Four years ago you graduated from Western Kentucky University with a B.S. Finance degree, with a concentration in personal financial planning.

After working for a larger firm for two years, you and another adviser you met at the firm decided to “go out on your own.” You formed your own “registered investment adviser” firm. Setting up the firm, including legal fees, accounting fees, and compliance consulting fees, and first and last months rent and security deposit on a new office location, and office furniture, computers, and furnishings, cost you about $20,000.

You also paid a securities law attorney $5,000 for assistance in navigating the employment agreements both of you had signed with the prior firm. Fortunately, the prior firm did not sue you, as you carefully chose your new office location to be outside the geographic boundaries of the non-compete. Additionally, while you placed general advertisements in the newspaper advertising your new firm’s formation, you did not directly solicit any of your former clients at the prior firm.

After a rough first two years, you and your partner were quite successful. About half of the clients you served in the prior firm found you and your partner, through the newspaper advertisement and just seeing you around town, and joined as clients of your firm. And, through a good system of prospecting (networking for clients), you also have secured several new clients. Additionally, you’ve taken the view that each new client is a client of the “firm,” not any one partner, and often both of you work with the same client.

Your investment advisory and financial planning firm now has $300,000 of annual revenue, from “assets under management” recurring fee revenue, after the first two years. Very impressive, in such a short-time! About $6,000 a month goes out to general overhead, software, and other costs. Each of you now take home about $80,000 in salary, and you pay your one assistant $40,000 in salary and benefits. Your firm has $20,000 in cash at present.

You like having a partner, as you can consult each other on issues that arise, and can cover for each other if one of you is tied up, goes on vacation, etc.

You and your partners have decided to spend $5,000 on an attorney, to get better legal documents in place.

You have been advised that your firm is worth one times its annual revenue at present – in other words, about $300,000. However, if your firm grows over the next six years, as projected, and has $2,000,000 of annual revenue, the firm will likely be worth twice its annual revenue. By that time, you estimate that the annual salaries of you and your partner will be $500,000 each. And the firm will be worth $4,000,000, at a minimum. In other words, ten years out of college your one-half interest in the firm could be worth $2,000,000!

Sketch out the terms of a buy-sell agreement, and employment agreements, that you and your co-owner desire,

1. Buy-sell agreement:

1. How will each in the firm be valued?

2. Will you obtain life insurance in the event either owner dies?

3. If so, who will own the life insurance policy on your life?

4. Who will be the beneficiary of the life insurance policy on your life?

5. Should you obtain “term” insurance or “cash value” insurance (“permanent” insurance” – such as whole life or variable universal life insurance)?

6. How will payment be made to the other partner is either of you departs the firm, due to disability, or termination of employment (other than by reason of death)? Should you tie the payments to receipt of revenue from clients? Should you tie the amount paid to the receipt of future revenue from existing clients? Over how long should payments be made?

7. Employment agreement:

1. What are the geographical and time constraints you desire to impose for the non-compete portion?

2. Will you have a non-solicitation agreement? Describe what a “non-solicitation agreement” means.

3. Will you have a “trade secrets and confidential information” clause? Describe what this type of clause is.

Answer rating: 100% (QA)

1 1 The firm will be valued at two times its annual revenue at a minimum This valuation will be used in the event of the death disability or retiremen... View the full answer