of in, in that framing. I feel like there's, you know, there's been a lot of discussion in the industry about firms growing, I sort of two related challenges. Firms growing to the point that the next generation can't afford, can't afford to buy them out, and firms transacting at valuations that the successors don't necessarily want to pay, which I feel like are kind of dovetailed together. Obviously if the valuation like multiple or such is higher, then it also makes the price harder to reach. But I will admit I struggled with this a lot, this framing, at least before valuations expanded. We can maybe come back to that in a moment. You know, I remember these conversations with peers. I went through a version of this in a prior firm as well, where the business got pretty big and it was selling for something in the neighborhood of two to two and a half times revenue. And it had a healthy 30% EBITDA margin, give or take a little, which basically meant it was selling for something like 7 times earnings, give or take a little.

[C]

Right?

[B]

7 times a 30% margin is 2.1 times top line if we math through it. And there was a fascinating phenomenon to me that cropped up when shares started to come to the table at this multiple, which was some people came up and said, okay, look, if we're going to make this work, I do need to be able to amortize it over a reasonable period. So I need someone to finance this thing for me for seven to 10 years. More than a dozen years ago you probably had to do that seller financing. Maybe a decade ago you had a couple of bank financing options that cropped up. But if you were buying for something at seven times earnings and you could amortize it on a ten year note, the math kind of worked. The cash flow basically covers the note. There's risk to that, which is if you don't manage the business well, the cash flow is not going to cover the note and then you're going to have a problem. But nominally, whether you were buying a practice for a half a million or 2 million or 5 million or 10 million, if the amortization of the note was longer than the multiple of the earnings, the deal kind of cash flowed itself at any size. And the phenomenon I saw, I guess I'm curious whether you would agree or disagree with this. The phenomenon I saw, people would say it's too big, I can't afford it. And what they really meant was I just don't want to take the risk of having a, having a seven figure loan to buy a seven figure business. It wasn't that the math didn't work and that it wasn't affordable it was essentially, it was more of a risk tolerance issue than an actual there's no way to buy this as the successor.

[C]

Yeah, I could not agree more. And that's been one of the bigger challenges that I have observed in the industry. Sort of from the ivory tower. As a consultant, working with these firms is oftentimes they just end up waiting a little too long, unfortunately. And now that they're waiting too long and doing nothing around succession planning, sort of at the micro level, inside the office, they're active with succession planning, they're mentoring, they're training, they're hiring, sort of with that end state in mind. But the problem is in the meantime, the firm continues to grow, which is great, don't get me wrong. But when they finally get the opportunity as next gen advisors and leaders in the organization to buy that first tranche of ownership, Michael, the number on it is, to your point, it's seven figures. And sure, the math works, but whether they initially look at that number and you know, have a little bit of heartburn, they come to terms with it and then they go home, they talk to their spouse or their CPA or their brother in law who's an attorney, all those people just sort of cringe because it's a million dollars, it's $2.

[B]

Million for your mortgage. Used to be the biggest debt I have, and now you want me to take one that's many multiples, right?

[C]

For, for what exactly? I can, to your point, the house, it's tangible. I know the value. I can influence the value here. I'm a minority shareholder. So there's just so many layers to it beyond the math and the spreadsheets and the contracts, frankly, the stuff that I know and love that deals with the human element and the emotions of these transactions. And, and we have to manage both as, as founders, owners, certainly as M and A consultants. And that's not easy.

[B]

So then we had this world where, okay, at least maybe the math sort of works if you're willing to take the risk and you can find someone, a bank or a seller to finance it long enough. And then valuation started going up and then PE firms started coming in. I mean, I guess in the simplest sense, PEs have access to giant swaths of capital, which for 10 years was at ridiculously low interest rates. And so I got to presume, in the simplest sense just PE firms could come in and say, I'm willing to finance this in a way that's even cash flow negative for me for a while because I have a lot of borrowing power. And I'm confident it's going to grow well enough to be successful in the long run. So I'm willing to actually go negative for a while to get a decent positive in the long term. And that means I can afford to pay more upfront.

[C]

Yeah, I couldn't agree more. And you and I both know this. There is when you work on these deals, yes, there's value and it's important. Don't get me wrong, I, as a fellow founder, business owner, when my day comes, value will be in the top five, don't get me wrong. But it isn't the only thing in the top five. And even if it's number one, number two has got to be a close second is the terms. You've got the taxes, you've got the compensation, you've got the timeline. There's just so many other components to these deals. But of course you can't cover all that in a marketing email or trade publication article. And again, the industry pundits do a really good job of writing about and covering this stuff. But the interesting sexy topic is the multiple and the value being paid. The hard part is the way you get to those high multiples. To your point, like on the surface, you would assume if the EBITDA multiple you're paying is less than the amortization on the loan or close to, because there's down payments to consider and taxes. If it's close to or less, it's probably got legs, it will probably work well. And you get these PE firms coming in and sure, they can aggregate businesses, they've got other considerations, maybe a little bit longer horizon, and they're offering these much higher multiples. The funny thing is, and it's frankly not really that funny, when you get into working on these deals and working to help folks understand and reset expectations is it's not just the value, which they kind of know, but the values end up being so much higher than everything else they've heard that it's hard to not focus on that. But the only way you can make the values work that you're seeing talked about out there with these outside aggregators and investors is to manipulate something else. And it generally is the terms. And it's not until you get much farther into the transaction where the advisor finally has that revealed to him or her. And they quickly realize, okay, well, all right, you are paying 10 times or 14 times my earnings. But number one, you pretty heavily manipulated my earnings. Normalizing it is what they call it. I'll say manipulating. And then you're not delivering to me a duffel bag full of cash, which is what I would have gotten if I sold for two or three times to my internal team or to appear. So it's always the devil's in the details. And folks, unless they really get into these deals, you just don't see those details.

[B]

So can you help us then unearth more of those, those details like how, how that works, how the proverbial sausage is, is actually made between, you know, what, what we see in some headline announcement about a multiple that's usually even a multiple of revenue at that point. Even, even earnings multiples aren't often publicly reported.

[C]

Right?

[B]

Like help us dissect what, what I guess a prototypical deal. I don't want to get any, any particular deal in trouble. Like what, how does a prototypical deal break down when you nominally see someone got this 3x revenue or more like what, what was actually going on there to get to those numbers?

[C]

So most of the firms that an advisor is going to be talking to may on the PE side. These would be larger firms that have taken a pee investment and they're now using that money to go grow, scale their business aggregate partner with firms. You have to keep in mind those are firms now that they've done enough in the merger and acquisition recruiting space that they've effectively been given somebody else's money to go gamble with. So just know they're really good at what they do, else they wouldn't have that private equity investment, let alone dealing with private equity directly. So these folks are professionals. I would say as a rule of thumb, they win or they go home. If you walk away from those deals thinking, you know, I got one over on them, I won, you probably just misinformed, unfortunately. But there are still instances where they, you can get a good or what I call a fair deal. They do pay in many cases higher multiples than you would otherwise expect in an arm's length transaction between two peer firms, big or small. The way they do that though is by adjusting the deal terms. So if you and I, Michael, are two independent RIAs, you know, couple million dollars in revenue and I'm going to buy your firm because you're obviously so much older than me, I would go take a loan from an industry lender. I would pay, you know, right now not the best interest rates, but the math would still work. I'll pay three times top line, seven, maybe eight times earnings. Generally equates to it to your earlier math and I'll pay the bank back over a Decade and I'll write this thing off over 15 years. So that's the general baseline when folks are saying, okay, well, I've received offers and talked to my peers, but then I got this other offer coming in and this PE firm or this PE backed aggregator that I'm talking to, and they're talking about much higher numbers. So let's put that conversation on pause and I'm going to see this through with this firm and just see if there's anything there. And they get into the financials and okay, it seems like this might have legs. You get to the terms and you find out, well, how are they affording to pay 12 times or 14 times my earnings? I mean, you and I both know said in plain English, they are giving me the next 14 years of income. Like everything that comes at the bottom of this machine, they're going to be giving that back to me. In theory, next 14 years. Granted, there might be some growth that can help, but still.

[B]

Whereas I view it the other way, right? A, an earnings multiple, you can, you can flip into an earnings yield in the inverse. Like you know, the, the, you buy a thing for 12 to 14x that that effectively means you're getting a 7 or 8% yield on it, cash yield on it. I'm like, okay, but like I can buy a corporate bond for not much less than that and have debt covenants. So. Right, yeah, so, so then help us understand. So how, how do these deals show up with these kinds of earning multiples? Like what's, what's the part we don't see and how this, this deal gets written?

