Julia Sexton (01:01)
today's topic is contingency planning.

to just kick off with essentially an overview of what contingency planning as a service is in terms of what we offer at SRG. we get a lot of questions from clients on not maybe what the service is, but misconceptions of what the service is.

So I thought maybe we'd debunk some of the common misconceptions as we essentially describe what the service actually is.

David Grau (01:29)
Yeah, good jumping

off point and to your point. I mean, we think about succession planning, right? It's planning for your exit, so I guess I could see how clients would get to death. Disability was certainly be an exit, right? And so why doesn't succession apply? But I guess it kind of does, but it's a lot easier to tackle the subject if you bivouacate retirement, which could be it could change as opposed to death and disability. Totally different risk profile.

Todd Fulks (01:41)
Thank you.

David Grau (01:56)
But even the term contingency or continuity, hear those terms used sort of interchangeably. I don't know. From the seat that I sit in, having talked about this topic long enough, you're spot on, Julia. It just gets called succession planning generically. I just feel like having worked with clients long enough, and I know you've talked to them too, when you say succession, then it just sort of lumps retirement into that conversation, which then makes it a lot harder to plan for, because they're just such different topics and problems to solve for.

Nicole Frey (02:26)
I think what has helped in conversations that I've had with clients is just to consider the timeframe. Succession planning usually is long-term planning. So this is where you are growing your successors, you're mentoring them over time. There's definitely a process involved in getting someone on board who eventually is becoming an owner.

With contingency planning, we're talking about emergency planning. So this is where we're talking about death and disability type planning. So this is ⁓ something for events that happen pretty rapidly. And we need some sort of exit plan or a contingency plan that can be easily implemented so it doesn't take a lot of time in order to get results there.

Todd Fulks (03:09)
Yeah, and I've always kind of thought of it as contingency

or continuity planning is kind of under the umbrella, so to speak, of succession planning. It's part and parcel of it, but definitely solves for a different issue.

David Grau (03:24)
Well, at though, if you really start to slice and dice the terms, right, succession can encompass a whole bunch of stuff. But I think about the lens that maybe an RAA would be approaching this from. I think you probably know where I'm going with this, right? contingency aspect, right? Like, hey, I go out to lunch today and I don't come back. Well, who takes over the clients, the servicing relationships, executing trades, right? Like environment lunch and the market plummets gives me a heart attack and I die. Who takes care of those clients?

But then you have legitimately like continuity concerns of like, hey, if there's a flood or a hurricane, how do my clients get access to their accounts? And these are all different things, right? know Todd from your background and previous seat you sat in. I mean, as nuances those terms are contingency continuity. mean, they kind of can mean different things, right?

Todd Fulks (03:59)
you

Yeah, absolutely. I think you bring up a really good point about an independent RIA.

to your point, know, the SEC came out a long time ago. We've always had a requirement for business contingency planning, right? And to your point, it's natural disasters, floods, earthquakes, things of that nature. But then later, the SEC came out and said, you know, they didn't give a lot of guidance here, but they basically said it said you need to solve for

your unfortunate immediate exit due to death or disability. So all of the states that I've looked this up on have followed suit with that. So it is something that's definitely a requirement for RIAs out there. And then on the broker dealer side, mean, there's not a requirement for it, but in my experience being in broker dealers that had OSJ models,

If you didn't have something in place in writing and on file with the broker dealer prior to something happening, then there's absolutely no obligation for anyone to do anything. And basically it would be up to the OSJ to move those clients wherever he or she felt like they should go, oftentimes to the OSJ, or someone else under the OSJ to be able to keep the assets under the OSJ. But there is no contractual obligation to pay any remuneration to a beneficiary under those circumstances.

Ryan Grau (05:35)
And I want to talk about that a little bit, Todd. So this is a conversation that comes up quite a bit in the divorce valuation work that I do along the lines of like personal and enterprise goodwill, specifically on the registered rep side of the industry. So I was registered rep. You are a contracted agent through a broker dealer in the independent side of the industry. They allow you to transfer basically.

Those those clients are being serviced by you. If you choose to leave, you can take those clients. We may not help you if you leave our broker dealer, but you know, those contracts are with us. You are the servicing agent now bringing this back to continuity planning. In the RIA side of the industry, you don't have that support or back office that has an interest one because they have the contracts and two an interest in maintaining those assets. So.

splitting this up into the registered rep side of the world, RIA side of the world. On the registered rep side of the world, let's say you're taking your golden doodle for a walk and you cross the street for getting to look both ways because you're on your phone checking out what's happening on Facebook and Bud Light truck comes and takes you out. So what happens to the clients in the registered rep side of the world versus the RIA side of the world if you don't have a continuity?

Todd Fulks (07:01)
Yeah. And again, that's exactly what I was saying. It usually, if there's an OSJ structure, usually just reverts the decision is the OSJs, or if there's not an OSJ structure, then it's the broker dealers decision on where those clients, where those accounts go. And that decedent has absolutely no say in who takes their business over and who takes their clients over.

Ryan Grau (07:24)
There is a group of clients assets to manage revenue to be generated from those assets. You pass away as a registered rep. The common statement from registered reps is well if I'm not here there's going be no money generated from these clients. We're all just going to go away. I don't think that statement is necessarily accurate because again the broker dealer has a vested interest in maintaining the contracts that they have. They're just going to reassign them to somebody else.

Todd Fulks (07:49)
Yeah, they can reassign them to someone else or just make them house accounts.

Ryan Grau (07:53)
Okay. What about on the RIA side?

Todd Fulks (07:55)
Now,

yeah, so let me go back to that statement real quick. So they can make them house accounts for any of securities business, but not the advisory business. There has to be an IAR on those accounts to be able to get paid.

Some custodians obviously have a vested interest on the just the RIA side.

But I haven't seen as much, I guess, influence from the custodians as I have from the broker dealer side. And then obviously you have situations where you have hybrids. You have somebody who's clearing through a broker dealer but also has an independent RIA and they clear through an outside custodian. So that makes it even more complicated.

Julia Sexton (08:42)
the barrier that we know we face often talking to clients on the sales side, maybe on some other projects as no project and service leads when we see a great, opportunity, it's something that we know our clients need. And it's oftentimes,

a contingency plan that they don't have, which I like to describe essentially as a life insurance plan for the business. So we know it's a sometimes tall ask or task to try to convince our clients why this is so important, not from a sales perspective or, know, SRG wants to take your money perspective, but a this is really important, whether we help you or not. This is a really important plan to have in place for.

your business, your clients, your family, as we all just highlighted. So even beyond just a matter of what actually happens to the clients, maybe we can highlight the importance for continuing the legacy that you've built, probably the most as well.

Todd Fulks (09:44)
continuity planning contingency contingency planning knows no age. I've got too many stories about folks who have left us way too soon. thirty seven year old who passed away just before Christmas had a young wife, three kids out of the blue. Another financial professional that was under 40 that went to bed one night and just never woke up. Everybody thought he was completely healthy.

