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Kem Taylor Demystifies Succession Planning

At Qii Consulting, we’re committed to providing you with the information and resources you need to achieve unprecedented growth and success in your advisory business — especially developing the next generation of firm leadership.

I’m pleased to welcome Kem Taylor of FP Transitions to the blog today. Below, she speaks to both founders and successors-to-be, unveiling innovative succession planning strategies that lead to positive, long-term results.

If you're interested in learning more about optimizing your business for succession, FP Transitions President and Founder David Grau Sr., JD, will be taking a deeper dive into the topic as a featured speaker at the 2019 FPA Retreat, with his presentation: "Creating an Enterprise Built for Growth." Click here to read more about his session (see "Educational Breakout Sessions Block 1" on Tuesday, May 7) and to register for the conference.

Preparing for the Next Tranche in Your Succession Plan

By Kem Taylor, FP Transitions

Your firm’s succession plan is designed to gradually transition ownership, leadership, and growth responsibilities to the next generation of advisors. The goal is sustainability of the firm, and it is accomplished through a plan that coordinates the changing roles of the founder(s) and the successor team over many years.

Selling equity in the business in a series of steps, or “tranches,” gives both the founder and the next generation of owners the time to wisely manage the transition and prepare for the changes to come. The transfer of ownership from the founders (known as "G1s"), to the second and third generation of owners (known as "G2s" and "G3s," respectively), starts with tranche 1. Tranche 1 is usually a shift of 10%–20% of ownership to the next generation; it is often called the “incubator stage” and allows for all parties to test the waters and prepare the business structure for the journey ahead.

The second step, tranche 2, tends to move ownership to 70%/30% or 60%/40%, with G1s retaining the majority ownership position. The tranche system — selling to G2s and eventually G3s — not only widens the ownership base but also provides increasing continuity support as the firm develops and the successor team comes together.

As clients progress through tranche 1, they often ask, “When should we start tranche 2?” And the answer is: It depends, but also know that tranche 2 tends to start well before final payments are made by the G2 owners in tranche 1.

Every situation, every firm, and every person is different. Not everyone in tranche 1 may move into tranche 2. In addition, the percentage of ownership that is sold and the deal terms do not have to be the same from tranche to tranche. However, one thing is vital: the readiness of the G1s, the G2s, and the business itself. All of these components need to be in alignment for the plan to be successful.

The best way to ensure this alignment is achieved over the course of the first tranche is to support open communications and the free flow of accurate, reliable information and calculations. It’s key to have day-to-day conversations and regular team meetings to review the firm’s progress, as well as the owners’ progress, in order to achieve set goals (like growth, profitability, recruiting, etc.).

As you sit down to talk about the future, the next tranche, and how it might unfold, here is a list of considerations, prepared for each party’s unique position and role in the plan.

G1s: The Founders Whether you want to continue working for 10 years, 20 years (or more), or you want to plan an earlier exit, tranche 2 is the next step in the plan. While the general goal is to increase the percentage of next generation ownership, the second “buy-in” is key because this is where your G2s start to shoulder more risk and responsibility. With that in mind, here is a shortlist of the most important issues for many G1s:

Hours: A decrease in ownership percentage should correlate with a decrease in hours worked per week; this is an essential part of preparing G2s and G3s to take over one day. You may decide to take Fridays off, or to take off a week each month. This is a good opportunity to see how the firm runs with G2s in place as minority owners and allows them to hone their skills as owners. If you are not getting calls from work while you are away and come back to a well-running office and happy clients, that’s obviously a good sign.

Training: You should spend time nurturing the G2s’ growth and monitoring their progress. Take the time to show them the ropes and give them the opportunity to make mistakes in a safe environment. Watch how they handle those mistakes and how they face challenges, and use those as teaching opportunities.

Timing: Think about your exit timeline — it may be a decade (or two) on the horizon, or it may be within the next year. Either way, you’ll need to consider the pace of your succession plan and adjust gradually to ensure alignment with your long-term financial and transition goals. Goals change and the tranches of your plan can and should be adjusted accordingly; you may even overlap the tranches or accelerate the plan depending on the situation.

Finances: Assess your personal and business finances and how they factor into your succession plan. How much longer would you like to work? Are you enjoying having business partners and next generation owners to work with? What does retirement mean to you? This is a conversation that should include a spouse and perhaps other family members as well. Consider how you may need to adjust financing for subsequent tranches to meet your personal income goals. Later in this article, we’ll highlight some alternatives to the seller-financed soft note that will support diversified risk and liquidity.

Mental Readiness: Think ahead. What do you want to do next? Whether you plan to leave the business entirely one day or stay on in an advisory role, the ongoing transfer of ownership, leadership, and management will be easier if you have post-work plans in mind.

G2s and G3s: The Next Generation

As next generation owners continue along the ownership path, roles will shift — you may earn a new title, your workload will most likely increase, and the G1s' responsibilities will gradually become yours. You will also be earning money based on the profitability of the company and have a say in shaping the future of the business. Here are some things to consider when assessing — and demonstrating — your own personal readiness for an additional investment in the company.

