Hello, all. Thank you for coming to the session today. My name is Marcus Haygood. I'm with FP Transitions out of Lake Oswego, Oregon. Our company is a consulting firm that consults with financial service business owners on how best to build their businesses and eventually realize their value in that business when they're ready to do so. And today we're going to be talking a little bit about healthy foundations for firm growth, talking about the four pillars, things that you should be doing as business owners annually and on a regular basis to build your business appropriately for growth. First, I want to say thank you to all of you for coming and then thank you to the NAPFA organization for having us and for our longstanding relationship with the NAPFA organization. We really appreciate it and think highly of you all and the organization. Some of the things we're going to talk about today, learning objectives. We're going to identify some key factors influencing firm growth. We're going to talk a little bit about owners' compensation, profits, revenue multiples, talent retention. All of these things relate to building a healthy, fundamentally sound business in the financial service realm. Skip over that one. I think it was Michael Kitsis that said financial service advisors are accidental business owners. And to some degree, that's partially true. But I think many of you got your start wanting to work with clients and provide good financial advice and you started to build your book of clients. You get to 100 clients, 200 clients. Suddenly, you're adding other associates. You're building out a team. You're ending up in a business and you're fundamentally having to figure out what does it mean to be a business owner? And that's a pretty significant mind shift. The first of the M's I will be talking about today is the mindset and shifting from being a practitioner in the business to really being a business owner and optimizing your business for sale. This business that you have currently is very likely your largest single asset. We're sitting at this time in the marketplace for financial advisors. We make a market for these businesses to be sold. And right now, we're seeing multiples in the 3 to 3 1⁄2 times revenue range or roughly about an 8 to 10 times EBITDA multiple range. So, you know, these are likely million to multiple million dollar businesses that you're sitting on. And that is not a shabby asset that you shouldn't take seriously. And so thinking about it like an owner in a business is vitally important to optimizing your business and your value. The second concept or fundamental thing to be thinking about is marking the value of your business. So getting a valuation on an annual basis helps to frame set what is it that you're working with. How big is it? What is that value worth? How do you transition that value from yourself to potentially next generational owners? How do you continue to optimize and build that value? If you don't start with value in mind, then obviously that will be a forgotten step. It's kind of like your client showing up to your offices to talk about their portfolio and not having any idea of what their portfolio value is. Pretty hard to build a financial plan if you don't know what it's worth. So we strongly suggest you get an annual valuation as part of the principles of building a strong foundation for your business. Valuation as an art really focuses around three different types of values. And one of the things you'll hear valuation analysts always talk about is purpose drives value. So why you're doing a valuation actually has a lot to do with what type of valuation a firm like ours would do for you. And you'll see here we have asset, market, and income approaches. Those are the three common types of valuations provided by any valuation firm. And if you choose a valuation firm to use, you really should consider what is the source of their data? You can go to your CPA down the street and get a value from that CPA firm, and it may be accurate. But most likely they're going to be looking at three, two, five transactions that have occurred maybe over the last 25, 40 years. What you really want to find is a firm that has active markets in these companies, that knows what they're currently trading at, and has good data, solid data to pull from so that they're giving you a data-driven approach to that value. You also want to make sure that, you know, they have expertise in fee-only businesses. Many firms or your local CPA may have no idea what it means to be a fee-only advisor. And so you certainly want to know that. When we talk about, you know, what approaches there, the asset, market, and income approaches, in the financial services realm, these businesses are not heavy asset businesses, right? So the asset-based approach to valuing these businesses really isn't applicable. So we end up with the market and income approaches to value. The market approach is really, really good for valuing a business that is a solo practitioner or maybe a couple of siloed practitioners working under, you know, an umbrella. Generally up to about $350 million in AUM is a range where a market-based approach makes sense. And in a market-based approach, what's happening is we're looking at comparable transactions, and we're using those comparable transactions to tell you what most likely you would receive if you put your business out for sale. So it's very important that there's good data behind that to give you an accurate assessment of what that value is. In the income approach, you're looking at really using that when you're valuing a true business, an ensemble organization with multiple owners. And the reason the switch happens there is because in the income approach, you're doing a discounted cash flow, and you're truly valuing what is the cash flow-carrying capacity of the business so that you can truly understand what it means to have investment in the business from potentially your next-generational owners that you're bringing into the business with you. What do valuations measure, and why is it important? Valuations measure the