then I'll give a quick introduction and turn it over to Mallory. Hey everyone, I'm Zach Hubbard. I am the webinar coordinator for NAPFA Genesis. Welcome to this NAPFA Genesis webinar sponsored by LOIS in Tampa, Florida. LOIS is the exclusive sponsor of NAPFA Genesis, bringing you these webinars, national conference and symposium scholarships, social events at NAPFA national conferences, plus two Genesis webinars per year on the latest insurance and risk management topics. I'd like to welcome our presenter today. That is Mallory Boutin. She is a consultant at FP Transitions, specializing in supporting fee-only financial planners and independent RIA owners. Mallory was drawn to FP Transitions by its culture of intellectual curiosity and emphasis on building relationships. Mallory gets excited about solving the puzzle that lies in the heart of each individual advisors or practices business problem. From there, she personalizes her approach to deliver the services they need while building a relationship that helps to support their long-term success. And I'm excited for Mallory to join us today to talk through this topic. I know this is an important topic that many of us, especially those of us as younger advisors at firms, think about. So Mallory, thank you for joining us today and I'll turn it over to you to jump into it. Fantastic. Thanks so much for that intro, Zach. And thank you to NAPFA for having me here today. As Zach mentioned, I'm a consultant at FP Transitions and I do essentially management and M&A consulting. I sit in our EMS department, which is Equity Management Solutions. And this is our kind of long-term relationship coaching and consulting. So I have a group of advisors that I work with on an ongoing basis, again, all NAPFA members. So I'm really focused in on the unique challenges and opportunities in the fee-only space. And before I worked with our EMS team, I was with Enterprise Consulting, which is our project-based consulting group. And so I spent pretty much all day, every day, helping firms figure out internal succession plans and kind of the unique features of each person's transition. So the things that we're going to be talking about today are really near and dear to my heart and things that I've spent a lot of time thinking about and working on. So very happy to have you here today. And that's me, hello. So as Zach mentioned, I'm going to hopefully be talking for about 40 minutes, and I want to leave lots of time at the end for the question and answer. So by the end of the 40 minutes, we're going to be covering exit options for founders, thinking about becoming an owner from your perspective as the G2, positioning yourself for ownership, and finally, some discussion of the mechanics of how internal succession actually works from a functional standpoint. A little bit of kind of context for the beginning of this conversation. What are the exit options for founders? If we had been having this conversation 25 years ago, there really weren't a lot of exit options. Most people would have really just relied on attrition, right? So built a nice book of business, a really good group of clients. As it's getting towards the end of my career, maybe I'm kind of taking the gas off growth, letting people kind of drift away naturally over time. And then when I'm ready to retire, the answer is I will send you a very nice letter and let you know some people you can reach out to. But in the early 2000s, people were starting to realize, hey, these relationships are really valuable and there are other options and there are better ways to continue caring for your clients after you're ready to be done in the workforce. So today, there are really two key exit strategies. One is M&A and the other is internal succession. And we're gonna spend the bulk of today talking about internal succession and kind of your role in it as next generation advisors. But I do wanna set kind of some baseline understanding around the M&A environment and how that works today. So first, who is buying? Who is out there making these acquisitions? You know, there's certainly the big aggregators or the roll-up firms. So people like Mercer or a Focus Financial, and these are large firms typically backed by private equity funding. Sorry, I will also say I am on the front edge of a pretty awesome cold, so a little bit of brain fog today, so bear with me here. But anyway, so big roll-up firms, PE funding, and their whole business model is going out and buying up firms. And some of these then may kind of roll into the larger business. They might have the rebranding to whoever purchased them. Some may also be able to keep some of their own internal branding. So you would still be, you know, Mallory Boutin, RAA backed by Mercer. So there are a couple of different ways this could work. And that is kind of the big roll-up. The other option is just other firms. You know, I work with firms that have $50 million of AUM and they're interested in buying a $10 or $15 million book. Or I have clients who are 150 million or 400 or a billion, and there are M&A opportunities at all of these levels. Regardless of who the buyer is, if it's a big firm, if it's a mid-sized firm, whomever, the number one consideration is always gonna be fit, right? So what is it that we're buying and selling? It's relationships. And those relationships are built on culture. They're built on, you know, shared understanding of what the service model is gonna be, of what the planning process is gonna look like, or a sense of, you know, knowing who it is that I'm talking to. So the number one thing is always going to be fit. And, you know, if you are a NAFTA advisor and you lead with planning, and that is what your clients like about you and appreciate about you, it's not gonna be a successful transaction to try to sell to, you know, a hybrid firm who does individual stack picking and they don't really pay attention to planning, right? That's not gonna be successful. So regardless of who it is or who you're selling to, that