When you envision your future, how do you want your firm to evolve? Will you look for a succession partner or become an integrated ensemble — or even a large-scale enterprise? Whichever model you envision, you’ll need the right advisors by your side. An equity ownership structure may be just what you need.
In an equity business model, all client relationships are considered part of the firm. Additionally, all revenue and expenses flow through the firm, and the decision-making process has a structure, as do entrances and exits. Here, we share insight into how equity ownership can drive growth for your practice — along with steps to get you started.
Equity Ownership Pros
On one side of the coin, an equity ownership structure brings everyone’s interests in profitability and long-term growth into alignment. Everyone works together to build the firm’s value.
It also offers flexibility. Not only can an equity structure help you attract and retain top talent — including next-gen advisors — by establishing a clear path to ownership, but it’s an efficient way for you to minimize your work when you’re ready to step back. And because ownership is tied to a right to a share of profits, it can be extended to key employees in nonadvisor roles.
Lastly, it creates sustainability for your firm, providing continuity of service to your clients across generations.
Equity Ownership Cons
So, why isn’t everyone adopting an equity ownership structure? Well, it requires reimagining how you work. Moving from a siloed structure, where everyone’s book of business is their own, is a big change. Some advisors won’t want to give up individual client ownership, or ownership over processes, systems, and so forth.
When considering an equity ownership model, keep the following challenges in mind:
- The model takes some time to set up. You’ll need to work out a formal governance, compensation, and partnership structure.
- Leaving the firm may affect your clients. The governing documents will determine the extent to which you may solicit clients to join you.
- You’ll still need to hire colleagues. That includes attracting and training the future partners who will lead the firm when you’re gone.
- You can no longer run personal expenses through the firm. That can be a big adjustment if you’ve intertwined your business and personal finances.
- There may be substantial tax implications. You should talk to an accountant before making any decisions.
It All Begins with a Plan
You’ve weighed the benefits and challenges, so now what? Start with a plan — and focus on how equity ownership can drive growth. Think about your vision and goals, and be certain the new structure aligns with both.
Once you’ve done that work, follow these four steps to get started:
1. Standardize your processes. You’ll want to be consistent across all areas of the business, in support of your shared vision. This includes everything from client onboarding and paperwork processing to investment management and financial planning. By creating standardized systems, you’ll ensure that every client has the same experience, no matter which advisor they work with.
2. Professionalize your P&L. Centralizing financial management by adopting professional accounting practices will help shift the firm’s focus from top- to bottom-line performance and provide you with a clearer picture of what’s driving success. It will help shape your entrepreneurial thinking, which will help drive the firm’s long-term growth. And, having a clean P&L statement is crucial to the valuation of an equity firm, which is commonly based on a multiple of earnings as opposed to revenue.
3. Establish clear compensation and partnership criteria. Having a formalized system in place is important for two reasons:
- Creating a transparent pay structure that covers everyone from paraplanners to seior advisors drives employee confidence in compensation and profit-distribution expectations.
- It shows advisors the economic value of buying in and gives them the financial capacity to do so.
4. Consult with your CPA and attorney. They’ll help determine the best tax structure for the entity and draft the necessary paperwork to put your governance structure in place. You have some license for creativity here, so be sure to reflect on your firm’s purpose and values when creating this structure. Consider the following:
- Type of ownership. Will ownership be limited to the high performers who are the future leaders and successors of the firm? Or will you let everyone purchase a small stake after they’ve passed a certain tenure? Having an inclusive structure in which everyone can participate will create a powerful recruiting tool and a team of dedicated employee-owners.
- Definition of ownership. Do you want to have a single class or multiple classes of partnership? Be sure to consider how either structure will affect decision-making, both in terms of who has a seat at the table and how voting takes place.
- Buy-in options. Is one of your goals to make it easier for younger advisors to join your firm? If so, you might want to put internal financing options in place, such as by structuring the first buy-in entirely through profit distribution or discounting internal purchases.
Realizing Your Vision
Creating an equity ownership structure in your firm will take time and effort, but it can also add a lot of value. You’ll embed a clear succession plan, and your shared vision and priorities will drive camaraderie and success and illustrate how equity ownership can drive growth for your practice.
At Commonwealth, our Practice Management team is uniquely qualified to help you determine the right structure for you, your practice, and, ultimately, your clients. With their wide breadth of expertise, Practice Management consultants will support you in every facet of your evolution, including cost and revenue analysis, firm capacity and scale, staffing, enhanced branding, and more.
Begin the conversation today. Contact us to learn more.
Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.