three things you see here, transition risk, market demand, and cash flow quality. Transition risk is really focused on what are the characteristics of the business clients, the clients that you have, and how likely are those clients to transition if you sold the business to somebody else. So we're looking at things like age and demographics, how long have the clients been with you, what does your net new client growth look like. In the market demand spectrum, you're looking at what is the market's appetite for your book of business or your type of business. And things like being a fee-only advisor, has an effect on that market demand. Things like location have an effect on that market demand. The size of the business, the total revenue of the business, and its revenue growth are all impacts on the market demand side. On the cash flow quality side, we're looking at what is the revenue and earnings that the business is going to continue to flow. So you're really looking at how likely is that cash flow stream to continue in the event of a transaction. So you're looking at things like what is the revenue, is it recurring or non-recurring revenue, what revenue sources are being brought to bear in the business, what is the earnings before owner's compensation, what is the impact of staff and compensation on these businesses, because that is your single biggest expense as a business in financial services. Ultimately, it comes down to what is the earnings capacity of the business, and the bottom line EBITDA. Third thing you need to be thinking about as business owners to optimize your business is really measuring key performance metrics. And we do that through benchmarking. If we're looking at your data in isolation, that's one thing. It certainly will show you what's happening year over year in the business and certainly will help you make changes, but it doesn't give you a comparative view of where you sit versus your peers and what others are doing in the business that you might be beneficially affected by changing your business model in a different way. And so the purpose of benchmarking is really to measure those key performance metrics and to optimize the performance of your business based on those metrics. It's also there for tracking year over year and for long-term business planning. One of the things that we talk about when we're doing our coaching with our equity management solutions clients is certain businesses use different metrics. So here on this slide we're talking about different sizes of practice, solo practitioners, what we call practices, small businesses, and then enterprises, full-on businesses with multiple owners and multiple structure. And you can see there's different metrics under each of these, and certainly they build on each other as you go up in size and scale. But things like bottom-line EBITDA are not as important for a sole practitioner who ultimately is likely to sell their business in an external transaction. Revenue is what they'll probably transact on. And so revenue becomes key for them, whereas as you get into an enterprise with multiple owners and multiple advisors under you, earnings becomes much more important because those potential next-generational owners will be using that earnings capacity to buy the business. There are a couple of fundamentals in our industry that I think are key to understand and to effectively build the structure underneath your business. When we talk about the rule of one-third revenue as a standard barrier, one-third, one-third, one-third, one-third, you'll hear it referred to as that often. This is a concept because there's really sort of two or three core pillars in the industry that are pretty fixed. First of all, you as an advisor can manage somewhere between 70 and 150 clients. And I can say that pretty confidently because we've done 16,000 valuations of firms, and when we look at the data, that's what the data says. Are there outliers? Certainly. There's advisors that are managing thousands of clients. But I can tell you those are the real outliers, right? It's not common. It isn't a lifestyle that most of you want to live in your business. So if you think about 70 to about 150 clients, each at about a million dollars, those are the average numbers, you certainly have to add another advisor at a certain point to grow your business. That's where the other core fundamental that the advisor sitting in front of those clients controls those client relationships comes into play. So you as a business owner building value, building your relationships with your clients at a certain point have to bring on staff. And every time you bring on staff, you open up the possibility that that person decides that they want to exit the business, exit where they're at with you, and they may take clients. And there's certainly things you can do to structure the business, structure your employment contracts, to have non-competes and non-solicits, non-acceptance, but that risk still exists. People leave Merrill Lynch. People leave Morgan Stanley every day. And those clients are supposedly not theirs, but they often take those clients along with them. So again, you have this situation where your clients were to grow, you have to have another advisor to grow those clients, to continue the growth of the business, but at the same time you're accepting a level of risk every time you bring in one of those advisors. And this is where fundamentally the profit becomes extremely important and this one-third, one-third, one-third rule becomes a core fundamental of building a long-term business model that's sustainable. No worries. The one-third, one-third, one-third concept really focuses in on the fact that your biggest expense is the compensation of those advisors that are working for you. So top line, one-third should go to those professionals that you're compensating. Then one-third should go for all the other overhead of the business, and one-third should get down to bottom line for profit. And the reason that that one-third for bottom line profit is sort of a rule of thumb or a good rule of thumb to use