Key Takeaways
A succession plan is only as strong as its financing assumptions.
If next-generation leaders cannot realistically fund equity purchases under conservative growth scenarios, the plan may falter when tested. Financeability should be modeled — not assumed.Ownership transition without governance transition creates fragility.
Granting equity without gradually transferring decision-making authority can stall leadership development and dampen long-term firm value. Economic ownership and operational control must evolve together.Valuation and compensation structures must stay aligned with reality.
Outdated valuation formulas and compensation systems that do not support capital formation can undermine even well-intentioned plans. Durable succession requires periodic recalibration as markets, growth rates, and firm dynamics change.Many RIA founders take comfort in being able to say, “We have a succession plan.”
Equity has been allocated. A buy-sell agreement is in place. A timeline has been discussed. Perhaps junior advisors have even begun purchasing small ownership stakes.
On paper, the firm is prepared.
But in our experience, the presence of a plan does not guarantee the viability of the plan.
The most significant risks in RIA succession are rarely obvious. They sit quietly inside financing assumptions, governance structures, and valuation frameworks — only emerging when the transition is already underway. By the time they become visible, the costs are higher: strained relationships, disappointed expectations, and sometimes a forced pivot to an external sale.
Below are four of the most common “silent risks” embedded in otherwise well-intentioned succession plans.
1. The Plan Isn’t Financeable
Many internal succession plans rely on a simple premise: the next generation will buy out the founders over time.
The mechanics, however, are more complicated.
Junior partners often lack the liquidity required to fund meaningful purchases. Even when third-party financing is available, debt capacity is constrained by personal cash flow, firm distributions, and lender underwriting standards. If the valuation is based on peak-market assumptions, or if growth slows, the financing math may not work.
Common pressure points include:
Junior advisors being asked to personally guarantee debt.
Compensation structures that leave insufficient room for debt service.
Valuations that imply purchase prices well beyond realistic borrowing capacity.
Reliance on seller notes that concentrate risk back with the founders.
A succession plan that depends on capital the next generation cannot reasonably access is not a durable plan. It is an aspirational one.
When financing constraints collide with fixed timelines, firms often face difficult trade-offs: lower the valuation, extend the transition, restructure compensation, or consider external alternatives. Each adjustment can create tension, especially if expectations were set years earlier under different market conditions.
Financeability should be tested, not assumed. Scenario modeling under different growth and profitability outcomes can reveal whether the plan is resilient or fragile.
2. Phantom Equity Without Real Authority
Another common structure involves granting economic participation to junior advisors, sometimes through profits interests, phantom equity, or minority ownership stakes, while founders retain full operational control.
From a founder’s perspective, this can feel prudent. After all, the firm’s reputation, client relationships, and strategic direction have been built over decades.
From the next generation’s perspective, however, ownership without meaningful authority can feel hollow.
If junior partners:
Have limited influence over hiring or compensation decisions,
Cannot meaningfully shape strategic initiatives,
Have synthetic equity but not actual equity,
Or lack visibility into long-term planning,
Then their psychological ownership may lag their economic ownership.
This misalignment often manifests gradually. Decision-making slows. Initiative declines. Cultural energy shifts. The firm becomes dependent on founders for both client leadership and internal momentum. This dependence can be exacerbated if synthetic equity (e.g. phantom stock, stock appreciation rights, etc.) has been granted to the next generation without an actual ownership stake.
True succession is not merely an economic transaction; it is a governance evolution. Authority transfer must precede or at least accompany equity transfer. Otherwise, the firm risks arriving at a future where ownership has technically changed, but leadership has not.
Equity without authority rarely produces owner-level behavior. And without owner-level behavior from the next generation, value creation can stall precisely when continuity is most needed.
3. Outdated or Artificial Valuation Frameworks
Many internal succession plans are anchored to valuation formulas written years earlier and are determined by multiples of EBITDA or revenue with a predetermined discount.
These formulas often make sense at inception, particularly when designed to create predictability. But over time, market conditions evolve. Interest rates change. Buyer appetite shifts. Growth rates fluctuate. Competitive dynamics intensify.