[C]

Which, yeah, you got to think, okay, well if they're just going to go out there as PE firms or PE backed aggregators and just grossly overpay for everything, it's going to be really hard to get the kind of returns that those PE firms are expecting in the time frames that they're expecting them. So the way that we have seen them done, and this isn't a good or bad thing, it is just peeling the onion back. So the listeners as they start talking to folks like this know generally what to expect. Every deal is different to your point. But fortunately I'm not client facing anymore anyway. So I just see the data in aggregate. When these deals are done, they generally, instead of having a cash payment upfront, that's generally the entire purchase price provided by an industry lender and some cash in the deal from our firm. Now you're talking about 20 to maybe 30% of a higher purchase price. But 20 to 30% cash upfront. The other two thirds, it'll be categorized in a variety of ways, is contingent as in like you'll see another 1/3 usually paid in the aggregator or stock, which you know again, when they're done with their pitches, and I've heard these pitches, you want to take the whole deal in stock with the growth rates that they're talking about. I mean, it's hard to not get excited over it. But you've got a third of the deal in cash, a third of the deal plus or minus in stock in the acquiring firm. The hard part is the stock in the acquiring firm is not valued at 10 to 14 times earnings. It's usually going to be 25, 35 times earnings. So you better buy the story that they're selling with that growth that they see. And the final One third, sometimes 20%, is kind of that earnout structure you talked about from the days of old where there's growth targets. And if you can hit those growth targets, then you'll see that last 20 or 30%. Problem is they're relatively aggressive growth targets. And also once this acquisition has happened, you're generally going to be leveraging their marketing team and firm. So there's going to be some changes. It just makes it sometimes hard to hit those growth goals. Plus then you're relying on 2/3 of this thing. The stars have to align, the markets need to hold up, the transition needs to go well. We need to be able to grow. You're putting a lot of eggs in one basket.

[B]

So when you talk about these back end structures with things like growth targets, I think it's such a relatively aggressive growth targets. Just can you give us some context, like what is, what is aggressive growth target mean in this environment? Because we all have different contexts about what is, quote, unquote, normal growth in the first place.

[C]

Yeah, that's fair. And it is relative. In most of these they're going to be targeting 15 to 20% growth minimum. Which again, doesn't seem like we're shooting the moon here, but when you're talking about the firm they're buying has historically been growing at the size firms they're talking to. We're no longer talking about, okay, if I can just get to a billion, then someone's going to be interested from private equity. Yeah, I mean that might get you in the door nowadays, but you need some size and scale for these firms to be interested because they don't want to buy your job. So they're not looking for owner, operator businesses. With 50 million in AUM or 100 million, that's not on the docket. So they're looking for larger firms. These larger firms, you've got a couple billion in AUM. The hope is that we can be growing by 8 to 12%. We've got the market appreciation when things are good, we've got organic growth activity, maybe the occasional win on the inorganic side. But to ustain, you know, 20 plus percent growth year over year, that size, that's it's not easy. I'm not saying it's not possible because we got some clients that they definitely do it, but it's not the norm.

[B]

I was going to ask like when you talk about things like can you sustain 15 to 20% growth rates, like at least if I'm AUM based, is that inclusive of market, like I get some, some market tailwind and I've got to make up roughly the other half from actual organic growth of new or existing clients.

[C]

Correct? Yeah, it would be inclusive and it is in its totality. We're looking at 15, 20% plus. But I'm also trying to be conservative. I've seen a lot more aggressive growth figures where you think there's literally no way that that will happen. Why would you sign that document with that expectation to get the final 1/3 of your payment? You've never grown that fast. So it's just about going in with eyes wide open. And I think the bigger challenge for me is aside from folks not having full information when they hear about these multiples, but they get it eventually as they do their research and they talk to the firms, is it just creates this unreasonable expectation unfortunately, that when I realize this and then I come back and you and I work on doing our deal at three times, I now understand what the alternative was, but now I feel like I'm settling when I do the deal with you. And so the expectations impact the peer to peer deals where people are still doing those deals, but they're just not excited about them and they should be. Those are really, really good values relative to where we've been at in the industry. And I gotta say it's the private equity and the multiples and the conversations around 10 to 14 times EB it is, it's sabotaging a lot of firms ability to do internal succession planning by creating these unreasonable expectations that frankly the internal successors can't meet. But we're still not really comparing apples to apples because the internal successor will go borrow money, deliver cash, a check and buy in. They're not going to show up and say, hey, you know what, Michael? I want to buy into the firm here that I'm working at. I'm going to give you a 20% cash down payment, and then I'm going to use some stock in another company.

[B]

No, I'll give you a stock, actually, that you just sold to me.

[C]

Right.

[B]

You want to roll your stock into your stock.

[C]

But when you see these multiples out there without that context, you think, well, shoot, you know, I've got evaluation done, and I'm doing my internal succession plan with my team, and we're talking, you know, eight, nine, maybe 10 times for a really good firm. I could just hit the easy button here and take this outside investment at, you know, 25, 30% premium. And it sounds a lot easier than mentoring and training and financing. So I think there are definitely some, some problems that the PE firms solve for the industry. I mean, it does grease the wheels of commerce. But there are definitely some downsides that I have observed, and they're just sort of an incidental issue. But it's having a pretty big impact on internal succession planning, and it sucks, because our industry was really starting to make some strides towards the internal succession planning. It's not the only way to exit the business, don't get me wrong. But I think it's a pretty good plan. A, because it makes plan B even better. If you end up building your firm, do internal succession. You're mentoring, you're training, you're building the systems and the processes. You know, what if. If the successors don't want to buy it or you change your mind, you are still so much more valuable as a result. But then when I start seeing these higher multiples, and I think, well, there's no point in doing internal succession. I don't, A, too much work, and B, I won't get nearly the same value. It just starts to sort of distract owners, unfortunately.

[B]

So you had mentioned earlier as well that a lot of these deals get struck at some multiple of earnings, but it may be quote, adjusted earnings. So can you explain more what. What that means? And it's literally like, what, what gets adjusted? What. What are the adjustments?

[C]

Yeah, it's funny because when we talk about ways to build a more valuable business, some of the basic things we'll talk to folks about is just know your P and L. You know, it's that old. I think it was Peter Drucker who said it, what's measured improves. Know your P and L, look at your financials every single quarter. You don't need to Spend a lot of time on them, but, but get to know them, make sure that they, they're clean and they truly reflect the business as it exists. And a lot of times when you look at these firms, they will be showing abnormally high levels of profitability in many cases. But it's because they haven't been investing back in the business necessarily. They're on the, the back nine of their career. They're not in growth mode. They're not trying to hire because they're not trying to grow that much anymore. So then you get these firms coming in through acquisition saying, okay, well, you might be at a 45% margin, but that is not sustainable, scalable. So we need to adjust the staffing levels. We need to adjust then your, you know, insurance premiums and costs. We need to adjust the size of your office because you're going to need more people to scale this thing. You're doing the money management in house. That's not going to work for us. So we're going to move it over to how we would manage it and what that cost structure would look like. Your technology sucks, so we need to switch it over to a more contemporary solution set. And all of a sudden you go from a firm that the owners were pretty excited about this thing. They 45% profitability and all of a sudden when the financial folks are done, it's at like 15%, 20% profitability, you know, baking in some reasonable owner compensation. So sure, you're getting 14 times, but it's not 14 times the profits that you were doing the math on.

[B]

So I guess that's part of what I was wondering or curious about. I feel like the traditional view of understanding the profitability of an independent professional services firm is something the effect of. Well, you can look at the earnings, but we all know it's a little higher than that because the owner's kind of putting some stuff through the business. And there's sort of this implied assumption of, oh, well, if you think that's what the earnings are, wait until you see what they really are. Once we back out, the creative tax strategies that the owner was implementing. Whereas to me, you're telling a story in a very different direction, which is, no, no, no. If you're a high margin practice, there's such things being so high margin that the buyer's going to come in and say, I won't actually give you an EBITDA multiple on those earnings. I'm going to adjust them not up to back out your creative uses of cars and boats through the business. I'm going to dial your earnings down because I think I'm going to have to put more cost structure in place to scale the thing that I'm buying from you. So your earnings are not what you thought they were for the purposes of our earnings multiple.

[C]

I couldn't have said it better because you're right. When you and I sit down, if we're going to take our respective firms and I'm going to get my financials ready to give to you or you to me so we can start doing some due diligence, talking about a deal.