is the key type, the key consideration. In terms of transaction timelines, these transactions typically take about a year. So, you know, it's not like I'm an advisor selling my firm. On Friday, I hand you the keys. On Monday, I'm on vacation in the Bahamas. Sellers stick around for typically about a year long consulting period. And in that year, they're working on transitioning clients. They're working on making sure, you know, the backend tech stack transition goes smoothly. They're making sure that the staff that's staying around is well integrated into the new firm. So it's about a year of making sure this is a real seamless transition. And I do wanna point out that there are four key stakeholder groups in any of these M&A transactions. Absolutely the buyer, absolutely the seller. We already spoke about how it's important for it to be a good fit for the clients, but it's also important that it's a good fit for whatever staff are with the selling firm. And I was reading literally yesterday in my inbox, industry publication landed, and it was an interview with the CEO of one of these bigger roll-up firms. And her point was, it's really hard to find good talent. And as we are looking at firms that we may be interested in purchasing, one of the key things that we're looking at is, does this firm have a really strong advisory staff, back office support staff, other folks that are gonna stay as part of the transaction? So when whoever the retiring advisor is leaves, they're still gonna be that strong group there that are gonna be able to continue servicing client needs, caring for all of the business operations, et cetera. So I do wanna point out that even if you are at a firm that ends up going an external sale route, or if you are a minority equity owner and it ends up being some sort of external sale, your role is still really important and you are a key piece of whatever that transaction is. So real quick, current market conditions. I think it's no secret that 2023 was a bit of a tough year in terms of raising interest rates, access to capital, et cetera. And we would assume, I think that some of these headwinds would cause a slowdown in the M&A market. That just really hasn't been borne out in the data, however. So at FP Transitions, we have a pretty robust M&A department. And in 2022, we did, I think, 135 transactions, and in 2023, about 170. So even with these adverse market conditions, there's still a really robust market for buying and selling these firms. That being said, we're really here today to talk about internal succession. We're talking about next generation advisors coming into the equity circle. So what is the motivation for that, right? Because if we look at timeframe, it's not one year, it's 10 to 15 years for a really comprehensive succession plan. Pricing, you're not getting a big check and the rest paid out over two or three years. You're kind of going piecemeal as the seller, getting little bits over time. So you don't have that big payout. And the mechanics, as we'll talk about at the end, again, take some time and effort. So what is the motivation for internal succession? This varies on an individual basis, but it's usually, one, the legacy for the founding person's kind of professional life, legacy in the community, legacy in the industry, wanting to see what they've built continue on. It is continuing to know for that person that their clients who they care about and really mean a lot to them will continue to have the kind of service that they know that they want, need, desire. And it also, part of the motivation is you, right? So just like the M&A folks are saying, hey, we really want to be purchasing firms that have strong next generation talent. That's part of the motivation for internal succession. When we think about bringing on staff, bringing on junior advisors, we think of the three R's, which are recruit, reward, retain. So it's finding the good high quality talent, making sure that they're rewarded for their contributions to the firm and to the clients, and then making sure that they stay. And one of the best ways to do that is by including an equity ownership piece. So now we will maybe go to the next slide, which is thinking about becoming an owner. What is the mindset? And before I get into my piece here, we do have a couple of questions for the audience. We could go ahead and get those going, which I can't see. Oh, yes, how do you start it? So the first question is, have you started an equity ownership conversation? Yes or no. Have you begun speaking to your G1 about is equity ownership an option? What does it look like in your firm? Is there a path to partnership, et cetera? Any of these things, have you started this conversation? Maybe a few minutes, a few seconds to answer that. Okay, awesome. So a lot of you have started down this path, and that's great. And for those of you that haven't, also good. Nice to have this kind of roadmap in your mind before you begin. One more question. The next question is, are you interested in equity ownership at your current firm? And that is specifically at your current firm. Where you are today, is this a place where you think you would like to be long-term as an equity owner? Okay, awesome. Oh man, that is like pretty close to the same. Okay. So, many of you are starting down this path, you're already in these conversations. I hope that you've started to think about these things already. But this is the, this is really the foundational piece. These are the, the, the questions you're asking yourself. This is, you know, the soul searching you need to do on your own before you really go too far down the road. And these three questions are, what does it mean to be an owner? Why do you want to be an owner? And is becoming an owner a good fit? So the first question, what does it mean to be an owner? This means I'm not just going to be an advisor, I'm not just going to be working with my clients. It means I'm going to be looking more broadly at the business, right? It's working on