I had one financial professional who was cleaning his windows and came in the house to get a drink of water and passed away under 50 years old. So this is something that I really think that every financial professional should have. In my opinion, they owe a due to their family, their clients, and their staff.

to be able to put this in place. And it doesn't have to be over engineered. Something is always better than nothing. And you can always change it as circumstances change.

Parker Finot (10:40)
Yeah, and actually I'll jump in here, Todd, just from the transaction advisory standpoint or even internal succession planning as well. contingency planning knows no limits, no bounds, especially with ⁓ age in that respect. in some instances, you'll have an internal succession plan. Maybe it's an accelerated plan where the successor is more qualified, but they're generally younger, right? And they're just looking to take over the business. Well, they would still

greatly benefit from having a contingency plan, especially being that they've purchased the business and they have debt outstanding on the business. So you need something that's going to account for that. And to emphasize the point around having something in place and the ability to change it later. In some of those instances, these folks don't have a dedicated partner. So either the founding owner who's selling perhaps can be having this in mind as another firm or other firms that they feel

are good fits for their business that the successor could align with in the interim until they decide maybe they want to do something else. Or alternatively, of course, SRG provides a backstop program, the contingency retainer agreement, which is really our firm stepping in to help in a catastrophic event to help ensure that the right fit is made, the value of the business is preserved. We act quickly and efficiently to address the situation.

David Grau (11:51)
Mm-hmm.

Parker Finot (12:04)
And that can be changed at any time as well. So especially for a younger buyer, that could be a really beneficial solution.

Todd Fulks (12:13)
Yeah, even you know circumstances change. Maybe the potential buyer ends up on the front page of a trade publication for the wrong reason and you need to change that person right? So they need to be flexible. They need to be changeable to the circumstances and that's exactly what we do.

Nicole Frey (12:28)
I just wanted to add something to Parker's feedback here. So what we see a lot too is as equity sharing occurs, for example, we have some minority owners. They were supposed to eventually take over the business, but the concern is still capacity. they need some time to really go into that ownership position. So we have worked with some clients. They did have that contingency plan.

with an outside third party buyer who would take over the business and is willing to work with those minority owners just for client continuity. And because those people are used to another culture and they know how to service those clients. So it's definitely a good fit for the buyer to take on those minority owners. But that is a temporary solution until those successors have grown into more ownership.

They know how to run the business and the founder is then comfortable to relinquish that business over to those successors because they've had some time to work towards that goal. So that's always an option. And that is a contingency plan that gives everyone some peace of mind initially until the true succession plan can be implemented, ⁓ whatever the scenario is. And I want to mention just one more thing on this.

Parker Finot (13:43)
Yeah.

Nicole Frey (13:46)
I do receive a lot of contingency plans that advisors think they have in place. It's a form they fill out with their broker dealer. ⁓ It is not a true contingency plan. Yes, it provides for the transfer of your clients and your clients are taken care of, but it does not help your family. It is not

David Grau (13:56)
Yeah.

Nicole Frey (14:08)
a plan that gives your estate some of the value that you created over all these years, all that blood, sweat and tears that went into your business. That is not the form that you ultimately need. Yes, on the broker-dealer level, it's helpful and it should align with your contingency plan. It should definitely list that person who ends up with your business, but you need something more robust than that.

David Grau (14:18)
Yeah.

Parker Finot (14:33)
And I just wanted to add briefly, Nicole, to your first example and just how that really highlights and emphasizes some of the complexity that can start to enter into the equation, which is you might have internal succession planning, but maybe the successors are not fully ready to take over the business. So you feel the best course of action is to have a dedicated third party buyer more experienced, but you have to really navigate these different themes and ensure that whatever you're putting in place

with the third party is agreeable to the internal successors and that could span across the succession planning work, the contingency planning work, and then even entity planning work for say an LLC or a corporation. So making sure that all of these pieces are compatible and naturally, know, us here at SRG, we are going to work together cohesively during these planning processes to make sure that the right solution is put into place there.

as far as deal planning goes as well Make sure you fully understand and realize what you have on file Kenneth and Nicole point around You may have something on file with the broker dealer may or may not be sufficient or thorough But also you may have an agreement in place that perhaps you've forgotten about Decided you're gonna sell the business to another party and found out. wait, the former contingency partner has a dedicated

right to purchase the business, which then complicates the timeline or even just the viability of the planned sale. So we always advise that it's obviously not overly common, but you want to make sure that you have a clear oversight of what agreements you have in place, which agreements are active.

Nicole Frey (16:11)
Especially since some of those agreements have a timeline for cancellation, so you can't just always terminate them with 30 days notice. So some of them are in place for two, three years before you can cancel them. So it's definitely important to take a look at that and always monitor is that still a good fit.

Julia Sexton (16:17)
Okay.

Ryan Grau (16:30)
Yeah, the the broker dealer is as a smart man once said, it's a the broker dealer continuity plans. They're a safety net, but they're a false safety net. It's a safety net that's maybe a foot off the ground. So it's not going to stop much. really, the intent of continuity planning is yes, to protect the value of your business. I would say that's kind of more along the lines of the selfish bit of it. You put time and effort, you've taken risks.

grow this business. But more importantly, you have developed relationships. People have trusted you with their life's earnings and you have a responsibility to your clients to ensure that they now don't have to go find a new financial advisor or they don't get matched up with some putz who doesn't know what they're doing or understand their accounts. So proactively taking the extra step to engage in continuity planning, deliberate continuity planning where

You at least have some control and foresight in direction as to what the outcome is going to be is important. And the broker dealer continuity plans really don't provide that really all it addresses is assets are going to stay with the broker dealer who's going to get this revenue and they don't really go much beyond that. The revenue is going to go to whoever you select. But what about those smaller accounts that

They really don't want to deal with. So often what you see with those documents is cherry picking. I'm going to take your top 50 clients. The other 50 can go pounce and somebody else can take care of those. And, by the way, it was a revenue sharing arrangement. So your revenue probably just dropped significantly. Now you're going to get a, your estate's going to get a portion of a lesser revenue amount. So again, it's a place to start.

David Grau (17:56)
Yeah.

Ryan Grau (18:17)
And going back to Julia's original question here for this particular topic is this is a very important thing for most financial advisors. Todd, yes, everybody should have one. But why don't they? And I think the big issue is just don't even know where to start. Don't know what my options are. So if we were if we can, let's break this down into a spectrum of financial planning situations or financial advisor situations where

On one end of the spectrum, we have your lifestyle, sole practitioner, maybe an administrative staff, but it's really just them all the way to an enterprise level where I've got multiple either multiple owners. I've got key people internally where I've got internal succession plan. And let's talk about some of the options. What works from simple buy sell agreements or what if I don't even have a continuity partner? What do I do?

and talk about what the options are, what works, what doesn't work at these different sizes and solutions. And then let's talk a little bit about the deal terms and how to actually make them work from a value perspective.