[B]

Then the car and the boat come back out, right?

[C]

Wash them earnings up, which is exactly what happens. As the owner, you think, okay, well, I see right now what my profitability is. But I know like, yeah, that printer and iPad and stuff on there, that's. It gets used for business purposes occasionally, but mostly it's at home with my kids. So we'll go through and do our adjustments. You think, okay, it's even higher now? Well, the problem is for the firm operating as a general rule of thumb, it's a, you know, 40 to 50% profitability that is generally a firm that's going to get something in the 5 to 6 times EBITDA range because it is so high profit that generally there's some exceptions, but generally that is a business that it won't be able to maintain that profit margin and still grow in scale and hit these targets that we're expecting. So then they go through and they do their quote unquote normalization. I've just never seen these firms do the normalization and have the profit figure go up. It always seems to go down and buy a fair amount. Sometimes at the end of the day, regardless of who the buyer is, it comes down to is the business going to be profitable. When I look at this thing as the buyer net of taxes, debt service and some expenses to continue to run and operate it. And I got to tell you, in most cases, if I go buy your business, Michael, and I pay you three times, there's probably 10 year financing your traditional deal. There's a little bit of meat left on the bone. If we have some growth and the markets are good, then I'll do just fine. But I'm not going to retire early on the acquisition. When you start seeing these deals Talked about at 4 and 5 and 6 times top line revenue, there's no chance. So then you've got to start figuring out, well, how would they make that work? And it's always through the Terms, that's.

[B]

Why I was going to ask, just to come back to that again. So as you noted, like the, the, the, the acquirers doing this serially, like they're professionals, they're good at this, like they win or they go home. If you think you won, you're probably wrong, right? It's, it's the what the old poker saying, like if you can't figure out who the sucker at the table is, there you go. So, okay, they're transacting deals at four to six times revenue. They're not the suckers because they're the professional investors. So what are we collectively missing about why they're not insane doing deals at these valuations? How is this still turning out so profitable for them that they just keep doing it and apparently they're hoovering up more private equity to do it because everybody else thinks this is equally awesome in the private equity world. Like what are we missing about why this math works for them?

[C]

Well, if they, if they're coming in just to stick to top line revenue multiples because it's, it's easy, it's simple, it's very comparable. But if they're doing, let's say four times, but they're only putting 20% cash down, I mean they're not emptying out the coffers to get these deals done. In fact, they're tying up very little equity, relatively speaking. Now it's a higher multiple they're paying on the revenue or earnings. It takes a 1/2 dozen another, but the down payments are lower. And so they can go get a lot more deals done, they can aggregate a lot more practices, they can gain some scales, some efficiencies. Again we, we don't need these five practices in Des Moines, for example, having five receptionists and five office locations and five people managing the money. So they can definitely get some scales of economy if they can just aggregate these things fast enough. But again, if you were going to go out as a normal acquirer peer RIA in the industry, you're going to go borrow the money from an industry lender. I'm going to deliver to you a duffel bag full of cash. I can only do that so many times and then people aren't going to give me money anymore, right.

[B]

Because I just, I've got too much debt load. I need to pay down my debt a bit with some earnings before I get to go re up again.

[C]

But if I could take all that same money and say, you know what, instead of paying cash and buying one deal, I could take and do 20% down and then other creative terms for the balance. Well, for every one deal I would normally have done, I can do five now. So now picture that with the power of a PE backed investor.

[B]

But I guess I'm still just trying to envision like, okay, but if I'm overpaying on deals and I can do them faster, I should just grow broke faster. And they don't seem to be, or at least they're not. Nobody seems to have blown up and the PE firms who ostensibly are very smart about how to make money on money, are happy to continue doing these deals. So I'm still just trying to visualize like how does this turn out to be so profitable for them that every PE firm just wants to back up wheelbarrows of cash to do this faster at multiples that high.

[C]

Yeah, again with the 20%, 30% cash down and the balance being paid either with your own money effectively. Again, you know how earnouts work. It's, we have to have the growth and then we're going to use that to pay you that last third and then the other third coming in equity in the aggregator or PE firm again, I feel like the term, which means.

[B]

If, if this doesn't work out when we write our stock down, your, your price will retroactively be written down as well.

[C]

Yeah, correct. And so but if it works, it's going to be amazing. But they have to maintain that growth as the PE firm or the PE backed aggregator for this to all work. So it's again, it sort of has some of that like multi level marketing thing where like, if we can all go and keep helping grow this thing, then the equity I got paid with will have value and if not, it doesn't. So it's, it basically it's the owner of the firm taking their chips, cashing them and giving them to somebody else. Because I think you can grow and be more successful than I could have done on my own. Which is where it, I hate it when it undermines the business plan that they had. They were building an amazing business with a great team, all internal. And then they decide, you know what this other opportunity seems like it could take the value that I was going to grow and quadruple it in half the time. I don't say there's no shortcuts because occasionally there are shortcuts. But it seems like every time I take a shortcut, it ends up taking me longer.

[B]

So this is kind of where we anchor that. At least before you get into the, you start adding the contingency risks of you actually have to grow at a certain amount after you're gone and you have to take some of it in stock and hope that actually works out for you. When you get to, I guess the more cash on cash deals, if that's a fair label, you're down in a two and a half to three times revenue neighborhood. I guess I'm wondering if that's a baseline, is that the baseline for everyone? Is there still a difference between what external deals get done at and what an internal succession gets done at? Should I be expecting, if I'm a founder, should I be expecting my internal successors to be transacting at a level in that neighborhood?

[C]

I think that's fair. Whether you're selling internally or externally, there is only so much cash flow in these businesses, so we can't magically create more. The one advantage I think the external, like peer to peer deal agnostic of size has over internal succession is you've got that consolidation event.

[B]

So.

[C]

So you got your practice, Michael, I've got mine, I buy yours and no, I don't come in and get rid of everybody. But there's definitely some consolidation that happens, margin expansion as a result. And so because you've got two cashflow streams coming together where internal succession, we're just taking that one and we're trying to start to do more with it.

[B]

Right.

[C]

You can get a very similar value from an internal succession plan as you can from an external one, but it's going to take longer in internal succession planning. I'm not going to sugarcoat it because anybody listening who's doing this or has done it knows. And you know too, because you built a business, businesses internal succession planning. If I tell you you can get a similar value to an external sale, it's going to be a lot more work. It will take longer, but it can definitely get a similar value, sometimes more. But you're going to have to put in the time and effort.

[B]

What, what makes it more like how do you get to sometimes more.

[C]

You know, the benefit I think of internal succession planning from evaluation, not value. Because you know, value can have a lot of different meanings to a lot of different people. But valuation dollars in your pocket over the course of time. If you start the process early enough, you are proactive, you know what you are working to build towards. You sort of have the end in mind when you start, which you know, doesn't happen for all of us, but you figure it out eventually. If you can be gradually taking chips off the table over time. By virtue of that sort of dollar cost averaging on the way up and then being able to continue to draw profits along the way while I disproportionately reduce my workload. You can get a very similar, if not greater value, but it can sometimes take 10 or 15 years to do it. And it is a lot of work. I mean, we have to be mentoring and training and building a business as opposed to just build the business up to a point where you're ready to retire and then sell it. If you built up something super efficient, fantastic. High five. If it's not super efficient, the next person will make it more efficient. High five.

[B]

I will admit in that vein, I mean, I've heard from a number of advisors over the past few years something to the effect of I was working on a succession plan. I did one, it didn't quite work out. I was getting ready to hire another person, do another one, and try to figure this out a second time. And I realized that so many firms call me every day just wanting to buy the whole thing and go away, that I've just decided I'm going to keep doing it as long as it's fun. And when it's not fun, I'm just going to answer one of their phone calls and this will be done. Why would I spend years trying to develop a successor to formulate the exit plan? That I could do. Just answer. That I could do by just answering the phone any one of the five days of the week that one of these firms calls. Because we're all just getting continuously bombarded these days. And from my industry traditionalist mentality of you bring the young person in and you train them and develop them and you transition your clients, them over time, and then eventually they take over and you ride off at the sunset. Kind of this idealized picture of succession planning. There's something kind of tragic to me about that approach.