strategy, it's thinking about HR, it's having, you know, a role in operations, or, you know, kind of the broader efficiency of the firm. We work with a lot of folks who are founders, who became advisors because they loved working with clients, they liked that interpersonal interaction. They, you know, really got a lot of satisfaction from getting to know people, understanding their struggles, understanding their goals, celebrating their wins with them. Those were the things that really got them out of bed in the morning and made them excited to be at work. And then they realized, all of a sudden, now I have a staff of two or five or 10, and I'm not having those really meaningful client interactions. It's them thinking about, you know, what is next year's health insurance going to look like, and how do I, you know, renegotiate our lease, and when is it time to hire somebody new, right? So it's all of these other things of working on the business, as opposed to really working in the business. So once you have a full sense of what does it mean for you to be an owner, and what does it mean in the context of your firm to be an owner, think about why do you want to be an owner? What does the value add to you? What is it that drives you? Do you really love these other pieces? Do you like solving the puzzle of, you know, increased operational efficiency? Do you really get excited about the idea of mentoring other folks in your practice and, you know, helping them become better at client service or whatever? There is, you know, kind of the excitement of the autonomy of I get to choose what to do, and I get to design, you know, the future of my firm and be a leader, and there's certainly a financial upside. You know, I will not downplay that it can be really financially rewarding to be an owner of one of these firms, and there's a lot of opportunity there. But at the same time, you're taking on a fair amount of responsibility and risk. So, you know, if a lot of your compensation comes from profit distribution, and for some reason, one quarter, there's no profit to distribute, that has a really big impact on you. So if you're a W-2 employee, and you're, you know, kind of going about your day, you're going to get your paycheck at the end of each pay period kind of regardless. But as an owner, there's just a lot more variability in both the upside and the downside. So we've thought about what it means to be an owner, why you want to be an owner, what is driving you in this endeavor. The last question is, is becoming an owner a good fit? And I specifically mean, do you want to be an owner of a firm, or do you want to be the owner of the firm where you are today? So I know many of you think like, nope, this is the firm, this is the right place for me. We're already having these discussions, I feel good about it, I'm confident. But, you know, this is probably a bit of a tired analogy. And I'm sorry about that. I use it all the time anyway. But becoming a partner in a business is a lot like a marriage, right? You are contractually bound to this company, you are committing to really spending your career in this place. Your name and your reputation are tied to it in a way that it wasn't before. And it is a lot easier to get married than to get divorced. Ideally, when you enter into a partnership, you're going to have super strong corporate documents that make it very clear what happens if somebody wants to leave the partnership, what the steps are, what the payouts are, etc. So there doesn't necessarily need to be, you know, a big negotiation or a power struggle about it, it should be very clear to just go to the documents. But at the same time, you really want to be going into a partnership with the intention that that is where you're planning on staying. As just kind of a personal anecdote, I'm a military spouse. So we have moved about every two years of my entire professional life. And that has allowed me to see a lot of different practices, a lot of different businesses. And I've seen some great partnerships, some really synergistic, positive pairings. You know, maybe person A is great at this, not so strong here. But person B really shines here and doesn't really like what person A does. And together, they're, you know, powerful and efficient, and they help each other be better, and everyone's running in the same direction. And it's great. Alternatively, I've worked in a place where, you know, somebody was really excited about the idea of being an owner, and didn't really think through, is this the person I want to be a partner with? Is this the person that I'm going to, you know, share my thoughts with and my income with and, you know, be on the same page with for the rest of my career. And then they found, man, now I'm in debt, and I'm really stuck in this place. And I, I don't really care for this other person. So these are the things that you really want to think about in a personal way. And you're, you know, as you're journaling on your own at night, these are the things to think about before you get too far down, down the path into ownership. Once you have answers to these questions, you want to position yourself for ownership. So I was talking to a client last week, and we were talking about how it's giving this presentation today. And he was telling me about a conference he went to 15 years ago. And he was sitting in a presentation about next generation ownership. And he said that the presenter probably said in the course of, you know, his 45 minutes of prepared remarks, the phrase substantial contribution, maybe like 50 times. And we kind of chuckled about that. And then I immediately told him I was going to steal it, because that's the crux of it. That is the main thing that you need to do to position yourself for ownership. And I don't have a roadmap for what is substantial contribution. It'll likely vary from firm to firm or person to person. But it is essentially thinking like an owner. It is having that entrepreneurial mindset. So you want to start by