S4. Ep. 1 - Using Succession as a Growth Strategy with Susie McEuen of Oak Street Funding

Bridget Haight: Hi, and welcome to On Point, a podcast by Oak Street Funding, where we bring research and data backed insights to dig into the minds of industry leaders to learn how we stand out, navigate, and break through this ever-changing industry. I'm your host, Bridget Haight, and you can support this podcast by following us on Spotify, Apple Podcasts, on our website, or wherever you get your podcasts. We will be there hanging out, talking to industry leaders, and ready to empower you to grow your business. Now, let's get on point. Today, I am delighted to welcome Susie McEuen to the show for the first episode of season four. Susie is Vice President of Strategic Markets for Oak Street Funding. And over the years, she has helped hundreds of business owners fund and structure loans for succession, acquisition, and working capital. Today, she's going to share ideas for growth and succession in 2023. Welcome, Susie.

Susie McEuen: Thank you, Bridget. It's a pleasure to be here today.

Bridget Haight: It's good to work with you again.

Susie McEuen: Thank you.

Bridget Haight: So, we'll just start right in. You know what? I was reading over my notes. And for those who are unfamiliar with the terms, what is inorganic growth, organic growth, what is that?

Susie McEuen: Organic growth is internal revenue growth and using your own product or services to generate revenue for your firm. Inorganic is looking for other ways to generate revenue by possibly buying a business of some sort or offering other services that have not been offered before to grow your business.

Bridget Haight: Got it.

Susie McEuen: And so I know we're going to touch base on that.

Bridget Haight: We will, but thank you for that clarification. So, many business owners see a lot of uncertainty as they look ahead into 2023. What would you say to those business owners?

Susie McEuen: They have a lot on their plate right now.

Bridget Haight: Yes.

Susie McEuen: There's a lot of uncertainty, and they're probably facing, I considered headwinds right now. And that is due to the volatility in the market, the uncertainty with interest rates, also with the fact that it's tight labor market and geopolitical situation that we have with Ukraine and Russia. And so it sounds like I'm being a Debbie Downer, and I apologize for that.

Bridget Haight: It is the world right now.

Susie McEuen: It is. But with turbulence, there's also opportunity.

Bridget Haight: Sure.

Susie McEuen: So, it's looking for those opportunities to grow your business. And I just looked at the prime rate. February 1st, we raised the rate, or the Feds raised rates up to 7.75 on prime. It's the highest it has been since September of 2007.

Bridget Haight: Oh wow.

Susie McEuen: So as you know, I work with a lot of advisors and RIAs, and I'm sure they're trying to figure out if they have variable rate type loans, what that's going to do with the cash flow of their business. So, I'm sure that has a lot of uncertainty. Some of the things I'm hearing from my clients when I say about the tight labor market is they're having a hard time finding talent.

Bridget Haight: Okay.

Susie McEuen: And it's in cities or towns that are not like Dallas, San Francisco, Phoenix or New York. It's other towns. There's really having a hard time finding talent. And I talked to an advisor yesterday, and it's causing to the point where they think that they're going to have to hire people that are not necessarily in the industry and just basically train them.

Bridget Haight: Okay. This is a common theme. I remember CPAs are in high demand as well, that those are.-

Susie McEuen: Right.

Bridget Haight: This is not unfamiliar news, actually. So, do you feel that inorganic growth is still an option in 2023?

Susie McEuen: Yeah, I do. 2022 was really good as far as M&A. It slowed down in the fourth quarter. I'm still seeing activity. I will say though, that I think it will slow down even more so because of the volatility in the market, rates going up. I think the buyers and the sellers are going to be more selective of who they're going to be working with, and things may not move just quite as quickly. The one thing that I will say back on your earlier question is that RIAs and advisors that are looking to buy books of businesses, they really need to work with their financial team, that'd be their banker, their accountant, their CPA and attorneys, to make sure that they put together a buy- sell agreement that's going to work really well for not only them, but also the lender that they end up possibly working with. It's going to be really important, because of the state that we're in as far as the uncertainty even with credit, is that they should really have their financial information in order. Be proactive.