[C]

We have cases we're working on every month where a single owner firm had some life event, they passed away suddenly, they got ill, permanently disabled, and we have to go sell it. And it's to your point. I hate to put the liquid label on it and sort of commoditize client relationships, but we're able to go place those firms and get very fair values with absolutely no notice. So it is possible and it is. It's tough to argue with the economics of these deals, but I think your sort of tragic label is, is not far off. Because if you made the decision of how you want to exit purely based on financial motives as an Advisor listening. You should just work less each year, retire through attrition and ride this thing into the ground.

[B]

Well, yeah, that still is the thing that fascinates me the most about the industry as a whole. I watch these industry studies come out year after year of whatever it is. 20 or 30% of advisors have a written succession or exit plan. And I'm like, look, from a client continuity end, I really wish more of us had at least something written to say what happens to my clients if something happens to me for the client's sake. But from a pure business economic reality, these things are so profitable, if you hang out with it while it winds down for 10 or 15 years, you probably still net more.

[C]

You do. I mean, I've done the math. You can do the math in your head. You don't even need a spreadsheet to do it. It just unfortunately, you know, if your clients were sitting in the room with you watching this happen, you would be in many cases not your listeners, of course, but other podcast listeners who are advisors. They would be mortified that their clients knew that they were, you know, out prospecting half the time. And by prospecting, I obviously mean golfing. So, you know, and we see it industry wide. We've got a good marketing team here, I think, and they'll send out, you know, newsletters and emails to different folks. I gotta tell you, it doesn't matter what day of the week, what week of the year, what month of the year. If we send out a thousand messages to folks at any given time, a third of those will bounce back with out of office replies. So unfortunately, retirement through attrition is the leading exit strategy for an industry full of professional planners. And it kills me, it hurts my heart.

[B]

And one again. And the irony of me is just it, it often really is actually the most financially remunerative path. And there's a point where you get a certain size in team members that, that gets more challenging. But for a solo practice, like a founder centric practice, just the math works remarkably well. And it's only better if you get to the point where you then eventually say, I don't really want to keep doing this with the clients I've got left. I've had a change in health and circumstances. And then you take a call from any one of the buyers that wants to aggregate you and you will get a terminal value for whatever was, exactly whatever was left that you had not attritioned down. And it still has value because of this str. Strange kind of liquidity in the advisor Marketplace. I mean, I don't think of it as belittling to clients. I sort of view as the opposite, which is just there's a lot of firms that are very eager to expand their client bases and will would be happy to serve your clients well if you are willing to help transition that relationship to them.

[C]

Yeah, I've seen folks recently in the last couple years start to take a little bit more proactive approach to that same sort of retirement through attrition mentality. But instead of purely retiring by working less and responding to clients more slowly or not at all, instead they end up doing like partial book sales where. All right, I know I've already cut down to like three, three and a half days per week. I need to pare my book down to make sure I can still take care of the households that I have. And so they'll sell the C and D clients. And I mean, when I talk about this at conferences, a lot of times, Michael, people come back afterwards. They don't usually say it during the presentation. Fortunately, they'll say what? I love the idea, like academically. But who wants to buy my C and D clients? To which I reply, a PhD. They're all over the industry. We're looking for somebody who's poor, hungry and driven. There are so many folks out there, they can't knock on doors all day long.

[B]

Like, yeah, there's a lot of younger, newer advisors that would really love that opportunity. Like, don't you remember what it was like when you were getting started if someone would have given you an opportunity? You're, I mean, we, we talk about it with some regularity here. Like your C clients are someone else's a gem clients. They're probably a little earlier in your, in their career than, than you are. Like your C clients are someone else's A client. Like, they're really going to serve them well. I mean, they really are excited to serve that client well because it's a really good client for them and they're at their stage of, of business and size.

[C]

Which is why I love talking about succession planning. Because when you can talk about this subject matter, generally, even the folks who are actively retiring through attrition, like while they're listening to me at the conference, they're not doing it on purpose. They took Fridays off because you know what? I'm 60. A, I've earned it. B, I'm not in growth mode anymore. I'll just maintain my book. I cannot be here on Fridays. Fridays aren't that busy anyway. Well, it's Nice to have a three day weekend. I love it, it's fantastic. But you know what's better than a three day weekend? A four day weekend. Mondays suck. Anyway, let's take Mondays off. You know, again, I've earned it. I'm now 62.

[B]

Yeah, well, unfortunately, 30 years building the goodwill of that business. Like, yes, I've earned it.

[C]

Yeah, I mean, and granted now it's recurring, but you know, the first 10, 15 years of this was, I wasn't in business 15 years. I was in business one year, 15 times because it was commission based. And so they take Mondays off and just like the upcoming holiday, you know what happens if you take Monday off? It turns Tuesday into a Monday. So they take half days on Tuesdays to ease into the work week, which now consists of Wednesday and Thursday.

[B]

Right.

[C]

And so they hear us at these conferences and talking about these succession strategies in their mind they're thinking, okay, there's pe. I'm not big enough for that. I'm just not really interested in it. But I'm not ready to retire either. So I'll just retire through attrition. I mean, kind of by default. And then they hear some of these strategies about, well, you could do, you could do a merger. You don't have to be huge to do a merger. You could do a partial book sale. Sell your C and D clients. Those to your point, C and D clients now become somebody else's A clients. They, they can uncover some hidden gold in there, take great care of the clients, they're auditioning for your B clients. When you're ready to cut back a little more, there's a lot of other ways to exit than just pulling the ripcord, taking the check and exiting stage left.

[B]

So now, so take us now on the other direction for a moment. So I feel like we have. It really wasn't my intention coming into the discussion. I feel like we've kind of beat up succession planning for a while because financially it may be a better deal to attrition out. And if you just don't feel like it, you can pick up the phone and your business is remarkably liquid. So who chooses to pursue succession planning paths? I mean, are there patterns, are there archetypes that you see of where is this a good fit or who is this a good fit for? What Advisors get excited to go down this path.

[C]

And it's so funny because I would tell you, Michael, it's probably the vast majority of your listeners, advisors who, they've gotten past the point of sort of that lifestyle practice not past as in like they've reached some new zenith of their career. It's just a different fork in the road. You can, you can enjoy having a fantastically efficient, simple lifestyle business, or they decide to put their foot on the gas and we're going to grow this thing and we're going to hire some people and we get past that point where it feels like the adult daycare. We've got some good, smart people on the team. That's the vast majority of folks who I'm talking to at these conferences, in industry events and attend the webinars. And they have good team members. Whether it's two or three of them or 25 of them, doesn't matter. They want to see legacy. Sounds a little too kitschy, but they want to see their legacy, their team, continue to succeed as they slow down and exit stage left. I mean, that's anybody who has good team members that cares about the team that they've built because they've been investing years in training them, creating little mini mes effectively. They want to see that thing continue to succeed in their absence. But then to your point, they get distracted occasionally with the PE conversation or that the letter they got from their peer, that you could just pull the record today and I'll write you a check. Well, yeah, but if you can do internal succession planning, you can exit gradually on your terms. You can help promote the next generation, if that's important to you. I mean, there's a lot of other really kind of fun, intrinsic things that I see play out with internal succession.

[B]

So in that vein, I guess, then help us reframe this all together. So if I'm the founder and I do want to do an external accession plan, I've spent a lot of time supporting, developing this team. I want to see them succeed. I'm very invested into the team as much as my clients that we serve. I would like to see this legacy continue and not have it disrupted by a giant AG gear that's going to rip the name off the door the moment the paperwork signed. So, like, I, I, I want to do this succession legacy thing. How do I, how do I pursue this and not feel financially disadvantaged? Because I'm not taking the, the phone calls with the, with the big numbers.

[C]

And I would say the client that we have or clients we have that don't feel that way are usually those that have gotten to a point where they have done a couple of gradual internal sales to their internal team. They've been mentoring and training, and they're now down to maybe 20 or 30% ownership in the firm they founded. And they'll probably stay that way in many cases until the day they die, or at least until their health begins to wane. Those are the ones that see the light at the end of the tunnel where they say, okay, you know what? I've been able to sell the first 20% tranche at fair value a decade ago, and then we doubled in size five years later, and I sold another 20%, and my remaining 60% was worth more than when I started selling equity. So they keep having this growth inside the firm, and they don't feel like Sisyphus pushing the rock up the hill all by themselves. Now they've got some other people pushing the rock up the hill. And occasionally I can take a day off from pushing the rock up the hill and then a couple of days off. Those are the ones that sit back and look at it and say, I couldn't imagine responding to any of those aggregator letters that I get in the mail, given where I'm at now in my career and how much value and I've been able to get out of this thing, both literal and figurative value.