is that will generally allow for next-generational owners to successfully buy in using the profit of the business to the value of your business. And this is also where value on an external market basis and value on an internal income approach, equity-based valuation will align is if you get around 30% to 40% to bottom line profitability. I saw a question. It is. And you should be compensating yourself. Again, there are reasons, there are obviously reasons to choose to compensate yourself as an owner in different ways, but you really should look at your business and build your business around the concept that you're paying yourself a fair wage for the job you're doing in the business as the owner of the business. Because that helps to align the business to what it will hopefully grow to in an enterprise structure. Yes, sir. I don't have a great idea of what you're referring to. Really, the tax incentives. Owners, for one specific, for Gary Brooks, have the incentive under the tax law to pay more as a profit because it's taxed at a different rate than paying it out in salary. And it struck me that the one-third, one-third is really kind of skewed towards, you know, a third profit is pretty high and may be artificially high because of the incentives of the tax structure to classify something that way. Would you please comment on that? Yeah, so to repeat the question. The question is around is the one-third of profit being skewed by the fact that many advisors choose for tax reasons not to compensate themselves as highly as they should for market comparatives? And certainly, that's a choice as a business owner you need to make, as I referenced, right? And, you know, so in the data, we're accounting for that. We account for, in our evaluation process, what real compensation should look like for the owner so that we don't have this inflation effect in the business and in the profitability of the business. Can you then comment on what would be appropriate level of compensation to assign, you know, in general? Yeah, so in general, and the question was what is appropriate compensation for an owner in the business? And it varies. I can't give you one number and one answer, but I'll say this. Generically speaking, around $250,000 in compensation for the primary owner of the business is a good starting point. Again, knowing that there are reasons to do that on a P&L differently for your own personal tax purposes, but to run the business and to think about it as a straight, clean P&L, you really should be thinking about at least $250,000 to you as the primary owner of the business. Yeah, so the question was, is that third inclusive of client work and the business owner work? The general answer is yes. But again, I said I'm going to give you $250,000 as the number, but that's variable, right? In a larger organization where you are truly a CEO and you're managing hundreds of people, that number is going to be significantly higher. It could be as high as $500,000. So generically, yes, and as a good tool for this third, a third, a third concept, $250,000 is about what a lead advisor or owner in the business will be compensated in today's marketplace. So again, the whole purpose behind the third, a third, a third, why it's important is because if you can get about 30% to 40% bottom line profit in the business down, that is where most scenarios will cash flow for next generational owners to use that profit distribution to buy into the business. So if you think about it from an investor's perspective, they're roughly looking for a 30% to 40% return on their investment for these types of businesses. Which brings us to monitoring the progress. Again, this is where benchmarking comes into play. You should be tracking year over year where your benchmarks are. Are you hitting that third profit? Are you too heavy on compensation? Is your staffing heavy relative to your peers for the same number of clientele? All of these things are things you can see in the benchmarks and plan around and adjust course because you're monitoring the progress that you're making relative to those key metrics. And that'll help supercharge your growth. You know, the one thing that is very clear in the data is multiple owner firms grow at about 50% faster growth rates than single owner firms. And it's just purely a matter of the addition of advisors and advisor capacity and scalability to those businesses as they get larger. Mastering ownership. This is a concept about protecting what you've built. Again, going back to these businesses being, you know, one million to multiple millions in value, if you don't have something in place that's written, that's clear, that documents who's going to buy the business and how it's going to be done in the event of a death or disability, you're leaving a very, very large asset at high levels of risk. And so we talk about it at a minimum putting in place a death or disability plan or what we reference as a continuity plan. These are required protection and it's not just from the perspective of the value of the business, that's an important component, but this is also for the longevity of the business, should something happen, but also in general for your clients to have a clear path for where they're going to be serviced if something does happen to you. And if you think about this from a growth perspective, if I'm a client and I ask you the question, who's going to take over if you're not around and you don't have an answer, it's highly likely I'm going to look for another advisor. We've polled the public and about 95% of them said their preference would be for an advisor who has a long-term plan and has continuity taken care of. And it's certainly, as advisors get older and older, a question that does come up. Every client that I work with has always stated that, yep, I have clients asking me all the time. The importance of continuity planning, you know, I put this in this order intentionally. It's really to protect your clients and their assets and this is why the regulators are now on the bandwagon of making sure that you guys have something in place. I