Employees are a key piece of the succession puzzle

Along with price and client care, the process of integrating team members into the acquiring firm offers challenges as well as upside.

Back in 2020, at the height of the pandemic, my long-time business partner and I sold our Houston-based registered investment advisor, with $450 million in assets under management, to a national integrator for a combination of cash, equity, and the fact that we were able to bring virtually all our employees along with us to the acquiring firm.

In early 2022, I was named vice president of partner integrations at the acquiring firm, Allworth Financial, and have been a key participant in the acquisitions of nine firms we have undertaken since then. As both a seller and an acquirer, when it comes to employees, here’s some of what I have learned.

It may come as a surprise that your employees, and the way in which you manage them, not only help determine potential partnership fits but can even impact your selling price. Here’s how.

First, there’s employee expectations. While all principals want their employees to thrive, small firms can typically afford to operate more casually than acquiring firms. For instance, at smaller firms, there’s more give and take, and it is not uncommon for nonexempt, or hourly, employees to set their own hours or, just for the sake of example, for principals to not have a clear grasp of the key differences between the rules that govern exempt and nonexempt employees, such as paying overtime.

While partnering with a larger firm should offer your employees numerous advantages, such as greater career advancement, the strict and unfamiliar adherence to rules and corporate standards — even to mundane requirements such as clocking in or clocking out — can cause culture shock for newly acquired team members.

Another aspect of acquisitions that surprised me was how often small firms retain problem associates. One reason is that principals of smaller firms understandably fear litigation or even brand retaliation, and they incorrectly believe that once they sell, the problem employee will be easier for the larger firm, and its more seasoned HR department, to manage.

However, there are at least two issues with kicking the can down the road: First, it’s actually more difficult for larger firms to fire employees for cause. And second, while there are always exceptions, the more employees you bring along, the lower your EBITDA. So by hanging on to a disruptive or unproductive employee, you are bringing along someone who’s eating into your bottom line and is difficult to fire, and who may damage your reputation.

I want to emphasize that a vast majority of the principals of the hundreds of firms we have met with not only want to bring along all their employees, but also negotiate admirably to improve existing employee career tracks. These are the type of principals and firms we look for.

Conversely, if you are seeking to implement a succession plan, any acquirer that insists you slash your loyal workforce before entering into a partnership is probably not a firm you want to be in business with.

Chris Brown is vice president of partner integrations for Allworth Financial, a fee-based RIA with $16 billion in AUM.