[B]

So can you walk me through that further, though? Just you kind of set this up. As I've been doing some partial sales to my team, I'm now down to 20 or 30%. But for those who have not, not gone down this road at all, like, so how does this work, and how did I sell the first 70 to 80%?

[C]

Well, it's a lot more fun, Michael. Just go to the last chapter of the book and start there, but we'll go back to chapter one. So I would say, where do these things begin? Honestly, from a succession perspective, you know, assuming they've got people at the firm, and it makes sense to start thinking about internal succession, because it does take some bodies, at least one other person besides yourself. Right.

[B]

Small detail. Yep.

[C]

Right. I think the jumping off point would be probably the formalization of things like your job descriptions. And if you've got job descriptions from a couple of positions you've hired for over the last couple years, lay the job descriptions out on the table, kind of get them in order of how much you're paying people, all of a sudden it starts to look like you maybe have a career track kind of. So formalize the job descriptions, the career track, and the pay bands. That's believe it or not, kind of step one. Step two is then making sure that the compensation systems inside your organization are designed for a team. We see a lot of folks who, they want to do internal succession. They want to train and promote and build an integrated ensemble team. I know you can't see air quotes, but they were there. But their compensation models are still sort of that old school revenue based payout on a grid. And your job, Michael, is to go get clients and then serve those clients and maybe even manage the money. Well, that, that doesn't really support a team. So we got to shift more of a team based compensation model. And then we get to a point where, okay, we've got a great team, we've got a career track. We can now start to have the conversation of, well, when you've been here for five or 10 years, wouldn't be uncommon. Then we're going to introduce phantom equity or synthetic equity. You know, a more specific term for things like stock appreciation rights, liquidation, rights plan. It's phantom, it's synthetic equity. But it's beginning to head down a path towards partnership in the organization. And then we can start layering in. Okay, you know what, if you've been here for 10 years, you've got your CFP, you're taking care of a certain level of clientele. Not everybody, but those would be your qualifications to have a conversation about actually being able to buy into the firm. And then they'll do their first, usually either a 1% to 5% sale, depending on the size of the firm that is company financed. That's how they'll prime the pump. We'll do the financing internally. We'll control it. Yes. Said another way, that is them buying in, let's say 5% and then they get 5% of the profits which they then turn on and give back to you to pay for the equity. It feels like you're kind of recycling your profits, but you are, you're doing it intentionally. Or we do maybe a little bit larger purchase, you know, something north of 300,000 as a value and we'll go get industry financing. The banks love financing these deals. They'll finance a 1 to 5 or 10% buy in for the next gen advisors. And they do it because, number one, they want to finance the rest of those purchases, obviously. But also the collateral for that small amount that was purchased is usually the entire firm. So the banks like the transactions. We can get things going internally by selling small, maybe 1 to 10%. That's your first bite at the apple. We grow for two or three more years. You get some of that debt paid down using the profits you're receiving and you show up and you buy another trance of ownership. And we have some additional profitability coming from the first purchase plus the second purchase. We start to pick up momentum pretty quickly. Now, to be fair, from a cold start, if we had done no sales, we've just been working together, mentoring and training. It's probably going to take seven to 10 years of doing those kinds of transactions to be able to have the owner get down to a minority stake. But through those multiple sale and acquisitions happening usually in 2 to 3, maybe 3 to 4 year increments, gaps in between, we're able to capture a fair amount of the growth and upside as the founder, while still making sure that the profits that the next gen advisor receives is sufficient to cover the note payment to the bank or back to the company. I'll pause there.

[B]

So my takeaway to the framing of this is just this traditional frame that we've got for succession planning, which is I reach the day that I'm willing to exit and then you go get the bank financing and buy me out because I use seller finance, but now you can bank finance it. Just that's not a good mental model out of the gates. The better mental model is we're going to spend seven to 10 years as one or more successors by a couple percent at a time in tranches every few years. And I guess, you know, if you start compounding growth, you can kind of buy like incrementally larger pieces over time.

[C]

Right. So.

[B]

So we're going to do this in two to four tranches over the span of a decade to get to the point where maybe one or more successors own enough that I even dip to the minority stake as the founder. And then I may still have a tail from there, where the firm is still growing and I'm still getting some of the appreciation, but the successors are now eventually buying out the rest of my stake.

[C]

Yeah, exactly right. It's, it's more of an emphasis on the planning part of succession planning, to your point, as opposed to a singular transaction. And there's nothing wrong with the singular transaction on the surface if you're selling to a peer, for example. Again, if you and I own separate RIAs, I'm going to work until I'm ready to not work. And then I respond to your letter or your email and I sell to you. That works because you know how to run a business, you know how you can get the loan. That's not as scary for you as a fellow founder. You know how to serve clients, you know how to manage money, you know, you know how to do everything pretty well, so buying my business and then me exiting over a 12 to 18 month period isn't crazy. But when you think about it, for me to do that same thing internally, even if I've been focusing on, you know, actively mentoring and training, putting you in the driver's seat while I'm still in the car as the founder, it's still. You're taking in, you're flipping the switch. It's very analog. Okay, Well, I own 100% of it and I'm going to sell it to you and you who have never owned their money business, we're going to flip that same switch and turn you into an entrepreneur and you're going to go borrow a loan, get a loan for a million dollars, two million dollars. That is scary. It's frankly why the number one lead source for our listings. When we list businesses that need to find a buyer, they're failed succession plans. But it's not that the succession plan really failed. It's more that the advisor founder failed the plan. They got to the exit door and they pulled the ripcord and the next generation just wasn't ready, at least not that fast.

[B]

And so you get, you get successors that didn't want to buy the whole big thing, but they'll buy a smaller thing that you like listed separately.

[C]

Yeah, I mean, basically they end up. We have these happen literally all the time where folks will call us and oftentimes we didn't work on them. But there's even some clients we helped do their succession plan with their one internal team member. But the next generation looks at this thing and they just decide, you know what, I appreciate the opportunity, Michael, to buy the business. I'm just not there yet. And you've got the founder saying, well, I mean, you are. I've mentored and drained you. I know you're capable of doing this. And they just, they're just not there emotionally, even though you can show them the spreadsheets. And so I, you know, I hate to have that analogy, but a lot of times doing succession planning, it's a little bit like boiling the frog. We got to turn the heat up real slow so they don't jump out. And before they know it, we cooked them. But we've got them to a point where it's pretty hard to say no to buying 1 to 5% when you can show me it pays for itself. It's a reasonable dollar amount. Well, okay, the next deal is a little bit bigger. I did the first one. It paid for itself. It worked. So the proof is in the pudding. We just have to approach these things, succession planning as a series of events. I mean, frankly, almost as a mindset. It's not a singular transaction. It can be, but that's a sale. That's not succession planning. To me, it's easier, though, that's for sure.

[B]

So how early do you start introducing tranches to make this work?

[C]

I would say, I mean, as soon as you have somebody on the team who, when you look at them, their skills and how hard it would be to replace them, that's a good time to contemplate getting them into some kind of ownership position. Maybe it's a phantom equity plan to start with. Keep it simple. Sort of try it on for size, since you've never had a partner before. But consider some type of, you know, equity sharing at least 10 years before you'd want to exit stage left. Give yourself time. Now, I'm telling you the ancillary benefit to building a business as opposed to a practice or a book of business, if you end up getting to a point where, you know what? I'm tired of it. I want to retire. I had a health event or my spouse had a health event, and I just need to sell it. When you are working to build an internal succession plan and it doesn't end up working out, you are generally still so much more valuable as a result. Because as an outside firm looking to acquire, do I want to buy the retiring advisor's job, where I've got to make sure I've got somebody here in house who can take over that book and we got to get to know the clients? Or would I rather buy a business that can mostly. It's mostly turnkey. It can mostly take care of itself with its existing staff. I'll pay more for the one that's pretty turnkey. So even failed succession plans, when they have to look externally, generally get more value.

[B]

So then how does this get valued? Like, when I'm ready to start doing my first 1% or 3% or 5% tranche, am I doing this at market rate and I'm getting valuation, or I'm setting some number along the lines of what we were talking about earlier. Is there discounting that I'm supposed to do because this is a minority stake that's not very marketable as a minority stake. Right. And all the. All the ways that valuation discounts can sometimes get applied, like, how does the valuation get set when you're starting to do these tranches?

[C]

Now, full disclosure, you're asking a barber if you need a Haircut. Fair enough if you help folks with these valuations. But even if you call one of our peers competitors, I mean, I would still give you the same answer.

