Sarah J. Kaelberer, CFP, ChFC, approached her mentor and the owner of the
financial services firm she worked for with a proposal: “I want to buy in. I want to make sure
I have a part in this,” she told E. Dennis Zahrbock, CLU, CFP, the firm’s
Fortunately, Zahrbock, a 45-year MDRT member from Rice Lake, Wisconsin, agreed it was the right time for Kaelberer, who had worked for him for seven years, to have some ownership in the firm. They hammered out an agreement for Kaelberer to buy 25 percent of the business.
In 2014, Kaelberer, a 17-year MDRT member from Wayzata, Minnesota, acquired another 25 percent. In September 2017, Kaelberer plans to purchase the remainder of the stock and become the sole owner of Business and Estate Advisers Inc. Though that final transition has been in progress for years, its successful outcome is the result of complete honesty, difficult discussions and some give-and-take from both parties.
David Grau Jr., president of Succession Resource Group, a succession planning consulting firm that specializes in working with financial advisors, agrees that purchasing a business, especially from a family member or mentor, takes time and a willingness to have awkward conversations. The transition plan needs to include discussions on price, payment terms, tax structure, timelines and roles.
Katy Baxter, an 11-year MDRT member from Tring, England, started discussing buying out her dad about 10 years ago, but they didn’t begin making plans in earnest until several years later, with a target date of September 2016. While Baxter was able to buy him out at that time, the transition itself is still in progress. “I don’t think I could have foreseen how long things would take to come to fruition,” she said.
Baxter and her father, Malcolm Charles Baxter, a 14-year MDRT member, hired a third party to assist them. This succession planning specialist helped them understand the range of options available, from selling the practice to financing a buyout, and variations on those routes.
“The negotiation process had its challenges, both in dealing with the parties involved, and for Dad and I to come to clear decisions about how we wanted things to proceed,” Baxter said. “We each had very different needs as far as the outcomes were concerned, but we both wanted to make sure the other had the best results possible.”
The process also involved the company’s co-director, who was planning to retire and sell his portion of the business to Baxter as well. “Our goal was ultimately to allow my dad and our co-director to retire and extract their respective values from our practice,” Baxter said.
“The process has been extremely challenging, and we are not sufficiently through the transition process for me to say that things are exactly how I would like them to be,” Baxter said. “However, we have made good decisions which will ultimately help me and my team do what we do best, which is look after our clients.”
For the final buyout, Zahrbock and Kaelberer spent quite a bit of time negotiating the fine points, but they had agreed on a business value years ago and tracked that annually.
One challenge for Kaelberer was handling the tax implications of the stock buyout. “I brought in an attorney who gave me a different perspective on the tax treatment, and it was not something Dennis had ever heard of, so he pushed back pretty hard,” Kaelberer said. “I pushed hard on my side.”
The pair agreed to share the numbers with an accountant — a neutral party they both respected — and ask his opinion. “Neither of us told him which side we were on,” she said. “We had breakfast with him, and he favored my approach.” But in the end, it was a deal that worked for both because they had the same objective — to see the company and each other be successful in their next stages in life.
The role of the owner after the buyout can be another sticking point. “You have to ask the owner/founder, ‘You want to be fully retired in the next 24 months. What does that look like to you?’” Grau said. “He might say, ‘Well, I want to stay in control.’”
When dealing with owners like that, Grau points out the realities of the situation. “You’ve sold the business, and someone has a $1 million promissory note on the business and they might want to take control,” he tells owners.
But successors also have to factor in the emotional investment the founder has put into the company. “When you’re buying from the person who started the business, it’s more than a revenue stream for them; it’s their baby,” Kaelberer said. “So sometimes emotions trump logic, and the more you can appreciate that and promise them that you’ll take care of the baby, the better off your negotiations will go.”
“Sometimes emotions trump logic, and the more you can appreciate that and promise them that you’ll take care of the baby, the better off your negotiations will go.”
— Sarah Kaelberer
5 STEPS OWNERS CAN TAKE TO ENSURE A GOOD TRANSITION
- Position your successor not as a subordinate, but as a peer.
- Catalog everything you do, including non-client activities such as handling lease issues, managing financials, and dealing with insurance and human resources issues. Work side-by-side with your successor on these before closing the deal, so they know everything it takes to run the business.
- Know when it’s time to step away. “Put a deadline on it,” Grau said. “If there’s no timeline, there will be some awkward conversations ahead.”
- Make sure all stakeholders are considered, including junior advisors and children outside of the family business.
- Bring in a third-party specialist who can have an unbiased perspective on the value of the business, the payment terms and your role after the transition.
— David Grau