Todd Fulks (19:29)
Well, right into your point, how powerful is it that you can tell your clients that I'm taking care of you now and if something were to happen to me, I've already planned to have you taken care of if I'm not around.

Julia Sexton (19:42)
Yeah, maybe we'll start on the small scale. Soul practitioners, lifestyle practices, I would say the most common reason, of why either they don't have a plan in place or maybe aren't just prioritizing that, whether it's overwhelming or just not knowing their options or not thinking that it's necessarily something they need to worry about. Obviously, we've essentially covered the why they need to accomplish this and why it's important.

But I would say most commonly what we would recommend that they consider is putting in place a simple buy-sell agreement. So don't over complicate this from a, need to find someone who's going to buy my business and I need to be willing to buy their business too. That's what we internally would call a reciprocal agreement. Can be overwhelming to find parties that agree on everything and that can feel overwhelming to tackle that.

when it's maybe something that they're not as familiar with. So a single one-way buy sell, meaning I own a business, I know I need to take care of my clients and I owe them that. So I'm going to find someone who is willing to buy my business should I not be here tomorrow. It can be as simple as that. However, maybe you still don't know someone. Maybe you've asked a couple of people and a couple of practices around you and they're not willing for whatever reason.

That's where, we've mentioned a couple of times and we share, we try to share constantly with our clients that that's what SRG can do in terms of providing that support. Again, whether it's SRG or anyone else doing similar work in the industry around representing them. The importance is to make sure that your only option isn't that broker dealer or home office option. So we essentially, with our experience, expertise,

Contacts interested parties that we have communication with constantly We can make sure that there is a best option in a worst-case scenario for your clients So at a minimum, I don't know where to start Start with having an expert in the industry take care of it for you

Ryan Grau (21:50)
Yeah, I've seen several of those listing type plans where I don't have a continuity partner, SRG help find somebody. and they work really well. The key is timing and making sure that all potential stakeholders in your estate are aware of that particular plan. you know, I, we've had one specifically where, spouse, husband passed away.

ended up having cancer, lost the battle, but they didn't have a continuity partner and they reached out. Practice was listed for sale and it was timing again is key because going through the vetting process, especially while dealing with funeral arrangements, grieving, all of the natural things that your spouse or your state is going to be going through and having us step in.

help facilitate that process takes a lot of that weight off of their shoulders, but it does take time to find the right successor and getting them into the deal terms and the transition agreements. Like there's a lot that needs to happen. And if you put the document in place, but you don't tell anybody that you have it in place. Well, I mean, yes, you did part of it. So even, know, even with buy sell agreements, it's important to communicate your intent with

your clients, with your staff, with your spouse, your state planning attorney, make sure anybody, even your CPA, that everybody knows that this document is in place. This is my intent.

David Grau (23:22)
Yeah, to your point, we've done it before numerous times, right? We have one right now where the advisory isn't deceased, but unfortunately the writing is on the wall and so we're working to expedite it. And our team can go fast to your point, but it's still going to take what I mean two or three weeks and that is wicked fast. If we don't get the call to start that two to three week process for let's say 30 days, right? Because you're putting somebody in the ground, the grieving process, figuring out the estate planning. Well, there may be nothing to sell.

Todd Fulks (23:34)
.

David Grau (23:50)
And so, I mean, to your point, Ryan, having a plan, great. Making sure people know what that plan is and is communicated to your spouse, to your CPA, to your attorney, somebody who can pick the phone up and call us, for example. I would also challenge the notion, because I've heard it said recently, and I think you guys all have an opinion on this, just get something in place, right? Something is better than nothing.

I get the premise of the statement, but I would also say I've seen what the something is. When firms say that something is better than nothing and the problem that I see is when they put the something is better than nothing solution in place, like just a basic template. I checked the box. They don't view it as something is better than nothing. I'll come back and improve on it later. I'll revisit this topic. They put that thing in the filing cabinet and they never come back to it. And when I see these solutions put out there through just basic free templates, I mean shoot.

which LGBT, Gemini, whatever your large language model is you're choosing to use nowadays. I've seen people generate that stuff. Again, you'd think something is better than nothing, but I think there's some cases where something might actually be worse than nothing, which I hate to say.

Todd Fulks (24:59)
Thank you.

Nicole Frey (25:00)
I'm glad you bring that up, Dave. What I've seen in the past

too are plans that are just not very practical. They don't pursue the best interests of both parties involved, especially with these types of scenarios. You have to be concerned about the buyer's risk and the seller's risk and make sure you find a good balance there. What I love about our program is too that we don't just throw an agreement with people.

It's the implementation that is key. And I think that's what everyone is mentioning here is you can't just have an agreement and put that in your filing cabinet and call it good. I know Julia's team does a great job providing template letters so that the plan can be communicated in checklists and to do items. So all of these things are provided so that people don't just walk away with an agreement. They actually have an implementation plan. And I think that's key.

Todd Fulks (25:54)
Yeah, and Nicole and David, to your point, having it is step one, having it in writing, right? Communicating it and then reviewing it once a year. Take it out of the filing cabinet. Take it out of the desk drawer. Make sure it still makes sense. If circumstances change throughout the year, then update it. You probably have to either update it or terminate it and find someone else. But then just from a mechanical standpoint, I've run into the situation multiple times.

We're licensing was an issue. So you have somebody with a 66 65 7 but their buyer only has a 6 right? So that's just not going to work and Then the other thing just from a mechanical standpoint is once someone terminates from a broker dealer be that because they're Disabled or they die that broker dealer per FINRA rules They have to you five that advisor within 30 days. So David going back to your comment about

If you take two weeks to reach out to us, then basically you've cut that window in half and those accounts have to move. So if that's the case, then they're probably going to move twice and that just causes a lot of client disruption.

Parker Finot (27:05)
Yeah. And I wanted to jump in here actually and add a few additional angles as well. First and foremost, like you mentioned a moment ago, Todd, you want to review the plan periodically. And something I would say as well, lending back to the consulting that Julia and her team provides is that some of the terms themselves can be crafted to be a little more dynamic, a little more evergreen. If you will, a lot of times we see things where someone set a rate years and years ago and that's it. says, you know, you're going to pay 1.75 times on the business.

doesn't make sense at all in today's state. I've actually seen some back halves of some deals that have really ran into some issues. The retirement clause, because the seller had the ability to solicit or receive bona fide offers, and then the buyer had to match or pass the offer. And it got really complicated, but long story short, produced a very negative outcome for the buyer who was a joint partner with the seller.