[B]

Answer.

[C]

It's important. If we were going to start doing succession planning and I'm 10 years out from my hypothetical retirement date, you know, it's not on the Outlook calendar, but it's sort of penciled in at home with my spouse thinking, you know, 2035 will be the year I'll probably plan to retire thereabouts. If we're going to start that process now. For example, I really, I should have been starting to do valuations, like formal valuations with a firm who knows what they're doing a couple years before I would contemplate doing any kind of sale event. Because I want to know, before I show up to that conversation, I want to know what the value is. And not only do I want to know what it is when I get my first valuation. Number one, I'm probably not going to have like the best financials for my, for my first valuation. Gathering the data is going to take a lot of work. It may not be perfectly accurate. I mean, I'm sure all of our clients get us stuff that is, but on occasion I don't think it is. There's some rounding in there. So the first valuation is not going to be probably the most tight data going in, but it'll be directionally accurate. But we can now identify the value drivers, the value detractors for this organization. We can start to look at the financials, you know, what were the pluses and minuses effectively. Okay, I've got, you know, a year or two before I'm going to contemplate doing anything with my internal team. I can start to make some adjustments, work with a consultant or coach. I can make sure that when I do finally show up for that first sale that I have a business that somebody would want to invest in because as it turns out, succession planning in that first sale event, it's quite literally somebody choosing to invest in the business. And then with these things being so often bank financed, well, guess what the bank wants to see. They want to see the financials of the company that this person or this team is buying into. I don't want to have to send over my financials with a long 400 word essay explaining, you know, why these numbers may not be exactly what they seem on the surface. So I think doing the valuations ahead of time, couple years in advance is a really powerful tool to just take the surprise out and Then you just, you generally start to get in a pretty consistent cadence when you have other shareholders on the team, big or small, where we kind of want to track and know our stock price. So they get in a very regular cadence of doing these valuations with, you know, us or somebody else, because it's, it's the most holistic measure of how the firm is doing.

[B]

So. So I'm still trying to visualize, though, just where these numbers get struck. And if you start applying discounts for small tranches relative to what you do. If I just came in and said, okay, I'm ready to be the successor, I got a bank deal for the whole thing, and you're going to sell me 100% and move on. Relative to multiples that we were talking about earlier, where do multiples get set? Do discounts get applied? Or how do they get applied in this context?

[C]

You know, good question. Again, part of why I love listening to your podcast is you always keep peeling the onion back another layer. So, yeah, to your point, we're going to talk internal succession. And for those first couple tranches, I'm, I'm buying in. And I don't care if it's 1 to 5% or 10 to 20, the first one or two or first few are, I'm going to be a minority stakeholder. So to your point, there is. The conversation will always come up. They're not always applied, but there's going to be some conversation around a minority discount, which is, you know, but for the audience bifurcating it, it is a discount for lack of marketability. It is a discount for lack of control. Both of which apply to some degree when you've got, you know, 49% or less, certainly 1%. So there is a minority discount. So we get the valuation. That will be, that will be fair market value. That's the value of the organization that I could go get from somebody. But I'm selling you 5%, 10%. That isn't, to your point, just 10% of the number that's on that valuation. It is. That's a starting place. But then again, as the buyer, whether I ask for it as the successor, which can be awkward, don't get me wrong, a lot of times we'll blame it on our CPA or our attorney that told me to ask you about this, you know, founder, boss, there should be some kind of minority discount for the stake that I'm buying. So, yes, very often you will see a 10 to 30% is pretty consistent. You'll hear from CPAs or even our valuation team, 10 to 40% is kind of the general range for internal succession. It tends to be on the lower part of that band, probably 10 to 30, where it doesn't end up always applying, even though it probably still technically should. Is a lot of those first purchases that we're seeing to start the succession plan out, they're seller or company financed. Well, if I'm going to let you buy in, for example, Michael, and buy 5% of the firm and I'm financing, I. E. You could use both my profits to pay me back with, you don't also get to have a minority discount on top of me giving you special terms for financing. So it's kind of an either or deal.

[B]

So if you want me to sell or finance you, I'm not necessarily going to give you discounts as well. If you want to go get bank financing, then I may apply some discounts because you're, you're now taking this risk on with the bank.

[C]

Exactly. And when we shift gears and start talking about bank financing, then they don't tend to be 1 to 5% purchases. I mean, depending on the size firm, it wouldn't be uncommon that the successor or successor team would do for using external financing. I might buy 24, 25% the first time, get that paid down, go five or six years, I'll buy the next 24 or 25%. So now I'm up to 49, you know, as an individual or the group. And then the founder will keep the 51% stake until they're ready to really take their foot off the gas and hand over control. And those deals, again, because they're larger, the bank will finance it, but the math still works. I get a larger percentage of the profits and I've got a larger loan. But these things generally still cash flow. And that's. It's been one of the really nice things I would say, Michael, from the industry lenders coming in is they brought some sense of normaly to the industry and the buyers and sellers because I can't just say, well, you know, I want 10 times my earnings. Well, the bank's gonna come in and they're gonna order an appraisal. And if the stake you're selling doesn't appraise, they're not going to lend on it. So it's been kind of an interesting way to get everybody to come back to reality.

[B]

So, so then in terms of the valuation itself, I guess before we, we apply discounts, are we typically valuing on revenue here? Are we actually valuing on earnings because it sounds like the bank's looking, looking at earnings for perhaps reasonable repayment of our debt purposes. So are these deal like, are you typically striking internal succession deals on, on revenue or on earnings?

[C]

Internal succession should always be focused on earnings. I mean again, when we talk about buying in the way that I'm going to service this debt is from the profitability that I will hopefully be receiving. So, and we've seen that over the years as the industry has just evolved around the topic of value and valuation for, for so long everything was focused on revenue multiples, revenue based valuations, market valuations, which are fine. They have their place. Their place is not on internal succession planning. Internal succession is all about the profits that this machine that I'm buying into can produce. And to your point, banks will for sure go there regardless of how you guys got to your number. They're focused on profitability.

[B]

So, so what are typical earnings multiples in, in this context?

[C]

Minority discounting aside, earnings multiples, EBITDA multiples in particular, we're generally seeing something right around nine times earnings is where most firms doing buying and selling succession planning internally, they're generally around that nine times number. You'll see some that will get to 12 times, but again when they're at 12 times, you're getting that higher multiple because you've been reinvesting in the business. You've got marketing, you're properly staffed, you got good technology. That's a really nice way of saying you have lower margins but you're more scalable. So you get a higher multiple, higher value at the end of the day. So safely you're probably looking something between 6 and 12. But yet 9 has been the average last year, the year before. It's pretty steady.

[B]

And, and is it, I guess, what, what shape. Can you talk a little more? Just like what shapes you to be towards the, the upper end of the range or the lower end of the range. If you're going to come off that number like what are my are there are some big factors that tend to move that materially.

[C]

I mean the softball on that one is going to be growth. You know, if we have consistent, demonstratable growth, if we have a well trained team or we're properly staffed, you know, we don't have five advisors on the team, all of which are serving 300 households, you know, and working 60 hours per week. Well, sure, you're driving a ton of profits out, but you have no room for any additional growth. So they have growth and they have the ability to Sustain and maintain the service related to that growth. That's, those are kind of key parts.

[B]

And, and what is like viable growth in this context? Is there some, like, growth rate you have to get to before the market really says, like, okay, this is actually good enough that you get a better multiple for this, probably north of 10.

[C]

Or 12%, then you start to maybe get a pat on the back. Anything less than that, and to your point, it's positive. But I mean, we have, we have a lot of advisors who are selling, doing succession planning, and they're pretty happy when they do their valuation and they turn in their data and they show you they've been growing by 5% per year for the last five or six years.

[B]

Yep.

[C]

And again, you hate, you wouldn't tell them this, but you and I both know when you look at that and you think, okay, well, I factor out.

[B]

Market, pretty much market average. If your clients are conservative, gross, which.

[C]

And to be fair, for the advisors who you're having these conversations with and they're selling, they're 60, 65. So you and I both know, plus or minus how old the book of business is. There's some RMDs, there's some clients who pass away. It happens. But yeah, I think as soon as you get into the north of 10 or 12%, and again, you have the ability to maintain the service on those clients while you're growing with the existing staff, you can start to see a little bit higher premiums. And again, we need technology inside the firm, and we can't just go out and upgrade everyone to the newest iPhone. That's not what I'm talking about. We need the CRM system and the workflows, the efficiencies, outsourcing where we can. Those are firms that ultimately, if they did have the conversation about private equity, there would be a lot less normalization having to take place.