don't know if any of you have gone through any recent state audits, but I know that there have been at least seven clients that I've talked to in the last six months that their state auditors are asking for a copy of their death or disability document, what it says, or their operating documents. It's also about protecting your team. If you've built out other advisors in your office with you, it's ensuring that they have someplace to go to as well and that they have continued success in their careers. It's about protecting your family and obviously your value in the process. We talk about the planning spectrum here for financial advisors in death or disability planning. No plan is really not an answer. To be quite frank, we're in an industry where you're calling yourselves financial advisors and if you don't have something written and in place, you're really not doing your own job. Verbal agreement with a peer, better than nothing, but certainly doesn't protect anything, certainly doesn't help the situation for your estate or your clients or your family. To clarify exactly what's going to happen, how the transition would happen, everything is in flux. The last thing you want to do is have a spouse try and figure out how to sell your business at the nth hour. We have internally what we call a practice emergency plan, which is a contingent listing with FP transitions in the open market should something happen to you. Certainly something you can put in place if you're with a broker-dealer or custodian. Oftentimes they have form contracts that you can sign that do transition the ownership of the business and do it on a revenue share. They're not great, that's not a great financial outcome for you, it's not long-term capital gains at the sell of your business and it's certainly not tax advantaged. The continuity plan, 50% of advisors have these in place or less than 50% of the advisors have them in place and then ultimately a succession plan, which a succession plan is about building a long-term sustainable business with multiple generations of owners in the business that will automatically take over the business. And so ultimately we see less than 28% of firms right now with those with that and that's surly numbers you know that have a long-term succession plan in place. So it's certainly a lot of the industry that hasn't addressed this still today that again the state and the feds are looking at it and certainly want you to have something in place. So I'm going to talk a little bit about continuity because I think it is such an important piece of building you know the foundation of your business, having something in place. They're really you know in the in in our scope of work with advisors there's really three primary documents if you will for the the case of putting in place something for death or disability. And if you're a solo practitioner these are really the the best options for you. But the guardian agreement, the guardian agreement essentially assigns somebody who can legally and effectively step into your role as the advisor, keep the office open, keep the lights on, access client information, provide clients with advice and guidance for at least a six-month period. Can go as long as a 12-month period but we suggest six months you're going to start to see client losses. They would essentially serve as a gap for a long-term or for a death or a long-term disability scenario or permanent disability scenario and for short-term disability they can step in and keep the business operating until you return. It's a good plan. It's better than nothing for sure and it's a step in the right direction but a better plan is to have a true buy-sell. It's find a partner firm that you are comfortable with that in the event of death or disability would step in and buy the business outright. These have mandatory purchase obligations written in them. So a very clearly state what will be the down payment? Will it be a note? Will it be an earn out? If it's a note, what is the interest rate on the note? So that your estate spouse isn't left trying to figure out all of those details on their own. It's already determined, it's already agreed to and it's a mandatory legally binding document that says this is how the transaction will occur. Even better, if you can get it, a buy-sell and guardian agreement. This now covers you for death, disability, loss of licensure, temporary disability because the person that will buy the business is oftentimes in the business with you, is perhaps an associate who wants to buy the business and is willing to step in on a temporary basis and continue to run the business. Again this covers most if not all the scenarios and so it's really a solid plan for somebody who is a solo practitioner that maybe has somebody who's an associate who is interested in being a potential owner. And then it's just about how do you create the funding mechanisms, oftentimes through life insurance, to be able to afford to buy the practice out. Ultimately the best plan and the best fundamental building block is building a long-term succession plan. Having multiple owners in the business with you, bringing that next generation of talent into the business, raising them in the business and having them as owners know that they're responsible to buy the business or have the business itself buy out any of the owners that have an event occur. This is ultimately the most sustainable scenario, not only for death or disability, loss of licensure, but also for the long-term transition of the business. Yes. Do you have enough data yet on G2 to G3 internal successions and how viable those are with these crazy multiple owners? Yeah, certainly you know succession planning as a concept is maybe 13 to 15 years old, so the track records are not tremendously long, you know, if you think about it in that context. But we're certainly seeing very successful situations where G2s are buying out the businesses. Is it every time and is it successful every time? Certainly not. And certainly as these multiples for the values of these businesses grow and grow rapidly, it becomes harder