equity ownership is an increasingly critical part of a firm’s compensation strategy for employee retention and succession planning just be careful to avoid these missteps not knowing your worth many rias decide to offer equity stakes to advisors without really knowing their firm’s value this “makes it difficult to ascribe how much equity they are willing to give to someone else” says harris baltch head of ma and capital strategies at dynasty financial partners best practice is to have a valuation done by an objective and welltrained third party that can then be used in combination with a sound internal valuation methodology experts say most firms use a thirdparty for valuation at least initially when establishing a procedure says lisa salvi managing director of advisor services at schwab then they might use another method or a combination to determine valuations internally for the next few years before doing another external valuation she says a good valuation will not only come up with a value but also flag areas where tweaks may be needed to improve valuations baltch says having a welldefined methodology can also help circumvent issues related to an owner dying suddenly or leaving abruptly he adds schwab research from 2019 shows that 40 of firms with 250 million or more of assets under management use a multiple of revenue while 30 of firms use a multiple of ebitda to calculate valuation twentyone percent of firms with assets of 250 million or more reported not having done a firm valuation structuring missteps at the median firm one in three staff are equity owners according to schwab’s 2021 ria compensation report structuring these plans is crucial firm leadership always has to think through their objectives in offering equity salvi says are they trying for example to encourage retention or is it more of a succession planning tool they also have to consider what ownership is going to mean and what responsibilities it includes salvi says for instance does it come with decisionmaking ability or voting rights and do all equity owners have leadership positions “the answers to those questions can look different for different firms” salvi says another consideration do owners have to buy in or are they awarded shares of the firm or is there a mix of the two “there’s not just one set way to do it you just have to be clear on what that looks like and how it works” she says david devoe ceo of the advisor consultancy devoe  company favors the buyin approach because it helps ensure employees are invested in the future of the business for firms that give away equity he cautions against offering a steep discount without explaining the thought process when employees receive equity for the first time the person could come to expect the same discount down the road whereas the founder may have no intention of continuing to offer that perk in the future he says think ahead when defining a plan it’s a mistake to think only in the present rather firm leadership needs to think about how much equity they want to share in the aggregate this provides a framework over time of what you’re going to share says john furey founder of advisor growth strategies a phoenixbased consultancy for the wealth management industry “you shouldn’t just hand out equity in a oneoff linear way without having a strategic plan” he says the plans also should be revisited from time to time to ensure they remain appropriate it’s common for firms to outgrow a plan they’ve built in the past “firms have doubled and tripled in size which calls for a recast” he says make equity affordable if your business objective is to get more owners and retain key people for the long haul as opposed to selling outright to the highest external bidder the internal equity you offer has to be affordable furey says this is something an outside consultant can help firms determine this is even more important now with external valuations so high firms sometimes make the mistake of thinking they should offer internal equity at the rate they could potentially get from an outside buyer he says “if you try to apply an external valuation internally the affordability factor goes way down” he says “it’s an issue that we’re coming across more often” erect guardrails firms sometimes craft equity agreements that don’t have appropriate provisions to sufficiently protect the firm many older agreements for example don’t have any guidance on how buybacks should work devoe says “zero information means everyone’s going to court” he says “the reality is when you think about legal and structural agreements you simply have to think through the worstcase scenarios and then you work backwards from there and make sure the appropriate risk mitigations are in place” he says input from experts can help avoid the horrorstory situations that can ensue when firms try to craft agreements on their own devoe offers the example of a firm that got burned by not having an appropriate buyback arrangement in place the departure of one highproducing shareholder and another top employee cost the firm millions since under the terms of the shareholder agreement the firm had to buy back shares immediately at two times the previous year’s revenue devoe says furey of advisor growth strategies offers another example of a firm that didn’t restrict when an equity stake could be sold costing the firm dearly a contributor left the firm within three years of receiving equity sold the equity back to the firm and made a windfall while there needs to be liquidity it can be restricted and made less attractive for the contributor to sell he says ideally a buyback agreement should state that anytime someone sells their shares a firm will be valued by an objective thirdparty expert based on current circumstances devoe says also there should be provisions to protect the firm in case shareholders leave on unfriendly terms “most firms are more than happy to give a retiring partner a fair valuation but ideally they are not paying a similar price for someone who’s damaging the firm” he says