[B]

So I guess my other question kind of related to that, we start talking about these multiples of earnings. As you said earlier, in external deals, there's often a lot of adjustments that happen to earnings. As the owner, I back out all of my creative tax deductions. As the buyer, you start layering in investments that should have been made that weren't made that we're going to adjust in. So when I'm a 1 to 5% owner, I don't necessarily get to dictate those kinds of adjustments. Or maybe I do. I guess that's what I'm wondering. If I'm the successor, do I basically have to take the Owner's earnings statement at face value. Do I get to adjust these? Is that a negotiating point? Okay, I'll give you 10 instead of nine, but I'm going to adjust your earnings down. So how do you arrive at the magical earnings number when the person who's selling to me has a remarkable amount of control about what that number looks like?

[C]

Yeah. And you're not wrong. I mean, it's from the person buying in's perspective that it is a little scary because I'm buying in and I'm relying on the profits I'm going to be receiving now as an owner to be able to service this note. It's one thing if it's company financed. You know, you loaned it to me, and I'm paying you back with your money. We're going to make sure that works. We'll figure it out. But you and I both know how banks are. If times are good, they will say, pay me. If times are not so good, the answer remains the same. Pay me. So when you're looking at the ability of the owner to kind of manipulate the financials, there have been two solutions we've seen that seem to have worked and are working pretty well for the longest time. When we do internal succession in those first couple sales, we would use a version of a promissory note between the successor buying in and the company. We call it a stretch note. There's other names for it. But basically, instead of having a promissory note to buy into your firm, Michael, where I sign it, I have an amortization schedule, a principal and interest. We know how those things work. Well, those are kind of scary because if you do decide to make some other investments in the firm, run more through the business, and there's not enough profits for me to cover the note, that's not great.

[B]

Well, your founder reinvestments tank my note payment in year two or three.

[C]

Yeah. And it is hard to go from one owner to two plus, because before, as the founder, it was just my other checking account. I mean, there was no one to hold me accountable besides my CPA at the end of the year. And they'll market it as a owner distribution. They'll figure it out. Now I have somebody else to be accountable to. It's kind of like getting married and having to share your bank account, because it is very much an economic marriage of sorts. So the traditional promissory note hadn't worked really well, so we shifted to a stretch note where what we end up signing for the first transaction or two is I will promise to pay you back, Michael, 90% or whatever the number is. We agree to, let's say 90% of the after tax proceeds I receive in distributions. That's what my payment will be on this note. And so if we do well, we have lots of profits coming out. I'm required to plow them almost all back in. And so we get this thing paid off faster or the markets are terrible. In 2025 we do an acquisition. We don't distribute much in the way of profits. It's just going to take a little longer to get this thing paid down. So that's one way to sort of future proof the first, second purchase buying in and make sure the next gen sees this will work.

[B]

And so the idea here now is now I'm out of the bank financing world and I'm back into seller finance, firm finance to structure this note that says the payment of the note is 90% of whatever the after tax proceeds.

[C]

Right.

[B]

Were Because I mean it's almost like a revenue based note. It's a profit, it's profits based note at that point. So I'm buffered as the seller in a bear market or as the buyer in a bear market.

[C]

Right.

[B]

As the seller, you just get your money faster if we're growing.

[C]

Yep. So that works really well just for the first transaction or two to demonstrate to the successor that this works. Don't be afraid, it will pay for itself. And then we can shift to some other financing structure, usually with a bank thereafter. The other alternative is we do the first purchase and it's, it's bank financed. Well, the bank requires collateral usually to be certainly the stock that was acquired, but also that the founder, the company is the co guarantor. Well, as it turns out, if the company is the co guarantor they're probably going to make sure there's enough profits to cover the note payment.

[B]

Yeah.

[C]

So banks turn out, they're pretty, they're pretty darn smart. And so with that requirement to be the co guarantor, kind of like mom and dad on your first car, it also helps make sure that this will get paid for. There will be profits distributed to cover the note. We will figure something out.

[B]

I feel like that's earnings, that's how we handle earnings after the deal closes. I guess I'm just trying to visualize or understand further how do we get to an agreement about what the earnings number is when we say it's nine times earnings or whatever multiple people we pick.

[C]

Right. And leading up to doing the purchase, that is it is a conversation that happens. It is. If your financials as the founder maybe aren't as tight as they should be, it can be an awkward conversation because obviously, you know, when I buy into a firm as the successor, I mean, this is our time to negotiate, make sure we, we get to a fair deal where we're both equally happy or both equally unhappy. That's same outcome, generally speaking. Well, yeah, but the hour before we sat down at the table and had this conversation, we were very much in a like owner employee relationship. And so now I come in and play hardball with my boss. Not a wise decision. You may rescind my ability to buy in. So it's a fine line that they have to walk. And it is again, it's part of why doing the valuation ahead of time can be helpful. Because the founder in a vacuum by themselves can get the valuation back and see, well, what the heck, SRG must be misinformed because my value, it came back so much lower than what I see out there in the industry. Well, it's not that we're misinformed, maybe occasionally, but generally speaking, no. Here's why we go through the financials. Here's where your earnings should be, here's where you probably should be reinvesting the business relative to your peers that you aren't. So when they have those conversations ahead of time, that makes it a heck of a lot easier because otherwise you're right. When I go to buy in, especially if it's a single owner firm I'm buying into, the financials can be not a hot mess, but they just seem like they maybe aren't as accurate as they should be if I'm going to be giving you money and relying on your accounting.

[B]

So the third party valuation essentially becomes like the neutral arbiter to pick a number in the good old fashioned negotiating. If we both don't entirely like the number, that probably means a fair midpoint between us. We're both equally happy.

[C]

Which is why it's, it's nice to do it earlier than when you're doing the transaction. Because when you get the valuation and you find out all these things that you just didn't know because you hadn't done evaluation before and you can explain a lot of it away. Well, yeah, you can, but at the end of the day, your financials are your financials and you got to give them to a bank and you got to give them to the valuation expert and your successor, nobody wants to hear all those explanations and do the normalization. So it's good to do that stuff ahead of time if, if we can. And again, we're talking about internal succession and usually the first purchase is when we're having these kind of awkward conversations, to your point, around the financials and the multiple. But it's a lot more awkward. A lot of the conversations that we see take place there wasn't a valuation done by a neutral third party arm's length. It's the owner who has read lots of articles, they're very well informed, they've got lots of small business owner clients telling the successor the value that they want. And you've got generally pretty smart successors going back home and doing some math and looking at the spreadsheet and talking to the lender saying, I don't think this works. That's where, again, an outside third party, whether it's the lender valuation firm, somebody can help ground things back in reality. And by reality, I mean the financials on the acquisition.

[B]

So now help us understand, I'm taking one step further back. So what exactly do you do? What is. What does srg, the business do?

[C]

Yeah, good question. I mean, it's changed. Just like the advisor space, we've kind of grown up with it. I mean, 20 years ago I was really just doing mergers and acquisitions. Pure M and A work, buying and selling business brokerage. And we always use the term M and A. It was mostly a like acquisitions. There weren't a ton of mergers happening. Today we see a lot of mergers happening. So historically it was just a lot of pure business brokerage work. Now at srg, we still do the succession planning and we'll help folks, I mean, folks who are at the exit door, we can help them sell. We can list the business if we need to, to find an outside buyer, get a higher value, if that's what the owner is desirous of. Do a lot of internal succession planning work, which is a lot of fun for us because again, we know where these things can get to if folks start the process early enough and they built some really amazing businesses and great teams. And so that's almost, you know, some of the most rewarding work that we do because you get to see the next generation taking over the current generation who's been working hard to build this thing, slow down and enjoy life. It's, it's really fun to watch. But we've had the opportunity now, doing it long enough to not just sit at the exit door and wait to see what our clients show up with that we can back up now and say, hey, you know what Michael, Let us help you get your, your entity structure set up so that when you're ready to do succession planning, you know, you don't just show up with S Corp or an llc or an llc, taxes and S Corp. Let's try to be intentional about this and kind of future proof it. Let's get your compensation plan done correctly so we have the ability to help them with the valuation. Do that sort of on an annual basis. We do a lot of that work as many of the firms like ours do. But then it's what do you do with that information? It's kind of like doing client segmentation. Well, the segmentation is not really that valuable. It's what you do with the information. Right. So we get a chance to help them build their succession plans, set up the entities so that that's a little bit more easy to do. Get their employment contracts buttoned up which will build more value in the business. Non competes, all that fun stuff, Create compensation plans again that help support a true team which then makes our job that much easier with succession planning later. So while we don't do practice management, we do focus on all things that impact the value of that organization. But we only do it for independent financial advisors. So we tell folks we know a lot about a little.