and harder for the next generational of advisors to be able to afford to buy the business out. So there's commitment, right? There's commitment from the first generational owner in the business who ultimately does want to receive the benefit of the value that they built in the organizational structure that they've built, and there's commitment from the G2s to help grow the business, and oftentimes there's discounting on that value as people buy into the business to ensure that that long-term sustainability is built in. Yeah, we did an owner-founder transition to G2 a few years ago, but now we're starting to think about G3 and how likely that's going to be without having the four of us to buy out the founder, and how it's going to take, you know, I don't know how long it's going to take, with G212 or even G210, I don't know how viable that is. Yeah, I mean, again, it's going to be unique to every case and what the values look like, and that's why this is so important that you start with the concept of valuation, knowing how big that breadbox is, what the timelines look like, and having a plan for how that's going to be approached, and then tracking against that timeline to make sure that you are executing on sales, and you don't end up in a situation where you have this mountain to buy out at the end. It's very important to be tracking all that stuff. So, succession planning, a thoughtful plan that looks beyond, you know, personal endgame strategies by creating appropriate structural elements to support the growth and profitability. Right, what are we talking about there? We're talking about building a business. We're talking about building a growth engine that the next generational talent understands by buying in, and by buying in at a discount on the front end, or under favorable financial terms, that their growth and the growth they bring to the business will ultimately cost them more in the future to buy out. Yes, sir? Going back to the question about the general assessment, if the successor owners are using the profits of the company to buy the business, and that's 30 to 40 percent, why do you need more successors than you have in the first place? They're just paying back the profits of the company for so many years. So, the question is, why do you need third generational owners and more third generational owners to continue the process of succession? So, I would argue that oftentimes we as an industry think about succession as retirement. It's not. Succession is about business building. It's about growth. And so, by using and allowing the next generation to come into the business and use the ownership benefits of profit to buy the business out over time, they will then need to find successors or other people to join the business to help them grow the business to ultimately do the same thing. And this is the process of succession, right? Why does it take more? It doesn't necessarily always take more. But the problem with not having it be more of a pyramid shape is not all of those successors are going to be successful in the process. You may start with one owner. They might have two successors. It might take three to four next generational owners to buy out those two. And as you increase the value and as they grow the value of the business, the mountain gets bigger and it's harder and it's bigger. And you're growing the firm and you're growing the number of clients you have. And you have to have that staff. Correct. Hopefully. Hopefully, if you're staffing correctly. If you had a million dollars of profits and you didn't have a million dollars of profit back, why wouldn't one person be able to do it? They would have hired other staff. Absolutely possible to do, yes. I'm not suggesting in any way, shape, or form that it requires you to have four people to do a succession plan or 12 people to have G3s involved. It's just the nature of how these businesses tend to grow and the fact that once you have three owners, one G1 and two G2s, then it's oftentimes going to require for that next stage of growth to have four or more G3s that are driving that growth to keep profits in line to pay off that value. The only other impact would be G1 multiples. One would think, however, we can talk about multiples and the multiples levels that I quoted. When I started with FP Transitions 11 years ago, we were talking about a two times multiple. Now we're at three to three and a half times. It's certainly been driven up and a lot of that has happened in the last, say, five years, that movement in multiple. We're seeing four times multiples of revenue and it's not uncommon now. Certainly, private equity firms coming into the industry and seeing the opportunity to come into a very, very large organization, they're paying, let's just call it a 10 to 20 times EBITDA multiple for those large organizations to take an equity stake in. They're using that equity then to go out to the marketplace and acquire smaller businesses at eight to 10 times multiples and they're gaining the benefit of taking all that business up and getting a 10 to 20 times multiple on it. That arbitrage is happening and that is having some effect on those multiples. It certainly is affecting a lot of firms when it comes to succession internally because it becomes harder for the G1 owners to consider not getting as much value out of it for the fact that they want to continue that succession. It's not as easy as me quoting sizes. I'll tell you it's past a billion where you really see that multiple expansion come in. A billion in assets under management. I would rather say what kind of profitability, half a billion in profitability. Again, it's hard to say because so much of this resides around what does the individual business or practice look like. ... The question is, is the game right now of these mass acquirers just to drive multiple expansion? I can certainly say that there is a high likelihood that PE has seen that that is part of the equation here and that's a reason why they've come into this marketplace in the last eight to 10 years as heavily as they have. Is it having an effect? Yes. Is