So do you do want to be very wary and clear on what your terms are, but outside of that, you could even have something like a valuation methodology that's required to be updated periodically. Otherwise the agreement will then be terminated or not renew. So again, it goes back to, there's a lot that goes into the planning around the terms that's going to make that agreement more durable. The other facet I wanted to revisit was around the, you know,

Nicole Frey (28:16)
So, thank

Parker Finot (28:28)
most unfortunate scenario where we don't have that dedicated partner outlined. Of course, we have those retain the retainer or the backstop programs, but we've even seen on the deal side, the transaction side where folks don't have an agreement at all. They're part of a larger team and the spouse is left to sell the business. It's, generally an agreeable, you know, scenario amongst buyer and seller, but they need someone to help bring this across the finish line. So we've had those scenarios brought to us and we've very rapidly.

brought those deals through to completion as well. So even if you didn't have a plan, just knowing a firm like SRG can help you is really critical as well.

David Grau (29:07)
Well, I to toot our own horn here, anybody who says that's about to do it. When I listen to you, Julia, talk through this stuff with clients and talk about how we get to evaluation, how we how we fund this thing with what if it's death, what if it's disability? Maybe we use life insurance, maybe we don't. Think through the taxation of the deal. If it's maybe just temporary disability. There's so many things that I hear you consulting on and you're very expeditious about hitting these points and working through it.

The idea of somebody just getting, let's say a free template, filling in some blanks and then putting this in the filing cabinet and thinking that they have some level of protection. I just, I don't know. It gives me pause. I get the need to satisfy some of the compliance concerns. Maybe if you're under FINRA, affiliate with a broker dealer, because Todd, you could probably speak to it better than I could, but you've got what? FINRA rule 2040. You got the SIFMA no action letters. Like, yes, you do need to have something in place prior to something happening.

to make sure we can get value to your spouse compliantly. But I would say maybe avoid doing a band-aid and just spend a little bit of time to get this stuff done right, right? Because it can be a lot of value and tax-free, which is a lot of value.

Todd Fulks (30:14)
Yeah. Yeah.

Yeah, absolutely. And then you also have to think about the different lines of revenue that financial professionals have, whether it's investment advisory, securities, insurance, all regulated by different regulators. Right. So and most financial professionals that we know.

kind of have all those different lines of revenue. So you have to pay attention to all of those different, those regulators, whether they're state regulators or federal regulators.

Nicole Frey (30:45)
So here's a question for you all. I just got one of those broker dealer forms in again. Provides for the client transfer. This form, however, has a payment provision. And that payment provision is a percentage of revenue. We call that earn out. As you have seen that coming in too, Todd, on the compliance side, what are the concerns about earn outs in case of death and disability?

Todd Fulks (31:09)
Yeah, I haven't. There are some broker dealers out there who don't permit it, but the vast majority of the ones that I'm aware of, they do. So to David's point, you know, they have the you know, there's the FINRA 2040 rule. And basically, I looked at that as a as a revenue sharing because it's usually in the same paid by the broker dealer. Right. Whereas I differentiate an earn out as the similar terms, but the buyer is actually making that payment.

And again, most of the firms that we work with that I'm aware of are completely fine with that because again, it emulates that rule 2040 and you're really staying in the same spirit as 2040. And by the way, I mean, you have to think about this. FINRA's only sole mission in life is client protection. And how much better can you protect your client to make sure that they always have access to a financial professional, even if you're not around?

David Grau (32:05)
Yeah. But to your point, Nicole, if it's just a simple form that says, hey, here's how we're going to split revenue and we'll make sure the estate gets some money for it. I mean, again, to be fair, yes, I would put that marginally better than nothing. But to know what the other alternative is, right, that it could be tax free at a two or three times revenue multiple. I mean, if you line those two options up for your spouse and said, hey, which one would you rather have? I mean, I think the answer is pretty obvious.

It just takes a little bit of advanced planning to put these contracts in place to get a very, very different tax outcome. there's also the element of, I mean, there's the contract, which we've talked about, and the value, and the terms, and the taxes. But I also, hear you, Julia, talking about some of the more practical elements. If I have a plan in place, and I've got that plan in place with Parker, and I put that contract in the filing cabinet, and I don't tell anybody,

I think of all the things you talked to them about, like on the practical aspects of like, how do we get into your office? How do we access your computer? I mean, there's both like the technical and the practical. I feel like, again, back to the templates and getting sort of comprehensive consulting, that stuff doesn't really get talked about nearly enough. Is that coming up in a lot of the consultations you're dealing with, Julia?

Julia Sexton (33:21)
Yeah, yeah, absolutely. And I think that's the we've highlighted the key differentiator amongst the quality of the actual agreement itself. But the implementation side of things. Sure, you can get a template from somewhere or you might work with another firm who provides templates, but it's the implementation that's key that we that I do. Of course, my best to cover all of those bases based on the actual questions or concerns that clients ask of us when okay, I have this agreement, but

Todd Fulks (33:24)
Thank

Julia Sexton (33:47)
now what, it's what to do with it. So whether the client's asking it or not, it's us being able to provide them with the recommendations. my mom, for example, recently filled out an I'm dead now what book, the importance of that. I mean, it's not fun to write, but it's the same thing doing that on your personal life side for your business. I know that all of our clients that we work with encourage that of their own clients to make sure that they have.

Todd Fulks (33:52)
Thank

Julia Sexton (34:14)
and it's in place and beneficiary is named to protect their assets that they're helping manage. So do the same for yourself. And the key there is to our point again, the implementation side of that.

Todd Fulks (34:25)
Yeah, and I can't overstate the practicality of the implementation enough, Julia, to your point. I've seen situations where someone's passed away. No one could get into that person's computer. He had a marketing program that was still going out for months to his clients, which was really, really confusing to them. Why they're, you know, they read the obituary, right? But they're still getting emails from this person.

And the buyer couldn't figure out how to stop it, didn't have access to that program. And it just, again, it was very confusing to clients.

David Grau (35:04)
Yeah, which I mean, even in the best of circumstances, Todd, half the time you can't get into your computer and you're alive, let alone trying to access your computer after you're passing, right? With two-factor authentication, I need your cell phone.

Todd Fulks (35:09)
I

David Grau (35:17)
What are the other things that I know comes up and I get questions on this, like at panels and I bring it up because it just came up on a conference call with a broker dealer RIA that shall remain unnamed, not relevant to the conversation. But the firm really didn't want at the upcoming session that I'll be leading, doesn't want me talking about multiples.

Right? Because the firm has a solution. They'll be the backstop. But the last thing they won't be saying is that typical multiples used here are between X and Y. Are you seeing big discounts, Julia,

Julia Sexton (35:51)
Yeah, we're really not. And that goes back to again, using standard language, which is not the actual practical coming from experts that do this day in and day out, which is for example, exactly what Parker does in his team, working for deals and having those practical applications. We tie that into, course, from our perspective, if we have a plan in place and you know, those events happen quickly.

David Grau (35:54)
Okay.

