Select Language

Check Application Status

Resource Zone

Put it in writing

Matt Pais

Rate 1 Rate 2 Rate 3 Rate 4 Rate 5 0 Ratings Choose a rating
Please Login or Become A Member for additional features

Note: Any content shared is only viewable to MDRT members.

Comprehensive, documented agreements lead to more successful business transitions.

The classic party game of telephone hinges on one universal truth: When information isn’t written down, it can be misheard, misremembered or forgotten entirely.

When it comes to a complex agreement between two parties about the sale or acquisition of a business, a formal, written document is not only essential to define the terms of the deal, but to create a tangible forum for protecting both parties from misremembered or misunderstood details.

“People say, ‘This is what the agreement is,’ but they haven’t seen it in 10 years,” said Clay Gillespie, CFP, CIM. “If you’ve written it properly, it’s dull and boring, and there’s
no juicy story.”

In addition to the business transitions that he advises on for pre-retiree clients, the 20-year MDRT member from Vancouver, British Columbia, Canada, has seen the importance of written agreements within his business. The practice has 17 owners, and Gillespie says the company has at least one internal transition per year, if not more. In the last couple of years, for example, three new advisors joined from another firm. Gillespie recently sold clients to two advisors and bought clients from another, and the practice just had two advisors retire.

Whether your firm sees the same level of movement as Gillespie’s or if transitions are rare in your practice, written agreements are essential. First, it helps to understand the circumstances these written documents prepare the affected parties for:

  • What happens to the business if you die?
  • What happens if you are disabled?
  • Who pays and who is protected should there be a lawsuit against the practice?
    (For Gillespie’s practice, each advisor pays an amount based on the calculation
    of minimum revenue they’re expected to bring in.)
  • What arbitration process exists for disagreements?
  • Should you leave the firm, what advance notice is needed and how much do you need
    to pay to buy yourself out?
  • What happens if you sell to a junior advisor?
  • If someone takes clients with them, what amount do they pay?
  • What can a person say or not say after leaving the firm?

The goal of a written agreement is to clarify policies in advance and prevent disputes. Gillespie notes that while his office has seen only three major issues in 25 years in which an advisor became disenfranchised with the direction of the practice, the written agreements have been essential in preventing legal problems. Death and disability can be straightforward, he said; who leaves and when and why is more complicated.

“If we didn’t have those agreements in place, I can honestly say I don’t think we would exist today,” he said. “They gave us the authority to get someone out of the firm that needed to go, with no way that they could sue us or we could sue them.”

While these agreements can help with the unexpected, they can also set a plan in place for more predictable changes at the firm. For example, veteran advisors may feel incentivized to sell their portion of the practice when they’re nearing retirement. That’s why Gillespie’s firm has agreements in place that require advisors — who can only sell shares back to the company, not outside of it — to start selling 10% of their shares back to the business at age 60, completing this sale at age 70.

“The purpose is for shares to be in the hands of active advisors,” he said, noting that preventing retiring advisors from selling large stakes of the company is a way to ensure that the firm outlasts the people.

Thinking ahead about every possible situation is also important because, according to George Hartman, one-third to one-half of business succession plans don’t come to fruition. Hartman, the CEO of a consulting practice that has worked on more than 5,000 business transitions, emphasizes the need to determine valuation in the short and long term, as succession agreements may take five to 10 years to be fulfilled.

Once valuation is determined, more questions follow: How will payment be made, using what formula and over what period of time? What roles and responsibilities will individuals have through the transition period? What happens if new business comes along as a result of one of the parties during the transition?

These agreements can also get ahead of challenges stemming from differing expectations or participation, Hartman said. In one case, he helped a family in which the father left his business equally to his two daughters. But the more qualified daughter had to buy out her sister, who was less knowledgeable and less invested in the work.

“If he had thought ahead of a better way to equalize things rather than dividing the company 50/50, he wouldn’t have inflicted the nonparticipant onto the participant,” Hartman said.

This logic also applies to when an existing advisor will actually leave, something Gillespie learned the hard way. The first time they bought a retiring advisor’s practice, they didn’t include
a so-called out clause, which defines when that person would leave. It wound up taking four years.

“We’re not trying to have semi-retired people hanging around,” he said. “The next time, we established they would leave in two years. They get revenue for those years, help clean up the practice and ensure that there’s less attrition.

“It’s win-win: They get paid more, and we get more clients at the price we paid.”


Clay Gillespie

George Hartman


{{GetTotalComments()}} Comments

Please Login or Become A Member to add comments