Although most advisers are probably familiar with buy-sell agreements, many may not be paying enough attention to their own.
“Buy-sell agreements are equivalent to a client’s financial plan,” says Matt Brinker, head of national partner development at United Capital Financial Advisers in Newport Beach, Calif.
“It isn’t just to figure out how the estate is paid out when the adviser dies,” he says. “It has to have a level of rigor, since it’s an integral part of a business continuity and transition plan.”
As an acquisitions specialist, Brinker has seen his share of buy-sell agreements, and some of them simply don’t work, especially when an adviser dies suddenly, he says.
“I’ve been on the frontline of these situations, and at times, it’s been utter, unmitigated chaos. If they aren’t stress-tested, they’re just worthless pieces of paper,” Brinker says.
Buy-sell agreements should be roadmaps to navigating changes, both foreseen and unanticipated. They should try to establish frameworks to make transitions equitable and smooth.
Sometimes that requires a very detailed level of understanding of the operating minutiae of a firm, Brinker says.
“A lot of times the lens of the buy-sell agreement is to make sure the adviser gets paid for the business, but there’s a lot of people involved whose lives are impacted,” he says.
As a fiduciary, an adviser has to plan for what happens to clients, their financial plans and even their data.
“How are the data and the investment management going to migrate? What happens to the staff?” Brinker asks.
“Otherwise the buy-sell agreement only captures one third of its intent, which is to make sure the adviser gets paid,” he says. “In the broader picture, the buy-sell agreement needs to be designed more holistically to consider all the stakeholders.”
If the plan involves one firm buying out another, does the purchaser have the ability and capacity to handle the new business, Brinker asks.
“You literally have to build a 100-day plan and stress-test it,” he says.
Among the areas that advisers should examine when they are drawing up buy-sell agreements are the definitions of a trigger event, the agreement’s integration with employment and firm operating agreements, the mechanisms for appraisal and valuation and the possible need for key person insurance, says CFP Andrew Chan.
He became a partner in Little Falls, New Jersey-based Locker Financial Services this year and is in the process of drafting a buy-sell agreement with his new partner.
Like a client’s financial plan, a buy-sell agreement isn’t a one-time event.
It should be revisited at least once a year and more often if there are significant events that could affect it, and it should be revised as necessary, Chan says.
But, there are limitations, he says.
“As a tool, the buy-sell agreement helps to define how the business will be sold,” Chan says. “But it doesn’t necessarily address the goals and objectives that the buyer and seller have about building a successful business that will endure that can be bought or sold.”
This story is part of a 30-30 series on smarter succession planning.