Julia Sexton (36:18)
then there should be no reason in theory to discount the purchase price when a buyer, a named partner would have all the success in the world lined up to have a successful transition. So we're really not seeing explicit discounts, but rather protections built into that purchasing event that we actually do and see commonly, again, aside from death and disability, but that Parker sees and writes into deals where

all parties are alive and well, there's just a transition of ownership. So things like look back provisions that we probably all heard, most of our clients have heard of, but building those types of practical considerations into even these death and disability agreements to strive for a successful transition. Because again, we have an order of events that we all know to follow or whomever is alive and stepping in knowledgeable of this plan to

David Grau (36:55)
Mm-hmm.

Julia Sexton (37:13)
ensure a successful transition, but God forbid there isn't. ⁓ We'll write in then the practical next steps of how do we measure what that lack of ideal transition is and then how do we adjust for that for the seller's benefit or the beneficiaries of the seller.

Ryan Grau (37:30)
Coming in with just from my expertise on the valuation side, back when I was just a wee lad and had a full head of hair and was consulting on continuity planning, I would always advise people don't guess what the discount discounting is going to be because there's elevated risk. There's going to be expected heightened attrition. Yes, potentially. But there are deal terms available to you that actually make

Todd Fulks (37:31)
Thank

Ryan Grau (37:59)
real time adjustments. So from a value perspective, if you opt to have the practice valued at the point of a triggering event, you value the assets that are there and in place. So assets, meaning the client list, the assets that are being managed, the revenue that is generated at the point of measurement at the triggering date without building in what is essentially an arbitrary discount on. Well, we think clients could leave because again, having seen this happen in real time.

I've seen scenarios where there's very little if any attrition when a sympathy letter is sent out from the spouse, letting clients know what's going on, letting them know that a plan is in place and that the instructions will be made soon. So with that, using the appropriate deal terms, because generally given the sudden unplanned nature of continuity planning, usually there's not any down payment.

Todd Fulks (38:31)
Yeah.

Ryan Grau (38:55)
Unless there's going to be insurance in play. Typically when you're doing a third party continuity by cell agreement, usually they're not going to be insurance. So we're talking complete contingent financing, easily over 10 plus years and having a performance metric in the first year of the transition year one. Where after that dust has settled, then we can true up the discount based on real attrition that happened.

But after that first year, like that's on the buyer shoulders at that point. So that needs to lock in. That also creates that sense of responsibility of, OK, I've committed into this liability, this obligation. I need to service this client base when that note locks in. I now have a debt that needs to be paid. So and along the lines of deal terms in value and discounting.

What are you commonly seeing people discuss around value? So there's having the practice value using stated multiples using stated values. What's kind of the trend and what are you seeing?

Julia Sexton (40:06)
I push hard to avoid stated multiples because again, it requires you then to actually review your plan every year or every couple of years at a minimum, which we can hope for the best, but reality shows anyways that that's not actually going to happen. Life gets busy. It might be five, 10 years before you pull that out of the filing cabinet. So using stated multiples, they're inevitably going to expire.

So it is more common and I encourage to either use statement, a statement or language around the then current multiples, which has its own risks. The idea is that you would establish what the industry multiples are at the time of a triggering event, but then that requires either a named party to actually keep up to issuing that information to the industry. But in my opinion, still maybe depending on who you.

are targeting in that language to communicate those multiples may still be better than the alternative to Dave's earlier point of something's better than nothing. If your something is stated multiples and it ends up being like Parker described, a 175, that might not be better than nothing depending on where we are in the industry in those multiples. So I push heavily in almost all circumstances it makes sense to essentially include language that a valuation would be performed.

at the time of a triggering event so that it is a neutral third party determination of the value of the business at that time, which is going to make a buyer, a seller feel more comfortable. Maybe, you know, still have that communication of, think that it's overvalued, undervalued, whatever the feelings are when you receive a formal independent third party appraisal. But the idea is that you have that neutral opinion to at least

fall back on to establish the current value for then the terms to support that one year later, let's look at the attrition, let's make sure that we have a clear measurement of what the expectation was versus reality. So to the extent that you can, and it would make sense to include language on determining the value at the time. Again, I would say the only risk there to show both sides of the equation or the conversation is

You need either a team, someone, named party, individual that would be able to essentially help support the evaluation process. So to the degree, which I'm sure you can weigh in on, to the degree that this triggering event happening isn't the first time that you get evaluation done would be ideal. So it's a great idea to get the practice valued for a lot of reasons.

David Grau (42:34)
Yeah.

Ryan Grau (42:36)
Yeah.

David Grau (42:37)
That was my concern.

Julia Sexton (42:52)
But in terms of establishing in this type of agreement that evaluation would be completed, it'd be nice to know that you've been through the evaluation process before.

Ryan Grau (43:01)
Yeah. So just thinking out loud on that particular topic and for the advisors out there, totally get where you're coming from. And it's kind of this, you know, well, there are pros and cons in every situation. So scenario one, I think would be ideal. It's definitely more work, but if you think you're only doing this once a year, you should have a business planning sessions regardless, but doing your valuation on an annual basis.

Todd Fulks (43:15)
Thanks.

Ryan Grau (43:29)
is, I think, instrumental into running your business. The cost evaluations are not a barrier. It gives you excellent insights into your business. And most importantly, more important than getting the value is it causes you to get your shit together of understanding what your client base looks like, what your financial metrics look like, what your AUM is. And for the really well high value practices out there, they have processes in place. They're using Salesforce. They're using Redtail.

And they're actually creating reports where they can pull information for valuations because there are lots of firms out there that do valuation. There's one thing that they have in common. Pretty similar asks in terms of what we're going to be looking for from revenue sources of revenue. A.U.M. Breakdown on A.U.M. clients and break down on clients. You need to have that information. A lot of advisors. I'm going to put probably 90 percent of the industry in the category of

They don't know that information about their practice and when they go through the valuation, they end up pulling their hair out. They look like I do and fast forward several weeks to a month later. Finally, I have the questionnaire filled out. Now put that burden on your estate who knows very little about your business. They're not going to able to fill that out. So bringing this full circle, if you have if you're doing evaluation on an annual basis and keeping that updated, it seems like updating your continuity plan.

Todd Fulks (44:32)
Thank

Ryan Grau (44:52)
once a year along with that would be best practice because then you can put a stated multiple in there because over the course of a year that stated multiple isn't going to change much. Yes there's maybe some changes in the market. There may be some changes in your practice but that's going to be pretty accurate within a year. Also not to mention most banks would accept evaluation within a year of a transaction. So there is that. But you those are two best practices there. Plus it also requires you to have a sit down conversation.

Maybe go out to a lunch, talk to your continuity partner and hey, just revisiting this. This is what we agreed to. We still all good. This is my valuation. Maybe we need to update the multiple. I moved offices, but it just seems like good practice that doesn't take a lot of time. And then the alternative would be putting a multiple in there with the multiple and not really, again, not having a.

not having it tied to an actual valuation. The risk that you run is potentially understating overstating value. Like it seems like any time you're using a multiple in that document, it needs to be tied to something recent. Or if you have a request for evaluation, the issue that I run into almost every single time when we're doing a distress type valuation is I don't know this information. So I don't even know where to get it.