that all they're doing? No. I would certainly say that many of the large acquiring firms are also adding scalability to the businesses. They may be growing at 20% a year versus the average firm that's growing at 8% a year. Both. Again, it depends on the firm. Some firms are growing at 20% annually and just through organic growth. It doesn't tend to be the case. Eight to 10% is much more common. I'm going to skip a couple slides here so we stay on track. The benefits of succession. Owners exit on their terms, so you get to control the process. Until you drop below 50% ownership, you still have full control of the business. Your G2s hopefully help you grow the business. That's the point. And help you grow the value of the business. Your client relationships are preserved. The business is preserved. Your legacy is preserved. And hopefully through the process of internal succession, you're optimizing both for profit and for value. Things to consider of why you want to do internal succession. And this still is the case today. Even with what's happening with PE firms coming in and large aggregators and all of that, the reality is there's a battle for talent. And talent is not readily available as much as it used to be. And that's going to continue across all industries, not just ours. Certainly it's nice to see that the CFP organization is minting a lot of new CFPs. But I don't think it's enough to match the dearth of people that are exiting the industry. So certainly there will be a continued battle for talent. And if you're not offering a path to ownership in the business, you will be at a disadvantage of those firms that are. Obviously getting the next generation ready, being an incubator, if you will, with your business for that next generation of talent is important and is valuable. Growth, look, I always talk about succession as not being about retirement. It is about growth. That is what these plans are designed to do. By bringing that next generational talent into your business as owners, you're able to securely keep talent that then can add another 100 to 70 clients to your platform. 70 to $100 million on average. That is the purpose behind it, is building that growth. And then capacity and sustainability, that's exactly what I'm talking about there. If you don't have capacity for new clients, your growth is going to stall out. So having that next generational talent, having them in the business, and most importantly having them tied as owners to the core operating documents of the business, they know now what happens if they leave. Do they leave with clients? Do they pay for those clients? Do they leave without clients and get paid for their equity? All of that is documented in a legal sense, and it's done in business contracts, which are not employment contracts and are outside the construct of employment laws where non-competes, non-solicits, and non-acceptances may not have the kind of holding capacity long-term. Ultimately, the goal here is sustainability in these businesses, right? We at FP Transitions believe that it's important to have independent financial advisors out there in this industry, and that it shouldn't be five roll-up firms again. Why did we go from the big five down to thousands of advisors only to go back in the other direction? Doesn't make sense to us. Skip the advertisement there. This is a schematic view of what a long-term succession plan looks like. So you can see this is over a number of years. There's four tranches of ownership. You can see the declining line there for the G1 founder and the timeline for ownership and how that all transacts as the G2s buy into ownership through those tranches. So tranche one might be as little as 5% to 10%, maybe even less, depending on how valuable the firm is and what the cash flow looks like. That might be a five-year buy-in. It might be a 10-year buy-in, depending again on cash flow and what the capabilities are of these advisors that are coming into your business. So if you think about that, if it's going to take four tranches of ownership, five years apiece, you're looking at a 20-year timeline. So if you haven't started this process at 55, it's probably pretty late in the game. So timing is important here. And getting ahead of that curve, especially as these values are increasing steadily with what's happening with PE money coming into the marketplace, makes that timing even more important because that mountain will continue to grow, and it will continue to grow away from your next-generational talent. Finally, I would just say the challenge is here to build a strong foundation for your business. It's really about getting the right people into your business with you, getting them in the right ownership mentality, having them be beholden to profitability, understanding what drives value, profit, ownership, and helping them understand how they help you grow the business over time. That is what we're talking about when we talk about succession planning. Again, why I reference it less as succession and more about growth in your business and building a foundation that you can actually sustain. Lastly, the commercial, FPTransitions does end-to-end consulting around all of these topics. Compensation is obviously one, but we do help businesses with M&A, compensation consulting, multi-generational growth plans, entity structure, et cetera. And with that, I will open it up to question and answers. Go ahead. Yeah, so the question is, do we advise people to look at their key performance metrics, to gauge whether or not their performance to that one-third, one-third, one-third is in line or over, and what should be done with the overage if it's there? And bottom line, answer the question is yes, we do advise on that, and we do think you should be doing at least an annual evaluation and benchmarking throughout the year to measure where you're at from a performance perspective. And so that is the core fundamental of what I work in FPTransitions doing, is what we call our equity management solutions program that provides evaluation annually, it provides a benchmarking report, and it