More on BWFA’s Future

Conclusion of a three-part conversation about BWFA’s succession plan

This article is my third in a series on the subject of succession planning — in other words, how the firm will continue to operate when some of our leadership team decides to retire. I am raising these issues because our clients are interested in our plans for the future and the financial security of our firm.

To review, there are now three owners of the company: Rob Williams (10%), Bob Cassel (39%), and me (51%). Our plan is to gradually transfer ownership of BWFA to several of our current employees, while Rob, Bob, and I reduce our work hours or fully retire. The exact timing of the transfer will depend on a number of factors, but we would like to see it happen in the next three to five years.

The problem we have to solve, of course, is creating a way for employees who want to purchase an interest in BWFA to finance the purchase. As you will see below, the numbers get pretty big pretty quickly.

There are many factors which determine the value of a financial planning firm, but the principal ones are gross revenue, profit, client retention, disciplinary history, and growth. Assuming high marks in each of these areas, the value of a firm like BWFA usually comes in at 2-3 times gross annual revenue; sometimes more. Obviously, companies with higher profit margins, higher customer retention, and higher growth rates will be valued at the high end of that range or even above it.

BWFA scores exceptionally well in all of these areas, with the exception of our profit margin. The “best” firms typically have a profit margin in the 27-28% range, while ours is only about half that rate. Why is BWFA’s margin lower than many similar firms? Because we have consistently chosen to reinvest much of the firm’s profit into staff, facilities, systems, and equipment to support the firm’s growth and its future.

BWFA’s revenue growth rate has consistently been in the range of 25%/year over the last five years. We believe that we can effectively support revenue growth of about 33%, and have planned for that level of growth over the next few years. Given our annual revenue and our anticipated growth rates, the value of the firm will be about $10 million in 3-4 years. Where do our employees get the money to make the purchase?

Several options exist, and we are exploring all of them. First, a number of private and public lenders have been stepping forward to finance these transactions for employees of the very best firms in our industry. Second, growing profits and profit margins from our own operations can help employees amortize these loans. A third option is “silent investors” who don’t want to become involved in running the firm, but who would purchase equity positions, thus reducing the amount employees have to borrow to acquire the firm — a “shared” ownership, if you will. Another option is that existing owners will just continue to hold stock in the firm, as part of their investment portfolio.

As I indicated in my last article on succession planning, we have hired the firm of Moss Adams to help us create the plan that works best for our current shareholders and the future principals of the firm. We want you to know that we are giving as much attention to planning our own future as we are giving to helping our clients plan theirs.