“Coach’s Forum” is a place in which you can ask your questions, tell your stories or give your opinions on any aspect of practice management. For each column, George selects the most interesting and relevant comments from readers and offers his advice. Our objective is to build a community of people with a common interest in making their financial advisory practices as effective as possible.
Advisor: Almost two years ago, I brought a young lad into my practice to help me manage our growth. At the time, I talked to him about having some ownership in the business some day and, perhaps, even taking over completely when I retire. I guess I was trying too hard to paint an inviting picture for him because now he is asking when we can have a serious discussion about him assuming an equity position.
He talks a lot about how he helped out on a sale or retained a client or did something else that earned or saved us money. He is very talented and hard-working. But he still has a lot to learn before I’d consider offering him a stake in the business. And I am not nearly ready to retire.
I am worried that he will leave if he doesn’t see a quick way to ownership and I’ll have wasted two years of training. What should I do?
Coach says: This won’t ease your concerns, but situations identical to yours are popping up in professional firms everywhere. My lawyer and accountant friends tell me that many of their new articling students have similar expectations. It doesn’t seem to matter to them that it traditionally takes years to be invited to become a partner. Call it a generational thing – they want it now!
In some way, you should feel good about your young associate’s request because it is the ultimate expression of his confidence in you and your business. From your perspective, there is no better way to express the value of working together than sharing the profits and value of the firm with someone who contributes substantially to its success.
That said, there are, in my view, two fundamental principles important to the whole discussion of partnership. The first is that being an owner is a privilege reserved for only the very best people in your organization. That privilege takes time to earn and requires a very strong commitment from both sides.
The second principle is that partners are not selected on economic arguments alone – just because they contribute to revenue, they don’t necessarily get to be a partner. Instead, I would propose a different set of questions:
– What measures will determine when your practice is ready for a partner?
– What are the criteria for becoming a partner?
– How will you communicate those criteria?
– How do candidates buy in?
– when should you add a partner?
Unless your practice grows substantially as a result of adding a partner, all you will do is dilute your income and equity. Adding a partner is based on the premise that owning a smaller piece of a bigger practice is better than having 100% of a smaller one. Determining how much additional revenue you have to generate before that statement is true is simple arithmetic.
Another approach focuses on “span of control”: how many clients you can manage. If your current number of clients is starting to exceed your ability to service them and it is putting some of that revenue at risk, you may be better off promoting another qualified person to be your partner in order to handle this capacity issue rather than simply increasing staff.
Some founding advisors I know have simply looked at their growth in revenue over the past few years and cross-referenced that with the individuals who are ready to step up to the ownership level. The theory is that as long as you have a good candidate and confidence that the firm is growing, you don’t want to keep that person waiting for too long. Practically speaking, most advisors with whom I have worked in this situation have combined the growth criteria with the availability of candidates.
– who should be a partner?
As the owner of your practice, you must reserve the right to decide what matters to you and your practice. However, here are some measures others in your situation have considered:
– revenue contribution
– management contribution
– character
– community and market presence
– intellectual contribution
Revenue contribution is the easiest to measure and typically receives the most attention. However, in some practices, it is less important than the addition of new clients. If you have a solid track record of growth, managing existing clients may be the most valuable criterion; if you need to rely more on individual effort and marketing for growth, you might score business development higher. My advice is not to go too far toward either extreme.
Every partner should be responsible for bringing new clients to the practice. Otherwise, business development becomes vulnerable. I have seen this most often in practices in which the founding advisor has been the primary business developer and the second-generation partner deals only with existing clients. I am currently working with an advisor in that situation who realizes that when he retires, the future of the practice (and, therefore, his extended payout) is uncertain. Consequently, he is considering an external sale to reduce that risk.
On the other hand, if you do not support the management of current revenue adequately, you could undermine a crucial aspect of future success: client retention. Because most referrals come from clients, retaining existing relationships is essential for ongoing business development.
– managing expectations
I have seen a few practices in which a well-intentioned advisor essentially made every employee an owner. As a result, rather than a privilege to be earned, being an owner became an expectation or entitlement. If you want the opportunity to become a partner to be motivating, the criteria for qualification should be well defined, as should the advantages and benefits.
Partnership opportunities need not be restricted to advisors. A successful practice often wouldn’t be so without strong support from the operations side of the business. It is more difficult to attribute revenue to non-advisor staff, but they frequently have a large role to play in client retention or in enabling advisors to focus on revenue generation.
– how do new partners buy in?
New partners should buy their shares rather than have them granted. It is natural for a founding advisor to feel loyalty to his or her associates and try to give them partnership on the most favourable terms. Express your gratitude, however, by providing financing rather than discounting the valuation of the firm or even giving part of it for free. You have earned “sweat equity” for taking risks and building your practice. Other team members who have been paid market rates to do their jobs have not, in my mind, earned the right to a discount.
Although your new partner may be full of energy and ambition, don’t be surprised if he or she doesn’t have much money for purchasing shares in your business. In the majority of such cases I have observed, the original advisor has financed the purchase.
Have an expert value your practice for purposes of allocating a partnership position. Be sure to engage someone who is familiar with the financial advisory business so that he or she can consider both the quantitative and qualitative aspects of a practice. Using an outside expert also eliminates much of the internal discussion around pricing the partnership offer.
– why share your firm?
Whichever method of partner promotion you choose to use and however you value your firm and finance the transaction, remember why you are doing it: to reward and retain your best people, motivate key employees to exercise the care of an owner, motivate your advisors to grow the firm with you, reduce the practice’s dependence on you, create multiple options for succession or to strengthen the management team. Your motivation should come from one or some of these benefits – not from the fear of losing a young protégé with overzealous ambitions.
George Hartman is managing partner of Accretive Advisor Inc. and CEO of Market Logics Inc. in Toronto. Send questions and comments to george@marketlogics.ca
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