Selling to junior partners is not a piece of cake

At a discussion panel last Tuesday at the NAPFA conference on selling a business to a junior partner, nearly every one of the 100 or so advisers in the audience said that they would like to buy or sell. But the audience raised questions about common obstacles. One problem discussed was how to pay the salary of a junior partner while he or she learns the business. Also discussed were how to determine a fair price and how to come up with a down payment. Panel member Karen Folk of Bluestem Financial Advisors LLC, described how she dealt with those issues to transition her business to 50% partner Jacob Kuebler, a recent University of Illinois graduate.

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“I used [adviser and founder of Cambridge Connection Inc.] Bert Whitehead's advice,” she said. “He said, "Don't pay very much. Better to start out low and give rapid increases,'” Ms. Folk said. As for valuation, she said that she used an expert who looked at the business' five-year-rolling-average revenue, among other things, to come up with the multiple of gross revenue they used to price the business. Client retention was a concern for some advisers, and Ms. Folk said that she is in the process of introducing Mr. Kuebler to all her clients. Two other advisers on the panel said that they lost clients when they bought out their older partner, but the amount was manageable. About 5% of Brown McLeod Inc.'s clients left the firm after Scott McLeod bought out his older partner, he said, while Ms. Folk said that she hasn't lost any. Jessica Smith, a graduate of the University of Alabama, joined her firm as an intern in 2005 and had planned to start her own business when the firm's owner retired. Instead, the firm offered her a chance to buy into the business as part of a merger with another firm in 2010. “I saw an opportunity to focus on what I wanted to do” without having to set up a business from scratch, said Ms. Smith, who is vice president and director of financial planning at Longview Financial Advisors Inc. Transitioning a business to a younger partner involved hard work and accommodations, but it was better than her default plan, which was to “fade out and die,” Ms. Folk said. Mr. McLeod, who had been in business for about 15 years when he bought his firm, said that he wishes he had begun saving earlier. None of the advisers have regrets, though there were psychological hurdles. “It is hard to let go of control,” Ms. Folk said. [email protected]