Or like we had mentioned earlier, like we can't get into the systems. This plan wasn't communicated, but dealer is not helping out so.

Parker Finot (46:23)
Thank

Todd Fulks (46:26)
And Ryan, to your point, I mean, there could be privacy concerns on the part of the broker dealer providing information to someone's widow or widower. So not to mention, like you just said, if the financial professional is having trouble pulling that type of data, their spouse most likely, unless they're involved in the business, will have no idea how to do that.

David Grau (46:50)
Yeah, we had a listing. I think it was either late last year or earlier this year that the only way that the listing team got that practice sold and listed and sold was through the sheer benevolence of that broker dealer stepping up and taking the time to have their field leader go pull all that data and share it with us, right? Because they have other work to do. Their advisor that they have loyalties to is now in the ground. Yet they still go out of the way. But again, not every broker dealer is equipped.

Todd Fulks (46:50)
and the state.

David Grau (47:19)
to do that is going to be willing to do that. So I think about the spectrum of like how you get to a value. Like the easiest way to do it is just put a state of the value, right? Julia puts in the practice is worth a million dollars. Like I know it's guaranteed to be wrong, right? But like also there's no room for interpretation. There's no math to be done, but it's also going to be wrong like tomorrow. And then you got the other end of the spectrum where we say, well, we'll just value it at the time. And now you're relying on

I mean, Julie, you said it. You better have a team or some plan of how you're going to get that data. And hopefully you've done it once or twice. And then somewhere squarely in the middle, it just feels like maybe tapping out a little too easy is building in a formula. Is that different necessarily than a stated value? Because you're stating a multiple that's probably reasonably informed, unless you just took averages that Parker, you publish every year. So anyway, think multiples get you close, right? But they're guaranteed to be wrong.

Ryan Grau (48:03)
Ahem.

David Grau (48:15)
using a stated value is guaranteed to be wrong. But any of these methods definitely should not include a built in discount. I'm gonna bring it back to what Julie was talking about earlier, because I see that way too often. And if you really do the best practices right, you tell the clients in advance, like, hey, if anything ever happens to me, I have a plan, the team will be in place or my peer down the street that's with the same broker dealer, the same custodian, they'll be in touch immediately.

And then you have the letter that goes out from the grave that tells them, hey, remember years ago we talked about this, there's a good chance you may end up at 90 plus percent retention. So to take and start with like a one times multiple to account for the risk, I you could be grossly undercutting the value to the estate. And that is like a knife through my heart. Use the terms.

Todd Fulks (49:05)
Yeah, and David, to your point, there are a lot of people who are really surprised about attrition rates and actually the lack of attrition rates, even in these emergency sales, the attrition rates are normally incredibly low, especially if you have those communications go out. To your point, that letter from the grave, that's incredibly powerful.

David Grau (49:14)
Yeah, right.

Todd Fulks (49:29)
If I got a letter from my financial advisor from the grave and he said, go see Parker, I don't want to get haunted. So I'm going to go see Parker.

Nicole Frey (49:41)
And for those advisors who are concerned about making sure their estate, their spouse receives the current value of the firm without putting a huge burden on them for collecting information, collecting the data that's needed for the valuation. To Ryan's point earlier, it is best practice to get a valuation done annually or if you can't do it annually, at least every other year.

Ryan Grau (49:41)
home.

Nicole Frey (50:03)
We draft that a lot on the entity side. So my team works with typically larger teams. Their goal is to get those annual valuations done so they are always up to date. They can take a look at the strengths and weaknesses of their business and make some tweaks there. So they do have a pretty current valuation typically at hand. So you can always craft a plan that says that we are taking the value of a valuation that is not older than 12 months, for example.

If it is older than 12 months, then we'll perform a new one. But ideally, you're diligent enough to just keep that current. That way you can save your spouse, your estate, work there, and you still feel good about the value that they receive. So that might be an option for anyone who's concerned about that.

David Grau (50:48)
When you've sat in Julia's seat in ages past Nicole, now as you work with teams on the entity side doing operating agreements and buy sales for partners, valuation and payment terms any different in the stuff that you work on for the larger teams?

Nicole Frey (51:03)
So one thing that comes up a lot is that adjustment mechanism or look back clause Typically when you work with teams the idea is that you Raise your clients to understand that the advisor is not an individual It is a whole team behind the services and the products that they're receiving

⁓ So that if one advisor steps away, they still receive the same level of service. So to Todd's earlier point, attrition should be very low. So those adjustment mechanisms are typically not needed. So there are some nuances there, of course, ⁓ but that's what we're looking for is getting a recent valuation, evaluating someone's interest in the firm. And when it comes to payment terms,

They tend to be a little bit more drawn out because a company has multiple stakeholders. So we have to worry about meeting payroll, their employees, their clients, their other owners, their contractors we're working with. So usually that payment term is about 10 years, but we create that incentive to seek big financing so a seller can get paid off sooner.

David Grau (52:17)
Is that similar to what you're seeing, Julia? Is your stuff 10 years, two years?

Parker Finot (52:17)
Yeah.

Julia Sexton (52:22)
No, that's what I was going to call out as one of the big differences that that I see between, for example, the death and disability language in the entity governance documents versus more of what we would call a contingency or continuity plan is a much shorter timeline on the note. Again, depending on the circumstance and what the seller and buyer are willing to explore, we can always look at life insurance under the.

trigger an end of death, but short of that or outside of that, maybe the life insurance policy doesn't cover the payment. Maybe you haven't died and that you are, you know, in a permanent disability scenario where that's not an option. We do explore that note. That's something that I often start the conversation with. That's maybe new news or new consideration for clients. A lot of times you just assume bank financing, close out the estate, pay their wife or spouse or family.

but to, again, in a fire sale scenario, expect that that's available, might probably is a tall ask. So you wanna build in again, the protections, maybe that cash is available and the buyer will just pay that out or find bank financing within 30 days. Great, that's best case scenario, but I'm sure, know, this is something that Todd can resonate with. We have a contract for the worst case scenario. So we wanna make sure that not only they're,

to easily understand for whomever is interpreting these, be it not you because you're no longer around, but that they make sense from a practical perspective of worst case scenario, what happens. So worst case scenario, we do wanna make sure that a buyer is not an immediate default, that we have at least a note over what's typically closer to three, four, maybe five years, but a much shorter term on that note.

Todd Fulks (53:53)
it.

Nicole Frey (54:13)
want to just quickly offer an explanation why those payment terms are different. In my scenario, we're dealing with a team that has a set income stream pretty much. So we have that income stream, we have our expenses, we're dealing with basically one pool of money. When we deal with a contingency plan with an outside third party buyer, scenarios that Julia is dealing with, we have a buyer who has their income stream and their set of expenses

Todd Fulks (54:28)
Thank

Nicole Frey (54:42)
they're adding another income stream. So usually from a cash flow standpoint, the scenario is a little different so that they can pay this off a little faster.

