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Buy-sell agreements for effective succession

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From the outset, RIA advisers should have a practical idea about how their careers will end.

One key to succession planning is a buy-sell agreement that protects the firm’s principals, their loved ones, clients and employees.

“Practice what you preach. As an RIA and adviser, you make sure that clients who are business owners have a clear plan that helps them prepare for the unexpected,” says Mark Schoenbeck, a CFP and senior vice president of business consulting at Kestra Financial, an independent adviser platform in Austin, Texas.

“If you are doing it for them, you should do it for yourself,” he says. “Don’t be the dentist’s kid with bad teeth.”

A buy-sell agreement can allow an RIA to prepare for the unexpected, protect personal assets as well as the business, and provide peace of mind, Schoenbeck says.

“The agreement should spell out who will purchase the business,” he says.

“Events that trigger the buy-sell might include death, disability, divorce or debt. The more specific and the clearer, the better,” Schoenbeck says.

Other components of a buy-sell can include details on valuation methodology and how the purchase will be funded.

“For all of these provisions, clarity is the key,” Schoenbeck says. “RIAs should eliminate any chance for confusion, misunderstanding or interpretation in the buy-sell.”


A lack of clarity may arise if there isn’t enough detail provided on valuation methodologies or processes.

“Be careful of overly simplistic valuation rules of thumb. Instead, set a clear formula and process,” Schoenbeck says.

“Also, determine who will be consulted to help moderate the process in case of disagreement,” he says. “Setting it up correctly from the beginning is paramount.”

As for valuation, buy-sell arrangements can differ widely.

“Valuation depends largely on the relationship between the two parties,” Schoenbeck says.

“Buy-sell valuations between existing business partners typically will come in lower than a strategic buy-sell between two firms with no existing relationship or partnership,” he says. “In addition, the ‘friendly’ buy-sell methodologies we see are usually more revenue-oriented than [earnings before interest, taxes, depreciation and amortization-based].”

Valuation is just the first step, says Erika Safran, a CFP and principal at Safran Wealth Advisors in New York.

“There also must be a realistic method of funding any buyout,” she says.

“If the agreement is to be funded with life insurance, for example, make sure the policy is kept up to date,” Safran says. “I know of one case where the firm grew but the insurance policy didn’t, so the insurance policy wound up being worth only a small fraction of the purchase price.”

This story is part of a 30-30 series on smart strategies for RIAs.

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