really establishing your commitment and dedication, taking an interest in the ins and outs of actually running the business. And this certainly is a fine line, and you want to, you know, stay in whatever way is appropriate for you and your firm and your role. But look more broadly at the business. Offer to take on some responsibility in additional areas. So seize opportunities to enhance your managerial, business, operational knowledge and skills. So not only will you be building up your experience to support your request or desire for ownership, but it'll also help you be better equipped when you take on that ownership role, right? You don't want to, you know, make the big leap, step into ownership. Now you're committed and you're seeing a profit and loss statement for the first time, or you're understanding for the first time what your HR obligations are. So take the opportunity now to think more broadly and think about operational leadership too. And in this way, you're investing in the future of your career. You're contributing to the overall efficiency and profitability of the firm. You're taking on that ownership mindset. And you're working for the good of the team rather than your individual interest or advancement, right? You are raising all ships with the tide, and you're not just worrying about, you know, am I going to be doing better individually with my clients, but how can I impact the firm as a whole? The last piece of this is really working towards smart, sustainable growth. Growth is kind of the foundational piece, right? In order to have another seat at the table of equity, that table needs to be big enough for you, right? So it is not very desirable for the founding person to have a smaller piece of the same size pie or a smaller pie. And you, as somebody who's buying in, you want to be buying into a company on the rise, a company that's going to continue to grow. You want your investment to continue to grow over time, just as you'd want any other investment to do so, right? So in order to kind of help support this growth, you could be, A, going out and leading the way on some of it, bringing in new clients, thinking about new opportunities or ways that you can expand, thinking about, you know, building out a referral network, whatever. So it could be you driving the growth, or it could be you enabling others to do so. It could be you taking on additional responsibilities that allow somebody who is fundamentally a great rainmaker the ability to go out and bring in those new clients. So substantial contribution, operational leadership, and growth. So think about those things as you're making your case for yourself. So now that you're well positioned, internally, you know why you want to be there. Externally, you've shown that you're, you know, well positioned, you're in the right place, you're doing the right things. Now, how do you have the conversation with your G1? What is the preparation and approach? I will apologize if some of these things sound really silly. The reason I'm bringing them up is I have come across them as problems in the past, right? So even if you think, oh my gosh, I can't believe somebody would have brought it up, you know, brought up equity ownership and passing in the hallway, I can assure you that has happened before. So as you're approaching the topic, come into it with a stance of being confident yet respectful. And you start that by finding the right time and place to have the conversation. So think about kind of the flow of your work year, quarter, day, whatever. And think about entering into this conversation when everybody has the time, the mental space, the ability to really think critically about what you're asking. So, for example, if you are a firm that does tax preparation, putting an hour on the G1's calendar to talk about equity ownership in late March, early April, probably not great timing, right? Like everyone's going to be stressed, everyone's going to have timelines coming due and just not really be in the headspace to think like, yes, let's do some like long-term planning for the future of our company, right? So make it easy for your G1 to have the conversation and make it easy for the next steps to be approachable. As you go into this conversation, show that you've done your homework, right? You're already in this presentation, you're already thinking about it, you're a step ahead just straight from the jump. But all these things we talked about, about running a business, make it clear that you understand that that is part of it. You're thinking about it more holistically than just like, man, wouldn't equity be nice? Make it clear that you know how this works, how internal succession works, what the mechanics are. What are the logistics around modifying an ownership structure? So especially if you're going from a single owner to multiple owners, you're going to have to change the corporate documents about how decisions are made. You might have to change what the entity is, like there's kind of the legal work that goes into making this all happen. I would really suggest that you be proactive about addressing questions and concerns that might arise and be ready to show how your proposal can be accomplished, despite of or because of these things, right? So think through what hesitations might your G1 have? What concerns might they have? What are any impediments that you can see as possibilities and really have an answer to that in advance. Next, you want to make sure you understand their perspective. And that includes really honoring the journey of how they've built the business to today, right? So think about, are you talking to the founder or someone who purchased the business or otherwise bought in, right? So if you're talking to somebody, maybe you're the G3 and you're talking to a G2 who purchased the firm over time in their own internal succession plan. They have a different perspective. They have been in your shoes. They have gone through this process before. It might be a little bit