Responsibility: With your increase in ownership, there will be an increase in responsibilities. This could include management of other staff, input on business decisions, and bringing new ideas to the table. Regular performance reviews provide an opportunity to gauge your progress, both for you and your fellow owners. You should also consider how you are personally handling additional responsibilities. Be sure you are up for putting in the time necessary to grow and improve the business, and to accommodate G1 owners' gradually diminishing role.

Production: Take time to review production goals — your own and those of the business as a whole. Are they still appropriate given the length of the anticipated succession plan, the level of profitability, and the financial needs of the ownership team? Look to see if you (and the business) are meeting, exceeding, or missing goals. Look ahead to see how your goals will evolve as you take on more responsibility and ownership stake.

Skills and Professional Growth: It is important to consider the skills you are acquiring over the years of the first tranche of ownership. How has your product knowledge improved? Are you comfortable reading the business’s financial statements? Continuing education, extra courses, and new designations are all signs of personal growth. But don’t discount your development of soft skills, such as the ability to lead meetings with clients, recruit and train new talent, and manage conflict when staff members don’t work well together.

Personal Goals: As tranche 1 progresses, it is important to ensure that ownership in the firm is adequately supporting your business, family, and personal goals. Do you want to earn more money? Do you want better control of your time and work-week demands? Do you aspire to more ownership and control? Continue to communicate your goals and needs with the stakeholders as business and financial goals — and risks — change with increased ownership.

Risk: For some people, an investment in the firm may feel like an exciting opportunity to contribute their passion to something they can help grow that can provide a substantial financial reward. There is risk associated with such an investment, and not everyone may be ready to increase their risk exposure. Each tranche tends to gradually increase the level of risk on G2 and G3 advisors, so take the time to ask questions and learn more about the process. You should also anticipate further risk through subsequent tranches or plan acceleration.

Vision: If you haven’t already, share with the founders what you see as the future of the business, the industry, and the economy. Consider every aspect of the business, including regulatory structure, entity structure, the ownership team, staffing, compensation, office location, and competition. Often, new owners revitalize and reenergize the firm. Let your enthusiasm and passion shine through as an important member of the ownership team. In 10 years, this will likely be a very different business so it’s best to think through all of the necessary factors now and prepare well ahead of time.

Ownership Mentality: Consider how you (both producers and non-producers alike) have worked to decrease expenses and increase revenue in the business. Have you considered a new technology, helped diversify the income stream, tightened up daily procedures, or maybe helped the company go green? Strategies to reduce overhead and improve operations show a commitment to the bottom line and overall growth of the business — all part of being an owner.

The Business: The Multi-Generational Firm You Are Creating Together

Transferring a business takes a lot of planning, hard work, and continual adjustment. As G1 and G2 owners collectively prepare for the next tranche, take time to review the business itself, including the following factors:

Growth: Check the overall health of the company. Refer to your annual valuation and benchmarking reports to analyze growth in revenue, AUM, and clients. Consider whether your growth supports moving forward with the next tranche.

Clients: As more responsibilities are shifting to G2s, look to see how your clients are accepting the new roles of the next-generation advisors. Introduce younger advisors into client meetings, if you haven’t already. Allow them to take the lead on certain projects to boost visibility and client trust.

Long-Term Vision: Are there intended G3s in the picture? Consider starting ownership discussions with them. Ideally, they have witnessed the G2 advisors' successes (and challenges) and may be ready to step up to the plate. If there are no G3 candidates on your team yet, it could be time for the G2s to make the search for G3s a priority.


When considering tranche 2, understand that you are not limited to the same type of financing used in tranche 1, which is most likely a seller (G1)-financed, profit-based soft note with a stock pledge as collateral.

Many current tranche 2 plans are incorporating a different type of seller-financing arrangement called “hybrid notes,” which have been designed to help G2/G3 better prepare for their roles as successors. In addition, bank financing can be used to advance G1 owners' goals or, if the time is right, accelerate the entire transition and allow for a full buyout of the founding owner with adequate time for the business to amortize the loan.

Moving Forward

The overall goal of your succession plan is to create a multi-generational, sustainable firm that will continue to care for generations of clients. The tranche system allows for the gradual, incremental transfer of ownership, and preserves the room to assess and adjust the overall plan as needed. Not every next generation owner will move from tranche 1 to tranche 2, and that's okay. People's lives and goals change. Regular communication between your owners, future owners, and other key employees allows for continual evolution of the plan and the best chance for success.

This article was originally featured on FP Transitions. FP Transitions is the nation’s leading provider of equity management, valuation and succession planning services for financial advisors. The firm’s team of consultants boasts nearly a century of combined experience providing unbiased strategic solutions for financial professionals, which have been compiled into two books: “Succession Planning for Financial Advisors: Building an Enduring Business” and “Buying, Selling, and Valuing a Financial Practice: the FP Transitions M&A Guide,” both published by Wiley & Sons. Based in Portland, Oregon, FP Transitions operates the largest fully-supported open market for buying and selling financial service practices in the United States.


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