When internal valuations diverge materially from market reality, several risks emerge:
Founders may feel they are leaving money on the table.
Junior buyers may overpay relative to economic value.
Disparities between internal and external values can create tension if an unsolicited offer arrives.
Tax planning assumptions may no longer align with actual economics.
Regular, independent valuation analysis can mitigate these risks. Even if the firm ultimately adheres to a formula-based approach, understanding how that formula compares to broader market data provides clarity.
Valuation should not be a static number embedded in a decades-old agreement. It is a dynamic output influenced by growth, profitability, client demographics, and capital market conditions.
Without periodic recalibration, succession plans risk being anchored to outdated assumptions, and those assumptions tend to surface at precisely the wrong time.
4. Misalignment Between Compensation and Capital Formation
Internal succession requires capital. Capital requires savings. Savings require structure.
Yet many firms unintentionally undermine their own transition plans through compensation design.
Consider the common scenario:
Junior advisors are paid competitively, sometimes generously, in cash compensation.
They are also expected to purchase equity over time.
However, compensation does not meaningfully reward business development, profitability improvement, or firm-wide value creation.
In this structure, capital formation becomes difficult. If junior advisors must fund equity purchases primarily through after-tax income, progress may be slow. Meanwhile, if compensation is not tied to long-term value drivers, incentives can skew toward short-term production rather than enterprise growth.
Durable succession plans often integrate compensation, ownership, and performance:
Clear pathways for equity accumulation.
Incentives tied to revenue growth, client retention, and profitability.
Structured distribution policies that balance reinvestment and liquidity.
Expectations around personal capital commitment.
When compensation and ownership strategy operate independently, the succession plan can feel like a parallel track rather than an integrated system.
Why This Matters More Today
These risks are not new. But the environment has changed.
Many RIA founders are now firmly within the traditional succession window. Demographic pressure is real. At the same time, external buyers (including private equity-backed aggregators) continue to offer liquidity alternatives that may appear simpler and more immediate.
Interest rate volatility has altered financing assumptions. Organic growth, while strong for some firms, has moderated for others. The margin for structural inefficiency is thinner.
In this environment, a flawed internal plan is more likely to face a stress test. If the internal path appears uncertain, founders may feel compelled to explore external options, sometimes later in the process than ideal.
The cost of a misaligned succession plan is not only economic. It can affect morale, retention, and culture. A well-designed transition reinforces stability. A poorly designed one introduces ambiguity.
What a Durable Succession Plan Looks Like
While no two firms are identical, resilient internal succession plans often share several characteristics:
Realistic Financing Assumptions
Financing capacity is modeled under multiple growth scenarios. Debt service obligations are aligned with compensation and distribution policies.Periodic Independent Valuation
The firm understands how its internal framework compares to broader market conditions and adjusts when necessary.Gradual Governance Transition
Authority transfer is intentional and phased. Decision-making structures evolve before full economic transfer.Integrated Compensation and Ownership Strategy
Incentives reinforce long-term value creation and capital formation.Clear Communication
Expectations are revisited regularly. Assumptions are transparent. All parties understand both the opportunities and risks.
Perhaps most importantly, durable plans are treated as living structures. They are reviewed, tested, and refined as conditions change.
Closing Thoughts
Having a succession plan is an important first step. But the real measure of its strength is not whether documents exist, it is whether the economics, governance, and incentives align in practice.
The silent risks described above rarely announce themselves early. They surface when financing is sought, when leadership transitions stall, or when market conditions shift.
For RIA founders and next-generation leaders alike, the goal is not simply to have a plan. It is to have a plan that can withstand scrutiny, market cycles, and the realities of capital formation.
Internal succession remains one of the most powerful ways to preserve culture, reward long-term contributors, and sustain independence. But durability requires more than good intentions.
It requires structural alignment, before the transition is underway, not after it is tested.
About Mercer Capital
We are a valuation firm that is organized according to industry specialization. Our Investment Management Team provides valuation, transaction, and consulting services to a client base consisting of RIAs, asset managers, and trust companies.