easier to have that conversation versus a founding partner who maybe built this business from nothing and doesn't quite have the same perspective or knowledge. Of how internal succession could work. Think also that for whoever the ownership group is, this is both their legacy and largely their largest asset, right? So there are kind of multiple layers of how there is, you know, emotion and kind of future planning on their part involved here. So think about the priorities and goals of the existing owners and the business. Get to know your potential future partners, both on that personal level and kind of the journey of getting to where they are today. And then think about how they envision their own careers, including their plans for eventual retirement. You know, by recognizing the time, energy, money people have put into building their business, it really acknowledges that your goal of ownership is that you want to work alongside them. You want to build upon the foundation that they've created and, you know, continue rowing in the same direction to continue going and growing in a way that they understand and align with. And ultimately they'll see this last piece, the value proposition, right? That having you on as a partner is better for everyone. And this is where that two-way road goes, right? It's good for you, obviously, to be a next generation owner, to be in that equity circle. It's also good for them to have you in the equity circle and to be a part of the leadership of the firm. And to be able to carry the firm on, you know, far into the future. So think about here, where can you be additive? How can you explain how internal succession maybe is better than M&A? You know, talk about growth and how the growth of the firm over time will be so much better with you there. The ultimate value will be higher. How is this better for clients to have you there? So the clients can continue with the firm and their families can continue with the firm. As you develop your own ideas for the business, try to think about what are the biggest concerns or roadblocks or things that are maybe holding the firm back. And how can you contribute? So ensuring that your objectives align with the current ownership, you're really going to strengthen your whole proposition here. You know, I work with firms that have really great G2s, really motivated, you know, excited about growth, excited about the future, excited about helping the firm. But their idea of the future isn't actually in alignment with the G1s. They want to start, you know, a different niche or they want to start a different client service model for different groups. And that's fine and that's great. And that is somebody who needs to find a firm where that alignment exists. So as you think about your approach, make sure that that mission, vision, values all aligns and you're demonstrating how you're going to be additive in that process. So, you know, as you're doing this, I suggest and encourage you to be as specific as possible. So look back at what you've accomplished, what you've invested, what you've implemented, where have you taken responsibility? Then look to the future, think about the growth of the business, identify the contributions specifically that you can make. Give some examples and measurable contributions of your growth. Research your firm's position in the industry. So you want to know, you know, what are the contributions I can make here? What are the growth goals we can have here? And how do we fit in the industry as a whole or in the larger kind of ecosystem here? And what are some opportunities more broadly for us? How can we grow into a bigger, better space? And then really, again, be specific and outline your plan. So it's very clear. You want it to make it an easy yes. And once you get there, so you're in, you've done what you need to do to show that you're the right person. You've had this conversation. Your G1 says, oh, my gosh, this is so smart. I can see how this is better for all of us. You're going to take some risk away from me. We're going to be good partners. You're going to bring these fresh ideas. We're going to grow together. This is amazing. Now what? Here are the mechanics of how internal succession works. And I will tell you that this could be like a full day thing, right? Like just this by itself. And I'm going to get through it in like five minutes and two slides. So this is like a very high level overview. But essentially, there are four key areas to consider. That is timing for you and for the G1. It is the tranches, which is a fancy French word that means slices. These are the individual transactions or sales of shares or membership units. Financing, how do you pay for it? And then issues around governance. So I will tell you that in terms of your timing, G2 timing, we suggest that next generation potential owners are with a firm for three to five years before there is an equity transaction. And that is really to ensure both sides that the fit is there, right? That for the G1, it assures them that you are the right person. You get along well. You are reliable. You do a good job. You're a person that they can really trust and rely on. For you, it gives you the time to make sure that this is the right place for you, that this is somebody you want to partner with, that they're going to be a good mentor to you, that they're going to be a good partner to you, that they're going to listen to your good ideas. So that is kind of the timeline for a first tranche. Overall, like I said at the beginning, a really comprehensive, smooth internal succession can take 10 to 15 years. And this is kind of the idea of what it looks like. It is starting out with the founding owner or owners as 100% owners. The G2 starts out at zero. We get to tranche one after a couple years. This is typically a small-ish sale. It's, you know, oftentimes 5 to 10%. It's big enough to be meaningful and small enough to be affordable and kind of a trial run, right? Making sure that the potential G2 has that