Ep 424: Executing A Successful Internal Succession Plan In The Private Equity Era Of Advisor M&A with David Grau Jr.
Feb 11, 2025
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David Grau Jr., president of Succession Resource Group, brings two decades of expertise to the table, dissecting the intricate world of internal succession planning for financial advisors. He addresses the allure of high valuations from private equity and why founders should consider the long-term legacy of transitioning their firms internally. David shares strategies for establishing clear career paths, managing ownership transitions, and the financial benefits of structured succession plans. He emphasizes that thoughtful planning can enhance external valuations while ensuring client continuity.
Founders should establish defined career tracks and metrics early to facilitate effective internal succession and talent development.
Breaking ownership transitions into manageable tranches allows successors to adapt gradually, minimizing financial strain and ensuring stability.
Despite the allure of private equity offers, thorough evaluation of terms can reveal less favorable conditions, making internal succession a viable alternative.
Deep dives
Internal Succession Best Practices
Preparing for internal succession is crucial for financial advisory firms. Founders are advised to create defined career tracks and compensation structures to facilitate the transition. Additionally, establishing clear business metrics and obtaining an initial third-party valuation helps set expectations and track progress. These foundational steps enable successors to develop the necessary skills and understanding to take over leadership roles effectively.
Tranche Sales Strategy
Breaking the internal succession process into gradual tranches makes the financial commitment more manageable for successors. David Grau recommends starting with the sale of a small ownership stake, typically between one and five percent, and gradually increasing this percentage over time. This approach allows successors to gain confidence and adjust to their new roles while minimizing financial strain. It also provides founders with the opportunity to begin transitioning their client relationships while maintaining stability in the firm.
Timing is Key
Starting the succession planning process early is essential, ideally by the late 40s for those planning to retire in their early 60s. It can take years to adequately prepare a successor and execute the transaction, meaning delays can jeopardize the firm's long-term success. Founders should prioritize laying the groundwork for succession well before their intended retirement age. This proactive approach can ultimately lead to a smoother transition and better outcomes for both parties.
Evaluating Private Equity Offers
Despite the allure of high valuations offered by private equity (PE) firms, internal successions remain a viable option. Often, the deals presented by PE firms include terms that can make them less attractive, such as aggressive growth targets or less favorable financial conditions. Founders are encouraged to scrutinize the details behind headline multiples to better understand what they entail. By weighing these factors, founders can make more informed decisions about their succession strategies.
Client Retention and Legacy
Integrating succession planning can enhance the perceived value of a firm, even if the founder ultimately opts for an external sale. Investing in a capable staff and developing a robust client relationship strategy benefits the entire organization. This preparation ensures a seamless client transition and can often result in obtaining a premium valuation from potential buyers. Furthermore, focusing on internal succession allows founders to leave a defined legacy and ensure that the firm's values and culture continue after they depart.
Post-Sale Considerations
For successful internal succession planning, leveraging the talents of existing team members is vital to build a supportive environment. Founders should create a culture of mentorship and training, allowing successors to grow into their roles with confidence. The potential for partial sales to younger advisors can also provide an opportunity for transitioning ownership gradually. Ultimately, a structured approach to succession can lead to positive outcomes for both founders and successors, while maintaining a strong client base.
David Grau Jr. is the president of Succession Resource Group, an advisory consulting and valuation business based out of Oregon that serves independent financial advisors with RIAs and broker-dealers. What sets David apart is his two decades of experience supporting financial advisory firms, which has allowed him to identify best practices for founders and successors navigating increasingly complex internal succession plans. This is especially valuable as founders face growing challenges due to frequent, high-valuation offers from private equity-backed acquirers.
Listen in as David shares best practices for preparing firms for internal succession, including establishing defined career tracks, organizing business metrics, and breaking ownership transitions into manageable tranches to ease financial commitments for successors. He discusses why internal successions remain viable—despite the allure of high valuations from private equity-backed buyers—highlighting how these deals often include challenging growth targets and less favorable terms hidden in the fine print. David also explains how preparing for internal succession can actually boost external valuation and why founders may find greater satisfaction in leaving a lasting legacy through their firm by transitioning it to internal successors.