provides that good look as well as a coach to help you understand what that means for you and your business. And it's not just are you getting a third down to profit, that's one important key metric to watch, but it's the interplay of if I'm over on profit by 40%, but my staffing relative to peers looks like I'm understaffed and I have way too many clients per advisor, then maybe it is about reinvesting in the business for new added staff to balance that. If it's our staffing looks fine relative to what others are doing, but we have overage in profit, then you're doing something better than the crowd, right? You're being more efficient. Then maybe it's about doubling down on technology or whatever it is that's driving those efficiencies. So, those are all key performance metrics that we're looking at and providing you guidance on what's most important for where you're at currently. Yes? On your last slide there, you mentioned compensation services, what exactly is that? Yeah, so there's a level of compensation consulting that we provide in our equity management solutions. So, if it's about numbers and where a certain person should be from a compensation perspective, we can provide that kind of guidance. But if you want us as a firm to come in and look at your entire organization, look at it from the perspective of that third, a third, a third, what do the drivers look like, and redefine how you're doing compensation all the way from ownership down to everybody else in the organization, then we can do that, right? We can look at each staff person, we can look at the roles that we're doing, we can do blended rates of compensation, accounting for the non-client facing work that you as owners do and provide guidance and counsel around what that should look like from a structural perspective. Most importantly, we can help you if you're using compensation methodologies that don't align well with profit, things like sharing and revenue, things like paying for revenue based compensation. We can ensure that you keep those at least in line or move to a different compensation structure that's more akin to driving bottom line profitability. In the back. Yeah, so the question was how long do the notes typically go for because in past conversations or past scenarios where we've spoken, we've talked about profits based notes and other easy financial scenarios. Generally speaking, the notes run somewhere between five and seven years. Most of them are paid off in that time frame. Do some of them run longer? Certainly. Yeah. Businesses that don't have good profitability, that aren't being run well, that they want to do an internal succession, more power to them, but it is going to take longer for those notes to pay down. And so oftentimes the reason we are beating the drum about using performance based notes or easy financing, low down payments, it's because, look, the financial wherewithal of the next generation of owners just isn't at a point where they can afford to do that. They need to do it out of profits. So the profits need to be there for them to be successful at doing it. Bob. How do you normalize the cost of depreciation in the market based approach? Yeah. So that really does come down to profit, right? That 30 to 40% range is about where the market based approach and the equity based approach will generate a similar value multiple and a similar value outcome. Are they always the same? No. Never are they the same? Well, usually not. But there is a balance point in every business where those do come out, right? It is somewhere in that 30 to 40% profit range. I think the sellers sometimes struggle that it requires that much profitability and that much profit distribution for this scenario to continue, certainly. And look, it is getting harder. The reality is we are starting to see some of those, going back to your original question, we are starting to see some of these long term succession plans not proceed in the same context, right? G1 owners are looking at what they can get and the deal structures that they can get. And the offers from these larger firms, and I won't just say roll ups because it is more than just roll up firms out there doing this, they are getting very attractive, right? They are paying full value on a market based approach, they are allowing the advisors to continue to operate their business the way they have in the past, they are continuing to have a level of autonomy. There are some firms that are taking an internal equity stake, so they will come in and give you a 30% capital infusion and bring growth to the table that they are able to do. So there is a lot of options, I don't want to have you guys walk out of here as this is a bad time in the market, it is a great time for you all, the marketplaces, owners of these businesses, because you have lots of different options to choose from. But to fundamentally build this business in this marketplace, with financial services, and do it in a sustainable fashion, you really do have to think about value, measuring it, keeping up with it, and running it like a business owner. So typically, when we are talking about these larger firms doing acquisitions, you are seeing as much as 75% down, but at least 50% down in cash. Yeah? Yeah, look, it's... Yeah, look, it's... Yeah, I mean, look, so to repeat the original question, which I forgot to do, I apologize. The original question was, what is the typical cash outlay in these transactions that are happening with larger firms? Again, in today's marketplace, somewhere around 50% to 75% down is not atypical. The growth side that you were talking about, that is certainly now an option. These buyers are getting much, much more sophisticated in how they are acquiring these businesses, and where the capital is coming from, it's either personal capital, it's private equity money, it's family office money, it's, again, personal capital of the families that might be behind these businesses. So it's coming from a number of different places, and ultimately, why are those investors here in this marketplace? Because they see an opportunity. They see the