A contingency plan is an agreement between two or more advisors designed to protect your business in case of your death, disability (temporary or permanent), loss of license, and possibly even retirement (although most plans do not deal with succession planning).
A contingency plan has two main priorities: 1) Ensuring that your business and clients are taken care of in your absence; and 2) Providing you/your estate with a fair value for what you’ve built.
- Revenue Sharing Agreements: This plan type is the most basic, simply agreeing at the broker-dealer level to share revenue between a named successor and your spouse. While simple and easy to setup, many broker-dealers no longer support these types of plans and they provide the exiting owner the least favorable tax treatment.
- Buy-Sell Agreement: This plan type is a contract between an owner and potential buyer to sell the business in case of a triggering event and contains a valuation methodology, payment terms, and other obligations of the parties necessary to create a turnkey plan that could be quickly executed and provide the selling advisor or their spouse/estate with the most favorable tax results.
- Cross Purchase: Similar to a Buy-Sell Agreement but this type of agreement is reciprocal with the two parties agreeing to purchase in case of a triggering event.
- Shareholder/Partnership Agreements: These contracts are among multiple owners of a company, ensuring that in case something happens to an owner, the business continues and the family receives the value. Given the internal nature of the transition, these plans have very good retention rates and are tax favorable relative to a revenue sharing agreement.
- Contingency Retainer: For advisors that do not have a contingency partner, but want to ensure the business is transferred to a qualified successor and a fair value is received, a Contingency Retainer agreement is a standby type of agreement between the advisor, Succession Resource Group, and the broker-dealer/custodian. The agreement engages SRG to work with the spouse and broker-dealer/custodian to find and close a deal with a buyer, usually within 60 days of a triggering event.
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