Everyone has heard the horror stories of founder buyouts gone wrong—valuation disputes, seller's remorse, eleventh-hour financing collapses, or pre- and post-sale surprises on the books—but with careful planning, an owner purchase it can benefit all parties. Our team has recently worked with clients whose owner purchase was textbook beautiful. Whether considering a purchase now or thinking about succession planning, read on for a best-case scenario.
Mackenzie Parsons AND Christina Sad are financial planners and directors with Financial Planning Cornerstone. Their formula for success includes four elements:
- good long-term succession planning by the firm's founders;
- buyers with the aptitude and temperament for business ownership;
- extensive research by buyers; AND
- a good match between buyers and their lender.
Long Term Succession Planning
Cornerstone's owners (also founders) began looking for their second generation owners several years before they intended to sell. When the founders interviewed Parsons for a position as a financial planner in 2014 — eight years before their planned departure — they were aiming to find a potential successor.
In 2017, when Traurig was hired, the founders had the same thought process: look for second-generation owners. When she received her offer, the owners indicated that there was a future ownership opportunity. As she says, it gave her a mental shift, going to work and thinking, “I'm going to treat this like I'm the owner because one day I will be.”
The founders further solidified their succession plan by giving Parsons and Traurig management and ownership responsibilities in 2018, four years before they planned to sell. Traurig took over compliance and investments, and Parsons took over accounting and human resources. This arrangement gave these two professionals invaluable hands-on experience running the business for approximately 3 1/2 years, working side-by-side with the founders to create a smooth transition.
Buyers Ready for Business-Ownership and Partnership
Even before that training period at Cornerstone, both Parsons and Traurig had several years of experience at large and small financial services firms. They worked with compliance requirements, HR issues, management, fee collection and accounting in addition to their client endeavours. With these experiences, both offspring knew that business ownership was the path they wanted to follow.
Parsons points out that “not everyone is inclined to be owners and work well together.” This reality put a lot of pressure on the selection of Traurig as a financial planner and putative business partner. Fortunately, everyone in the process — the owners, Parsons and Traurig — “just clicked,” according to Parsons.
Extensive research
Parsons and Traurig spent at least two years talking to other RIAs to learn how they structured their acquisitions and financing. Finally they asked for help Brandon Controls e Advisor Growth Strategies, which encouraged them to seek outside funding. They also worked with their accountants and lawyers, but both say they would have brought in those professionals even earlier than they did.
Good match with a lender
Traurig and Parsons decided to go with a 100% buyout instead of buying in tranches. Because they were first-time homebuyers working to maximize their retirement plans (as they advise their clients to do), neither had “huge amounts of cash” on hand. This point was vital as they talked to many different lenders because some required large bank balances or liens on their homes. They took the time to compare requests from multiple lenders and settled on one that made them feel comfortable.
They knew their lender for two years and there was mutual respect. The lender was assured that the business would be in good hands after the sale based on the collective experience of the buyers and the strength of the business. Traurig and Parsons estimated that the lender encouraged an approximation of risk by forcing founders to maintain a seller's note. In the deal structure, the founders delayed repayment on their note for a year, giving the new owners time to settle into new roles before starting repayment.
Final advice
A key role in the success of this transaction was played by well-thought-out planning by both sellers and buyers, well in advance of the purchase date. If you buy with a partner, being able to work together is vital to building a trusted relationship. Choosing a lender that will work with the buyers' situation can make business ownership a reality, even if the buyers don't have a lot of capital ready.
Alicia Chandler is president of Indianapolis-based First Franchise Capital, a First Financial Bank company.