Parker Finot (54:51)
And that's a, it's a perfect segue actually to what I was going to highlight. Also, I think in response to Dave's earlier prompt, which was, you know, how are we thinking about value in a contingency plan versus an internal company purchase? A lot of times that, that methodology of value can even be differentiated just to your point, Nicole, around the synergistic or strategic buyer in the contingency scenario, where it's more of a market-based valuation approach.

Julia Sexton (54:52)
Yeah, exactly.

Parker Finot (55:17)
to assimilate the business under your own versus in the internal buy-in scenario, we are dealing with that dedicated income stream from this specific business, which will exist just as it did the day before, as it will the day after. So it's that income-based valuation that's most commonly utilized there. Doesn't mean that you couldn't have a freestanding business where the contingency partner's buying on to, say, a remote location, a...

fully encompassing operation. It's got a number of staff. They're buying into that entirety, which again would point more to the income-based valuation. But some of the differentiation is also that methodology of value.

David Grau (55:58)
Yeah. I had two questions for you Just get your thoughts on because they've come up recently and one we sort of touched on earlier. So I'll take the easy one we touched on previously and that is the use of an earn out. Right. I mean, I think we get why folks would want to use an earn out if I pick on Todd. Todd and I are going to create a contingency plan. I'm going to perceive that there's maybe some heightened level of risk, right? If I'm going to commit to buy his business at a moment's notice, right? I don't know. He could be dead. He could be disabled. Maybe he lost his license.

back to that one. I would hate the idea of committing to paying on a promissory note, right? Because I'm buying an asset that has the ability to literally vote with its feet. And we're in a scenario where Todd's just suddenly out of the picture. Letter from the grave or not, it still just seems risky to me. So I get why people would lean then into an earn out, which for those listening that don't know what the earn out is, it's just literally me agreeing to pay Todd's estate a percentage of revenue for five years. Pick the number.

Todd Fulks (56:35)
Good.

David Grau (56:55)
What are your guys' thoughts on an earn out, right? I mean, it certainly mitigates my risk and would get a buyer comfortable committing to do, to be a contingency partner. Any downside you guys could see?

Ryan Grau (57:06)
so in the scenario that you just laid out, where I'm paying a percentage out over time, there's risk in that. The alternative is I'm going to pay you out until a value cap. There's risk in that. So I think a well-structured earn out needs to have definitions around both time limits and value cap, because if you don't have the value cap, well,

Then you could pay out over a period of time and it could be very little. But I mean ideally if all the assets are there should pay out. But there are other issues that go into that. If you have the. So we get time cap if you have the value cap now and you could be paying out for a very long time. So putting the you know say this won't stretch out longer than a 10 year time frame.

Todd Fulks (57:32)
Thank

Ryan Grau (57:58)
at whatever the last valuation was or an agreed upon number that when we hit this metric, we're going to consider all payments filled.

Todd Fulks (58:09)
Well, David and Ryan, I don't know why you guys keep killing me off, it definitely, earn outs definitely mitigate the risk. But the other thing that I've observed over the last 10 years is when someone buys a business, actually, a financial professional gets to a certain level, they tend to, their growth rates tend to flatten and actually go negative. But when we see someone come in and buy those businesses,

The growth rates that I've seen have been 9 % the first year, 19 % the second year, 28 % the third year. So definitely understand from a buyer's perspective, the risk mitigation, but most likely that business, those assets are going to grow in the hands of Yeah, which is fine, right? I mean, you're more than happy to pay a little bit more because you've brought in more assets overnight, essentially.

David Grau (58:54)
You could end up paying more for it.

I just go back to I think Brian, said it earlier. What if something like that happens? Todd's dead. I buy his book of business, but I just had a baby or I just bought a house or I'm just not feeling super motivated right now. If I'm paying a percentage of revenue, like I have no skin in the game, so I mean, I know how often Parker because we've looked at the deal stats together. I know how often earnouts are getting used in like peer to peer deals. Do you ever use earnouts either for a fixed period of time?

or fixed them out. Julia, you're doing these plans anymore? Like, I know we have the language for it.

Julia Sexton (59:39)
Yeah, not not often. And it's also from a perspective of hypothetically, the seller may not be here. So now we're putting the responsibility essentially the keeping that up to date, keeping a check on this earn out making the adjustments to either your wife, your family, maybe you do have a very reputable representative, someone that's more than capable, I'm not suggesting that your beneficiaries or someone on

David Grau (59:56)
Hmm.

Julia Sexton (1:00:08)
wouldn't be, but it's high expectation for a group of individuals who are likely grieving you on top of everything else. So it's just not as practical from the fire sale perspective as well.

David Grau (1:00:20)
Well, and Todd, you've recently have been in that broker-dealer environment. You can't tell me that there's never any math errors, right? And like how things are paid out. And you have a spouse, to your point, Julia, who doesn't know how that math is being calculated anyway, let alone the source of the data. So I know. I get the validity of an earn out as a risk mitigation tool, which is why I suspect it comes up in a lot of the conversations that I privy to. I just wasn't sure how often it actually gets used, because it just seems.

fraught with risk from a practical perspective.

Ryan Grau (1:00:50)
Yeah. The other issue you run into is like, or to your point, the spouse doesn't know necessarily what is normal in terms of revenue production for the business. Maybe they do. I'm going to assume in most cases they don't. So, and I've had this scenario where there were two buyers for one practice person passed away. Client base was split and they each were making payments on an earn out.

Todd Fulks (1:00:51)
event.

Ryan Grau (1:01:18)
And while one person says, well, you know, with the book of business that I acquired, you're all paid off. And the other one wasn't even close. And so the spouse needed help understanding like, are they actually paid off based on this contract that they agreed upon and put together? There wasn't much language in there. I don't know what's normal. I need someone to help me out. And well, there weren't a lot of options for them. And then, you know, the other part is.

Correct me if I'm wrong here, but the primary difference between a revenue share and an earn out is an earn out as a financing vehicle attached to an asset purchase agreement that creates a purchase obligation. With that purchase obligation comes representation, representations and warranties in terms of what you're going to do, who you're going to be serviced and what the expectations are. Meaning you're going to buy this practice, you know, in that first year or certain timeframe, you're not going to go change the fees. So.

Well, I don't want to service these clients and they're at 70 basis points. I'm a ratchet it up to 1.1 % and well that blows half the clients out. So that kind sets those obligations. Whereas in the revenue sharing arrangement where it's again, generally the kind of default that most broker dealers offer, there's no real representations and warranties. It's just a, you're going to get a percentage of whatever I decide to keep. And obviously one has different tax consequences than the other.

Todd Fulks (1:02:12)
Yeah.

