In this episode of Plan Francisco, Maxwell chats with Bryan Hasling, CFP, EA of JW Harrison Financial Planning. Their conversational dialogue gives insight into how the structure of a firm/business has changed, and also delves into the evolution of the sale of a business. What happens when a sole owner becomes willing to share the business with other partners? How is this transaction conducted—and is it different for a family business? Maxwell and Bryan get into the gritty details of succession planning while also discussing the future of industry trends which, of course, means the adoption of technology. Click here to listen!
Bryan Hasling is an all-encompassing financial advisor in the Bay Area who works with young professionals and folks looking to retire. He’s taken on a further role than what he started as. First, he seems himself as an entrepreneur trying to grow and move the business forward. Second, a technician who handles the technical aspects. His third hat is managerial—making sure people are satisfied in the workplace. He states, “for most people, the definition of being satisfied in the workplace is working towards something.” Young, driven people want to move forward—own the business, run the firm, etc. The manager is responsible for making this development happen.
Bryan considers himself a manager by heart because he likes playing the big brother role. Although he also sees the importance of also playing entrepreneur. Entrepreneurs are dreamers—visionaries who think about the next step. “How do we grow? How do we make sure systems are in place for everyone to be happy?” His role as an entrepreneur is to make sure the systems are set up so everyone can grow responsibly—fostering the management side of business.
In terms of climbing up in the financial advice world, the goal is to become a partner. Once employees are ready for partnership, they should be able to buy in, to gain equity in the business. Partnership = ownership. In Bryan's firm, you are a partner if you own anywhere from .01-100% of the business. How does this happen? The owner just needs to be willing to sell some of their business to keep their team motivated. But the first hurdle is being willing to share the pie. The person who’s trying to work their way up hits a ceiling if the owner doesn’t want to sell shares.
Once the owner is willing to share, the value of a business must be determined. Typically, a business’s value is annual revenue times two. So, a business that brings in $100,000 a year is worth $200,000, give or take. However, a one-time transactional business is more like 1 or 1.5 times annual revenue.
So what happens when an owner decides to share? Say the business is worth $1 million and the owner decides to give 10% to a partner. But the partner doesn’t have $100,000 on hand, and the owner doesn’t want a lump sum of $100,000 for tax purposes. So they decide on a payment plan. The shares are transferred and a down payment is made, which is taxable. Common arrangements see 0-20% down. They can then get a traditional private loan or choose seller financing (a 6-10 year note/agreement with an assigned loan interest rate which simply has to be above IRS minimums). Of course an attorney is involved which costs a large chunk of money. This is essential due to the importance of planning for “what ifs” with contracts like buy/sell disability insurance for the loan agreement. In the end, it can be a costly endeavor to “make partner.”
A lot of Bryan’s clients are ready to retire and want to liquidate their equity in their business to use during retirement. Their business is their retirement plan. Unfortunately, rarely people are 100% in on buying a $1 million business. So Bryan’s firm coaches these clients and recommends options like a graduated buy-in schedule with multiple partners. Sometimes the process ends up looking like the succession plan Bryan and his boss just did.
Why would anyone do this when not close to retirement? It comes back to the ceiling. If there’s no “ceiling” for an employee to reach, they are more motivated to develop their career. Selling a small percentage of a business to a driven employee is great for morale and retention. It’s a small price to pay for hopefully big dividends.