ownership mindset, that they can take on the additional responsibility of being an owner, that they're, you know, good partners. Then you see as the time goes on, we go into tranche two. That's a second standalone sale of, you know, maybe 10 or 15 or 20%. It really depends on the circumstances and the people involved. And then over time, the equity percentage owned by G2 goes up. G1 goes down. The responsibility, the decision making, the management at the same time for the G2 goes up while the G1 is handing more and more of that over. And you'll also see that, you know, partway through this plan, we have G3. It's just like G1 needs G2 to be there to provide the support, to be the next generation, to ensure that the firm can continue into the future. G2 needs G3 there for the same reasons. And so the idea is that this is an ongoing process where, you know, eventually you have people leaving as they retire, new people coming up behind them, people coming into leadership roles. And this is all taking place over time. The pricing and valuation is a bit complicated. There's a lot that goes into it. You typically, I will just say at a very high level, want to come to a place where you can pay off your each round of financing in five to 10 years. So that's kind of what we're looking for. And again, the tranches may overlap. So you may have two notes outstanding at once, but each one as a standalone should typically be able to be paid off in about five to 10 years. The financing is often at the beginning seller financing, not always, but often. So as the person who is selling the shares or the membership units, they're also holding the note. So when you have your quarterly loan payment, you're writing the check to the G1. This is in large part because it's difficult to get external financing. There's typically a minimum of $250,000 for these externally financed notes, these like standard bank loans. Oftentimes people will get either an SBA loan or a standard loan at the end when they're buying out the rest of the G1 and maybe will refinance some of the earlier notes. But there's often a little bit of internal seller financing at the beginning. And this is really, you know, kind of a show of good faith from the G1 that they really want you to be part of the ownership circle and they want to make it possible for you. Lastly, issues of governance, and then we'll go to the question and answer time. At least at first, ownership does not always equal management, right? So you will have certain rights and responsibilities as an owner. You'll be able to see, you know, the financials to some level of detail. But as you're considering buying into equity ownership, you want to take a very close look at the corporate documents, the operating agreement, a member's agreement if you have one. And these really outline how decisions are made. Is it one man, one vote? Do you vote based on the percentage of shares you have? How are decisions made in terms of, you know, are there some categories of decisions where there only needs to be, you know, 75% of the share votes need to be positive in order for something to happen? Are there other things where maybe the threshold is at 95%? So essentially, it almost needs to be unanimous for this decision to be made. And lastly, are there decisions that really get held out as being the prerogative of the founder, regardless of what the share count is? So there's a lot of nuance into corporate governance, how people are entering and leaving ownership. So, you know, what is the threshold of if you want to bring on a new owner? Who has to agree to that? So there's a lot of nuance there. It's something to be aware of. And those are the four big pieces. And now it is 1245, my time. So I'd like to pause here and take some time for the Q&A. Great, thanks, Mallory. We did have a few questions come in. So we'll kind of go down the list here and ask those to you. So first question, just actually two questions came in in reference to the financing that you were discussing. So one question came in, mentioned you referenced payoff in five to 10 years. When you think about that, did you exclusively mean basically profits paying off the loan or the financing in five to 10 years? Or is that a combination of maybe additional payments being made, things like that? So there are kind of two pieces to this. One is, is there going to be a down payment or not? So that is a piece to consider, like, do you need to have cash on hand? Then in terms of paying off the note in five to 10 years, we find the greatest success of if you can pay off the note with a portion of your profit distribution in that amount of time. Oftentimes we'll put balloon payments at the end. So, okay, maybe we'll set it up. It's a variable note. You will pay down the note to the G1 on a quarterly basis whenever you get your profit distributions. And instead of saying, okay, every quarter you owe me X amount of dollars, we'll say you owe 50% of your profit distribution to pay down the note. That typically leaves however much you need to cover your taxes and then maybe a little bit leftover as your own kind of additional income. But that means, again, everything predicated on growth, that assumes that there is growth over time, that you're going to be able to pay it back in five to 10 years based on that profit distribution and then potentially with a little balloon at the end if growth doesn't go as you expect. But yes, it's basically based on profit. Okay, perfect. And then another question around financing. So when it comes to seller financing of internally sold equity, what do you see used as the interest rates typically on those types of transactions? It is incredibly variable, which I know is not a super satisfying answer. The CFP answer, it depends, right? It depends. It depends. Yeah, it depends on the unique circumstances of your deal. And when we put together deals like this, there are 10 to 12 different levers that we can adjust in terms of figuring out their ideal terms. Interest