Bradley Shammas’s began his career at Conaway & Conaway. There, he worked for six years as a paraplanner.
Conaway & Conaway sold a variety of commissioned financial products. They also charged financial planning for a fee. The firm hit an issue with compliance that required a break-up of the company. As part of that break-up, Shammas launched his own investment management firm, IWM Financial. Shammas took the managed accounts and annuities to his new firm.
This case study is more akin an internal succession plan than anything else. (Or perhaps this falls into the category of an Exit Plan. You be the judge!) This is because Shammas did not specifically seek out soon-to-be-retiring financial advisors for purposes of buying their financial planning practice. Despite this distinction, there are still several best practices to note from Shammas’s experience.
Leveraging Outside Experts
As with other Exit planning interviewees, Shammas utilized the services offered by FP Transitions. The $7,500 fee charged by FP Transitions was shared equally between Shammas and his counterparts at Conaway and Conaway.
And just like the Exit plan of now-retired financial advisor Ian Kutner, Shammas brought in an attorney to review the boilerplate succession planning template supplied by FP Transitions. The additional $3,000 charged for attorney services was well worth the cost, opined Shammas. This is because Shammas did not want to use the typical free attorney supplied by his broker-dealer. The reason being was that Shammas was cognizant of the obvious conflict of interest for the B/D’s attorney. Shammas knew that an in-house attorney offered by the broker-dealer would do as much as possible to keep clients assets custodied with the broker-dealer.
The price for the book of business was determined by the conventional multiple of revenue metric. Using a multiple of revenue is likely more applicable given that the item for sale was simply a book of clients – and not an entire business. Other metrics, such as profitability, may be more useful when overhead expenses are involved.
The book of business contained 108 households. The vast majority of the business was commissioned-based. In calculating the sale price for the entire book, there was not a clear delineation and distinct valuation for between recurring and non-recurring revenue. Not segregating recurring from non-recurring revenue for the purposes of valuation may be considered unconventional.
Tax Treatment & Terms of the Sale
The sale terms required a down payment of roughly 4.5%, with a seller-financed note at 6% for seven (7) years to pay the balance of the sale price. Currently, the note payment consumes roughly one-third of the IWM Financials’ annual revenue.
Why such a relatively small down payment? It was all that Shammas had available. The fact that Conaway & Conaway were willing to settle for such a small down payment speaks to the fact that Conway & Conway was willing to do whatever possible to make the deal with Shammas work.
Per the terms of the sale, Shammas is restricted from selling the business for two years. The seller, Conway & Conway, is restricted from selling the seller-financed note for six years. A non-compete clause was also part of the agreement.
Most of the firm’s sale price was categorized as Goodwill, giving the sellers better tax treatment (i.e. long-term capital gains). The balance of the sale price was structured as compensation for consulting services provided by the seller, with the seller working to facilitate a smooth client transition over to Shammas’s new firm. This last part is critical. This is because Shammas believes that the strength of the client relationship is made this succession plan successful.
What’s Next for Shammas
Shammas’s long-term plan is to move the assets inside the commissioned products held by his clients into a fee-based model. Much like Ian Kutner, Shammas sees the AUM billing as the future.
Given the terms of the seller-financed note, Shammas may refinance with a lender such as Live Oak Bank. Refinancing into a longer note will ease the strain on the business’s cash flow.
Shammas does not see himself buying another book of business in the near future. This makes sense, especially since buying a book of business was never Shammas’s career goal . The succession (exit?) planning opportunity only came about because Shammas’s previous employer faced compliance challenges.
Between now and his ultimate retirement from the industry (though a long way off), Shammas emphasized the importance of categorizing clients in his CRM. Shammas hopes that demographic and psychographic categorization will make his book more valuable to future potential buyers.
Bradley Shammas offers Securities and Advisory Services offered through Client One Securities, LLC Member FINRA/SIPC and an Investment Advisor. IWM Financial, Inc. and Client One Securities, LLC are not affiliated.