opportunity to help these businesses become part of something larger, see an increase in value as a result of that, and everybody potentially gain from that. So the conversation around, is equity included? It can be, and it can be all equity if you want it to be. There are buyers out there that are willing to do that. Zero, which is why it's such a nice business to have. There are no other industries that I can speak of that have a three to four times revenue multiple attached to that business. You talk about something like a CPA firm, you're talking about one to one and a half times, generally, two times max. So it's a very profitable business that you have. Again, why I speak to these are multiple million dollar businesses, for sure. There's a lot of hands up. Yes? Yeah. So you can start sort of in two different places, right? And it's about level of commitment and where you kind of feel like it makes most sense for you. I'd strongly suggest come talk to us later. We can get into more of the details. But the question was around, what does the cost structure look like and the time commitments look like to engage somebody like FP Transitions to do this work for a firm that is maybe one owner looking to add a couple of G2s? Generally speaking, what I would say is you can start as low as where you should start, in my opinion, which is in the equity management solution. It can be $95 a month to get your valuation in a death or disability document done and start to have some conversations. The next level up from there is what we call our equity management solutions professional level program. That professional level program gives you that equity based valuation. So now you know what all the different multiple values look like. If you want to go past that and you actually want to dig into, I want to do a compensation change, I want to put in place next generational owners, I want to design the plan for the next 20 years, and I want to execute on the first tranche, you could be looking at something in the neighborhood of $30,000 to $50,000 all in to accomplish that. Could be as cheap as $20,000 depending on how many people are involved. Usually if we're looking at something that I would generally say plan around, if you're really wanting to dig into long term succession and building out a plan, plan around $15,000 to do all the compensation, consulting, the modeling of the cash flows and the transactions, and around $15,000 for the actual legal documents to execute on the transaction itself. Any other questions? What would be a good time in the market to buy or sell firms or merge firms? Yeah, merging is probably the most overused word in our industry. If you're talking about firms of substantially equal size coming together, I would say that's the rarity, not the norm. If I had to put numbers on it, I'd say probably about 75% to 80% is more a traditional acquisition, bigger firm buying smaller firm. Can still have components of a merger, meaning there might be equity share, there might be upside for growth, other compensation arrangements. But if we're talking about a true merger, probably 20% to 25% of the time where two firms of similar size and scale are coming together. And the reason for that is it's just much more complicated. Bigger firm buying smaller firm, it's pretty clear what's going to happen. Mergers, there's a lot of interplay of personalities, of decisions, of where the cash flow is coming from, who's bringing what portion of ownership to the table with their book of business or their business as it sits today. So it's just a much more complicated scenario. At the expense of potentially being a stone's throw, are you looking at about excelling with the companies and so forth? Considering that I'm not considering them, I just want to understand their competition. As field managers or advisors, we're not looking at multiple revenue streams. How do we compete? When you see price differentiations, or even if you're looking at it, the only firms that are being offered by the base firm, some are equal to multiple, but the only to stay on the income-based approach, that's the bigger cap at the moment. Yeah, so the question was, what is the differential from a multiple perspective between different styles of businesses, right? Fee only versus fee for AUM versus a mix of hybrid businesses. We're attractive. Yeah, look, you're highly attractive because of the recurring nature of the revenue stream. Where there has been some debate on value is where there are fixed fees, specifically fixed fees that are too low relative to the market, or fixed fees that are non-recurring in nature, meaning every year getting a new planning fee and you might not get that planning fee every year. It had been a bigger gap previously for those non-recurring revenues. The fee for planning revenue is actually now being seen in a better light and buyers are more likely to pay typical carrying multiple rates for that business. There's still a little bit of perception in the marketplace that it isn't quite as valuable. Whether that's true or not, whether that really applies to your business is harder to say. It's more about how you structure your fees. Are they at a high enough level or is it a built-in contract where you're doing the financial planning every year and you're doing the asset management and it's all one blended fee? They can, yes, and some firms do that. They do take that approach, but others don't, right? Others are here to say, look, you've run a successful business and it's working and we're getting 30% to 40% margin out of this thing. I'm happy to ride along and I'll invest in it, right? I very much appreciate you guys' time. It's always a pleasure to speak with you guys. Always great questions. Again, we're here for the rest of the event. I believe it's booth 115, but I'm not 100% sure. Come by, see us. We appreciate you and thank you very much for your time.

financial service firms

business foundations

firm growth factors

owners' compensation

revenue multiples

talent retention

business valuation

succession planning

benchmarking

private equity