rates tend to be better on seller financing than if you were going to go to a conventional bank. It tends not to be really where people are making their big bucks. So it's oftentimes pretty standard, maybe just a little bit above prime, for example, or maybe less. So it depends on kind of how motivated the seller is, what the requirements are for terms, and then how it all cash flows out. Awesome. Going back to determining fit of ownership and whether or not it makes sense at the current firm, if somebody is interested in ownership at an existing firm, what are some red flags that they should seek to identify or look out for in an existing firm that might say, you know what, it's not really a great fit for them to become an owner of that firm? You know, some of it is going to be that kind of gut feeling, right? Like you're talking to your G1 and you're like, hey, I'm really dedicated to this firm. I really, you know, want to be here for the long term. I want to participate in the growth of the firm. And they kind of brush you off. Like, okay, like you need to at least be willing to be a part of the conversation. Think about some of it is personal, right? Like you don't need to be best friends with your partners, but you need to get along with your partners. If you find yourself at the end of the day, like I cannot wait to get out of here. It does not matter how profitable your firm is, how great your growth is. If you don't want to be there, if you don't want to spend time with these people, that's a pretty big red flag. If you don't feel comfortable providing honest, thoughtful feedback and having a really constructive dialogue, that would be a really big red flag for me, too. So it's mainly about the communication. Can you be your authentic self? Can you communicate clearly? Are you respected? Those are the big things that are going to lead to success. And then finally, you know, are you respected? Those are the big things that are going to lead it for me. That makes sense. Great. And then another question regarding determining fit. Are there any questions or conversations you recommend? Maybe slightly more experienced advisors, a couple of years, maybe making a switch in firms, ask of ownership or the hiring folks to weed out some of these red flags before entering the firm, if equity ownership is their goal, or is there anything that you would recommend they ask as part of that interviewing process to maybe identify some of those? Yeah, I would hope that the firm that I was interviewing with had a defined, either defined career path or defined path to partnership. So they're not saying, yeah, you know, you'll definitely be an equity partner in five years. But I want them to say, yeah, we want people to be in the equity circle. We want to set you up for success in getting there. Here, here are the things that you would need to do. Here are the steps to getting there. Here are the ways that we will support you in that. Here's the professional development that we offer. Here's our plan for mentorship. I would want to see these things and that they are I'm thinking about them and are like actively engaging in these thoughts. And not just be like, oh, yeah, no, totally. There's going to be equities on the table at some point. But yes, equities on the table. And we have a plan for what that looks like. Maybe a slightly more specific question. I'm not sure how much detail you can get into on this one. But if someone say given a range of equity to purchase, say they're offered between one and five percent to purchase, how would you coach an advisor on evaluating how much to actually purchase within that range, whether it's on the high end or low end? How do you typically coach advisors through that? Part of it is understanding the cash flow and building out that pro forma looking into the future. Typically, if you have a really great, high performing firm, really strong profit margins, you feel confident about the growth. You feel like, man, this is a rocket ship I want to get on. Then you want to buy as much as you can as early as you can, because it's only going to get more expensive from there. One of the things I didn't talk about in that internal succession plan side is each tranche, each sale is a standalone transaction, and it takes place at the valuation at that time. So if you buy five percent of a million dollar firm and then later you're going to buy 10 percent of a firm that now costs a million and a half dollars, it's more expensive then. And then your next one. So you're kind of chasing your own growth, right? So typically, if you have a really high performing firm, you would want to do as quickly and aggressively as you can and can't afford. Assuming that it's a well-run firm, that it's profitable and you're going to be able to pay down that note in a really reasonable time. When we see notes that look like they're going to go beyond 10 years or 15 years, that's when we start to wonder, is this really going to cash flow out in a way that is successful for everybody involved? Perfect. Tailing off that affordability conversation, I think as firm valuations continue to balloon, that affordability becomes even more of a challenge. So in your experience in the firms that you're working with that are truly serious about bringing on new equity owners and bringing people into that equity circle, as you called it, are you seeing any firms out there doing anything creative or unique to address the affordability challenges for that maybe G2 or even G3 advisor? Or is it still, hey, maybe we'll give you a little bit of a discount in terms of the valuation, but not much. You're just going to have to save up and be able to afford this significantly larger buy-in. Mm-hmm. There is really only so much flexibility in the ways that you can get creative. If you decide maybe I'm not going to be a full equity owner, maybe I'll have a profits interest plan, or maybe I'll have a stock appreciation right or something. So there are other ways that you can recruit, reward, retain