[B]

So as you reflect on this journey, kind of building the business and going down this path, what surprised you the most about building a business? Helping advisors through succession thing that surprised.

[C]

Me most, I mean I would say probably how, how much time and money, profit, however you want to label it, how much time and money you have to be willing to invest to create a business versus a really flexible job. When I launched Succession Resource Group, I could have just kept it a lean, mean lifestyle business, you know, had a support staff and kept it pretty easy, pretty flexible. But I mean that would have very much been a job. To your earlier analogy, when I stopped showing up for a couple of days or a year, then there's not much there. But to actually build a business that can serve clients grow in scale, that's, you know, you know, just looking at on the surface, well that's going to take time and of course you can have to reinvest back in the business. I had no idea how much time and how much money profits that you could otherwise have taken out of a cash cow and really enjoyed spending with your family. Instead you kind of make the business part of your family and you put a lot of your time and money back into that. I had absolutely no idea. And if you'd have frankly told me on the front end. I don't know that I would have done it, but here we are and it's been a lot of fun. It's been a wild ride, but it's, you know, it's a lot when you stand back and look at it.

[B]

So what was the low point for you on this journey?

[C]

Yeah, I mean, you know, you've got your ups and downs, but I mean, if I had to label low points, I mean, frankly, I'd say losing good team members, man, that's probably the one that just, it's a real kick in the nuts. It hurts, it's no fun. When I started the business and hired staff and trained them, you know, I kind of thought of it like, this is like it's your, your business family. And I've come to learn as we've grown, you don't generally fire family. And you can, been there, done that. But when it comes to a business, at least ours, I would say we're more closely aligned to, like, we're an all star team. And, you know, you, you've got all stars on the team. You're very good at curating that talent and helping mentor and train it. And so it really sucks when somebody moves on, but it happens. And I would say my team knows this. You know, we give them letters of Recommendation, recommendations on LinkedIn while they're here. I, I, I want to keep everybody, obviously, but I want anybody who moves on to move on, to do bigger and better things, even when they do choose to leave but still sucks. And the only other one I'd say is just occasionally you lose sight of why you're doing what you're doing. When you, when you have those, I have those momentary lapses, it happens, and not like once every decade. It happens on occasion throughout the year, and then it just kind of starts to feel repetitive and a little bit of a grind. And you just have to get back to as cliche as it sounds for that mission, vision, values, like, why do we do what we do? What impact are we having? And that can renew you. But when I lose sight of that, that can be a real low point throughout any year.

[B]

So what else do you know? Now you wish you could go back and tell you 15, 20 years ago, as you were early on into succession planning with advisors, you can't start the process too early.

[C]

I mean, again, having grown up in the business and kind of grown up with M and A, when we first started out, like you talked about, it was just purely transactions. When you're ready to retire, you list and sold your business, you found a buyer and you exited. Sage left after a 12 month transition period. If we were lucky to see where we're at now, boy, it would have been nice to just know these businesses have value. There will be a next generation of talent that will come up. They will be mentored and trained and start with the end in mind. And instead, you know, so many of us, myself included, sort of tackled the things that were in front of us. You focus on the basics, the blocking and tackling. But if I could have been a little bit more forward looking, which I tried to do now, but in the moment it feels speculative until it then happens. So it would be nice just to frankly sort of have faith in the industry and know that even now when you see reports about Advisor Head Countdown or the Cerule study with the 100,000 advisors, trillion dollars in assets exiting will be okay. Everything will get back to normal. Things move in cycles. And so just having that little bit longer term mindset and being in it.

[B]

For the long term, well, I am struck by, I mean, just how long term it quickly gets if you start working backwards to say if I'm, you know, if my plan is to exit in my early 60s and I need 10, 15 years to do the deals and all the tranches, I almost have to get the first slice done no later than 50. And if I need five plus years of developing some talent to get there, like if, if I'm hoping to exit in my early 60s and I'm not already starting the process in my early 40s, I may be behind. Yeah, feels a little intimidating. I have to say that out loud.

[C]

What Matthew just did. Basically you're saying, well, I should start thinking about, you know, selling parts of my firm and doing succession planning when I'm in my mid-40s, I'm, I'm in.

[B]

High, I just kind of feel like I'm hitting my stride.

[C]

Right. I want to give up any equity right now I'm growing by 15, 20% every year. Let's, let's give it a couple more years. I need to capture some of that value that, you know, I've missed out on for so long putting money, blood, sweat and tears into this business. I get it, man, it's, it's tough. And I, I sit here listening, I think I'm 40, 80, so what? 40, 44 should be pretty easy math be 45 this year. To think about selling off parts of the firm now just seems absolutely crazy to me. But at the end of, the end of the day, if you've been focusing on building good talent and you want to be able to put your next generation in a good position to succeed you someday, don't wait too long. I get it, but don't wait too long.

[B]

So then, what advice would you give to the prospective successors trying to open the door and do this? I mean, for all the discussion around succession from the founder end, I mean, the number one thing I hear from successors on the other end is, you know, we're, we're on the seventh year of the five year succession plan, but he says he's really going to start it this year and I'm still waiting. So what advice would you give to the successors that really are actually eager to buy in? Maybe not 100% of the thing in a single year in a giant bank transaction, but if I want to get succession planning started, and I'm having trouble because the founder can't quite seem to get there, even though we've been talking about it, like, what advice do you give to successors that are trying to figure out how to get this going?

[C]

I would say the first piece. And I say this to a lot of folks and don't necessarily probably always like to hear it, but for the successor, no, you're not ready for the founder, know that they will never be ready. And also as the founder, when you started your firm, you weren't ready. None of us are ready until we do it. So make sure if you're going to be doing succession planning, I don't care where you're at in your career. And if the succession buying events five or 10 years off, you're never gonna be ready until you do it. You'll figure it out. If you've got good people for the actual successor, be a sponge and work your rear off. And I'll try to keep it peachy, but work your rear off, I mean, just, you know, they say work smart, not hard, do both. At the very least, just work hard. Because there'd be a lot of folks that, especially in this industry, they just because of the recurring revenue, they just don't work as hard as many folks probably should. So for the next generation, work hard, be a sponge, two ears, one mouth, do more listening than you do talking. Which frankly again is part of why I'd love to see the succession planning happening. Because if you got two ears, one mouth, and you got a good team of successors under you and they're listening, there's a lot that they can learn. And when advisors list their practice and sell with us and they retire. When they sell to a peer and they exit in 12 or 18 months, they can still get a good value, but I know it doesn't affect them directly. But you think about it from an industry perspective, Michael, just the brain drain on the industry if folks don't do this kind of proactive succession planning with their teams, how much knowledge they take out of the business. I mean about the industry, the investment strategy, the, the products, the clients and the families, these things just it takes a lot of time to get all that intellectual capital out of a founder's head that's been accumulating that stuff for 20 or 30 years.

[B]

So as we wrap up, this is a podcast about success and just one of the themes that comes up is literally that word success means very different things to different people. And so you, to me, ironically, have built a business, a successful business, around succession planning. Like the business is in a wonderful place. How do you define success for yourself at this point?

[C]

I would say initially creating something that can exist independent of me. I mean, again, we might eat my own cooking, ascribe to our own philosophies. So certainly creating something that can exist without me would be a key attribute of how I would define success. Also that provides a positive impact on the industry. I mean, obviously we work on mergers and acquisitions and valuations in the financial services industry, but I don't care if I was in real estate or some other profession, you know, software, I want to be able to create something that can exist independent of me. Maybe you call that leaving a legacy. I won't go that far yet. I'm only in the 40s. But also it has an impact on the industry. And frankly, the last one checkbox would be enjoying what I'm doing.

[B]

Enjoying what I'm doing. I love it. Well, thank you so much, David, for joining us on the Financial Advisor Success podcast.

[A]

One even given more ideas, tools and resources on how to break through to the next level of success as a financial advisor, check out the leading financial planning industry blog, Nerd's eye view at www.kitsis.com, where Michael covers the latest practice management trends and financial planning strategies. And by joining the members section, you can earn IMCA and CFP continuing education credits along with exclusive member content. Get it all now at www.kitsis.com.