⁓ 100 % because those 2040 plans are paid out at ordinary income. And there are no action letters on timeframe limitations. So different VDs will, wealth management firms will interpret those FNRA guidelines, no action letters differently. But the timeframe that most broker dealers adhere to is five years. Now I've seen it go a lot longer. Some are a little bit more flexible.

David Grau (1:02:56)
Right.

Todd Fulks (1:03:08)
But that's kind of where I've seen most broker dealers, wealth management firms land is the five years based on some no action letters.

David Grau (1:03:18)
What are your thoughts on it? I just unpack that one real quick, because I've had that come up multiple times. I mean, I guess it's probably come up in some of the conversations Julia has had, where advisors would tell us that, the broker dealer said, I can't make payments for longer than five years. That be your interpretation? I mean, you read those HIPAA no action letters like I have.

Todd Fulks (1:03:38)
Yeah, so that's a good question. The tendency that I've seen is when it is an earn out, then they usually limit to five years. But if it's a fixed promissory note, it can be longer.

David Grau (1:03:52)
Yeah, okay. And that's been the same takeaway, right? If you read the Rule 2040 in the SIFMA No Action Letter, that is designed for a broker dealer to pay an unlicensed spouse a stream of continuing commissions and all the things that need to be in place in advance of that happening. But Julia, how many continuing commission agreements have you produced in the last month?

Julia Sexton (1:04:15)
Yeah,

how many?

David Grau (1:04:17)
Right? mean, these are structured as buy sells that I Ryan, you said earlier with the APA, the asset purchase, like you should buy sells that are transacting the relationships and the rights to the future revenue. But it's an asset purchase, not a revenue share. So.

The other one I was going to touch on real quick is the right to purchase. So again, kill Todd again. So I see a lot of these agreements where folks are telling me that, OK, we have a plan. If something happens to Todd, I've got the right to purchase his business. But you'll notice the emphasis there is on the right to purchase. And that just gives me pause where Todd inadvertently thinks he has a solution. And he might if I exercise my right. But what if I don't? What are your guys' thoughts?

Gun Park (1:04:33)
Okay, I've run the timing.

David Grau (1:05:03)
That has come up more than once.

Todd Fulks (1:05:07)
Yeah, I'm not a fan of a right of first offer, right of first refusal in that situation, especially when I'm the one dying because of what you just articulated, because it may let's say it's 30 days, which is pretty, pretty short. Sometimes I've seen them 60, 90 days. And again, those accounts, those clients have to move somewhere. And David, if you decide, ⁓ I thought I wanted to, but I don't, then I've really screwed my family.

Because that's an asset that's going to diminish in value quickly. It's going to evaporate. And I'm sure Ryan, everybody on the call can speak to how quickly, if there's not a plan in place, the value of these businesses can disappear.

Ryan Grau (1:05:50)
one of the questions that I wanted to bring up kind of along those lines is a very commonly overlooked topic is right of first refusal and right of first offer. So, and often in these continuity agreements, like you're on, let's say a supported independence platform, or you're on some other platform where they do offer continuity solutions.

They absolutely are looking to grow and create a pipeline to acquire your practice. So when you enter into those documents, there may be a little hook in there called right of first refusal and right of first opportunity, one or the other. It's usually there's not a combination and there's a very important distinction. And I have seen this where a right of first refusal paints you into a corner because often what the language will specifically state is that in

any circumstance where there is going to result in a change of ownership, I, as your continuity solution, have the right of first refusal to buy your practice at the terms and conditions set forth in this agreement. Well, if you aren't updating that agreement consistently, well, then that value may not match. And again, you're going to paint yourself into a corner that you have contractually put yourself into, whereas the right of first opportunity gives you the freedom to

Offer that person the ability to bid on the practice, but you are not obligated to move forward with them. I have seen that happen several times in less than ideal scenarios where they end up just, I went into this right of first refusal, didn't realize what I was getting into. I want to sell to somebody else that I met. It's really cool. That's really going to jive with my clients. This person is now my second up and I'm obligated to go with the second up and they're gearing up with their attorney.

because they're saying I'm in violation of my contract.

David Grau (1:07:43)
And I know we have language like that as an option in our contracts, but I also know, Julia, that there's term language in our contract. Most of the ones that those strategic buyers are putting in place to your point, Ryan, there's no term. It goes into perpetuity. If you die, become disabled, or you retire, we're buying this thing unless we decide we're not.

Julia Sexton (1:08:03)
Well, any final thoughts? Thanks guys for weighing in from each of our common but unique perspectives on the topic of continuity planning, contingency planning, succession planning, how they're similar from a holistic planning perspective, but they are different in terms of how we can uniquely support our clients and their needs.

Todd Fulks (1:08:08)
Okay.

Ryan Grau (1:08:24)
I know ⁓

David Grau (1:08:24)
I'll just say they certainly

impact all the different aspects, right? Like, know, Parker, didn't talk as much about this stuff because you focus on when people are alive and transferring their businesses. But I know it comes up in the obligation section that the buyer needs to have life insurance. They probably need to have a death and disability plan if I'm going to sell my business. So comes to the buyers. Nicole, you talk about ad nauseum in the buy sell terms. Julia, you live this reality every day.

Ryan, I guarantee you talk about it at least weekly, if not monthly, from an evaluation perspective. So it's one of those things, I go back 10 years ago and I feel like contingency continuity got talked about a lot. And nowadays I feel like even though there still are very few advisors who have a solution in place, it just doesn't get talked about as much as it should.

Nicole Frey (1:09:11)
It is simple. It is cost effective. I don't think there's a reason to not have one. Even if you don't have a buyer, SRG has a great solution. We can serve as an advocate for your spouse here at State. there should be nothing that holds back advisors from implementing such a plan. It will give you some peace of mind and making sure that that fits your needs. I think our team can definitely help with that.

Todd Fulks (1:09:19)
Thank

Thank

I would echo that and just say You want to have something that's practical, that makes sense. You do not need to over-engineer it. It's more simple than what people think. We do this. We pump these out on a regular basis. We can help with the nuances with

price terms, the practical aspects, the documentation aspects. I truly do feel that financial professionals have a duty to their clients, to their staff and to their family to put something in place.

Ryan Grau (1:10:08)
of the big issues that I mentioned earlier is just, I don't know where to start, which is why I think a lot of people understand the importance of it, but haven't reached out because they don't have that internal solution like you have when you've got multiple partners or when you have key talent, firm that is appropriately licensed and familiar enough with the business to step up.

So just making sure that if you have questions, reach out, we can talk to you about solutions. We can help you strategize. And we also have resources that we can share with you to get the creative juices flowing, to think about how you can put actual actionable items in contingency plans in place to protect your practice. it just really takes that first step of wanting to solve the problem and put the time and energy because

it's really not that difficult from a time and monetary investment, but the impacts and the benefit of it are astronomical.