with really strong packages that are not necessarily buying out truthful equity. So synthetic equity options, things like that. In terms of actually being able to afford the equity, it is tricky. And it really comes down to, I hate to sound like a broken record on this, but what is the profitability and what is the growth? The other thing I didn't really touch on is we typically see internal succession a bit like a pyramid, right? So say you have one founding partner, they built it and make it as big as they can, and you have a really strong staff. It's probably going to take two G2s to be able to afford to buy that person out. And then you have the two G2s, you're going to continue to have growth. You're going to continue to have a really strong team underneath you. It might take four or five G3s then, right? So what started as one person probably is not going to be one person at the end. You're not going to have a single G2 buying out a single G1 in most cases, partially because it is so expensive. It is hard to afford, and it is hard to take on as one person into the next level of growth, the level of complexity that it requires. Right. Awesome. And so this will probably be the last question, but if anybody else has questions, feel free to type them in the Q&A as well. As you think about the firms that are the most successful at this whole process, right, of developing new equity owners and bringing them into the circle, what are maybe two or three steps or processes that you see them putting in place to really make sure that they're continuing that pipeline of new equity owners, allowing that older generation to start to cycle out? What are they doing to set themselves up successfully there? Sure. One big thing is a culture of mentorship. So really being thoughtful about sharing knowledge, working together, taking the time to do that kind of internal professional development to talk through how decisions are made. So instead of just saying, this is what we're going to do because I pulled it out of the air, we're going to really talk through what was the decision making? What was the thinking behind it? What is your perspective as the junior person? What am I not seeing as the senior person? So really having that collaborative, meaningful kind of mentorship and shared collaboration is really helpful. And then that needs to waterfall down, right? Once you're the mid person, you're still being mentored, but you're also a mentor. You're also helping the people coming behind you. So it is this kind of cyclical shared success, shared decision making. Ultimately, not that everything is a group decision. Some things are just going to be a decision that are made, but then we can talk about why that decision was made. Yeah. A statement came in the Q&A, but that kind of addresses that. Part of the cycle as I'm hearing it is just that cycle of mentorship, identifying those folks that are on that equity partner track and helping to bring them up early, helping them understand the benefits and how to save and effectively buy in from the jump is really kind of the best way to do it. If you're a firm owner that's maybe trying to catch up and maybe has a balloon valuation, right? It's built a successful firm, but maybe hasn't had those processes in place. What can those types of firm owners do to maybe catch up or how can the next generation help them facilitate that process? I'll be very honest and say that there are a lot of founding advisors who really struggle with this process. It feels very overwhelming. It feels like, oh, I have plenty of time. We always joke about advisors being on the rolling five-year plan. I'm going to retire in five years. And then you talk to them in two years. I'm going to retire in five years. And then it comes five years. And you can do that in this industry, right? You can have these meaningful relationships and be helpful to your clients for a really long time. So it can be hard to kind of help them see you really just need to rip the band-aid off, right? So as a G2, if I'm in that position, I see I have this G1 having a hard time with it, coming in with a very clear plan and saying, this is the plan that helps you too. This is a plan that you need for your future. And here's how we can work together to be mutually successful is I think the best way to approach it. Awesome. Well, thanks, Valerie. I think that about wraps us up in the last minute or so here. Any final thoughts or final words that you want to leave our attendees with? I just really think that the fact that you are here as Genesis members, so you are earlier in your career, you have a lot of runway ahead of you. You have a lot of opportunity ahead of you. So the fact that you are thinking about these things, now you're taking a critical look at what is the best fit for you and what is the best fit for your future is just going to pay dividends in the end. So use your planning skills on yourself and in your own careers, and you'll be in a really good spot. Great. Well, Mallory, I'd really like to thank you on behalf of NIFA Genesis and all of us here at NIFA for just this great session. I know this is a really important topic. I talk to a lot of advisors in the Genesis group and younger advisors in general. This is something that we're all thinking about and talking about. So really appreciate you taking the time. Folks that attended, really thank you again for your time and attention. Please do complete the survey at the end of this presentation that you should receive. Actually, that's emailed to you after the webinar. Really valuable to receive your feedback. And I hope that everyone has a great afternoon, and we'll see you on the next NIFA Genesis webinar. Thank you. See you, everyone.

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internal succession planning

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ownership mindset

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mentorship

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