Bridget Haight: Sure. That makes sense. So, have you seen any recent trends from business owners pursuing inorganic growth?

Susie McEuen: Yeah. They're being creative. And I actually was with a team last week on a due diligence trip, and they were two independent advisors that have obviously their own firm. And they said during COVID, they're like, okay, what can we do differently to grow our business? And so what their goal is now is finding independent advisors that wants to join their team and use their brand, use their services. And it's great for advisors that may not want to have all that pressure of actually running their business. And so a lot of teams are now looking at adding on advisors to add revenue to their bottom line, kind of scale up. But anyway, these advisor teams are looking at ways to grow revenue by bringing on independent advisors that want to use their services, their brand, to help even grow their book of business. And it helps generate revenue to the bottom line, basically.

Bridget Haight: Got it. So, what organic growth trends have you seen recently in the RIA industry?

Susie McEuen: With the fact that we've had so much volatility in AUM, assets under management, because of just drop in the stock market, I think advisors and RIAs are looking at opportunity to expand their relationship with their current client base. They're having to look at things a little bit, I'm sure, differently, because we have had so much asset appreciation over the last several years, great growth. And so looking at these RIAs and seeing if they have grown because of asset appreciation, or are they really bringing in new revenue to their business? And so in doing that, because of the great asset appreciation, it could get easy to not, I want to say, provide as much one- on- one services with your clients. They're going to have to really dig a little bit deeper, look for opportunities that to gather new assets from elsewhere. That's going to help with their organic growth. They're going to have to look at possibly gen two relationships. So if it's me, have my accounts with an investment advisor, and that investment advisor should be talking to my kids, adult children to make sure that if something happens to me, those assets stay. So, they need to look also at marketing opportunities that maybe they haven't had to do in the past because the market has been so positive as far as growth.

Bridget Haight: Right.

Susie McEuen: So, gathering new assets, looking for opportunities where maybe a client has accounts elsewhere. I do hear this quite a bit with opportunities where buyers and sellers are coming together, and the buyer is coming to us for financing and they're saying, " I looked at his book or her book of business and there's opportunities here that they just have not picked up on. And so I see how I'm going to be able to grow this book of business now that the seller is out of the picture."

Bridget Haight: Got it. Okay. So, here's a big one. In their Q4 deal book, DeVoe and Company reported another record year of M&A activity with a slowdown in Q4 due to rising rates and subsequent market conditions. As buyers become more selective for M&A, do you see organic growth becoming a more prominent choice for RIA firms?

Susie McEuen: There's still going to be sellers out there that need to sell their books of business or RIA because of health reasons, their age, or an opportunity where they meet the right advisor or right RIA that's going to be their succession. And there's going to be M&A out there. I don't think it's going to be coming to a screeching halt. I'm working now with a couple different M&A situations where it's health related issues. So, they're trying to make sure they're coming together, have everything in place because the seller's got current health issues. Actually, two right now that I'm working on as far as closing. But organic is definitely, like I mentioned earlier, is really critical right now just to keep the revenue growing. We're seeing a downturn in obviously in AUM at these RIA practices, but there are RIAs out there that are just... They're still growing, and they're growing because they're doing the right thing. They're out there finding new business, they're finding possibly individuals that maybe own a business, and they're selling it. So, those are opportunities that are still going to come about and help with the organic. So, it's going to be a combination thereof, but everybody's been really riding the wave with asset depreciation, and also the fact that there was such a flurry of activity of sellers and buyers out there.

Bridget Haight: Oh, okay. So, some business owners may be considering succession this year. Can these businesses still grow in 2023?

Susie McEuen: Oh, yeah.

Bridget Haight: Okay.

Susie McEuen: Absolutely. I'm doing a lot more succession financing now than even M&A. In my pipeline, obviously, I've mentioned I've got acquisitions that we're doing financing for, but it seems as more activity with succession. The owners out there, they need to have a continuity plan, and they need to have a succession plan. Continuity plan is where if say I'm the owner of the RIA or I'm an advisor, and Bridget, I want you to step in if I have any health issues or I suddenly pass away, and that's a continuity plan.

Bridget Haight: Okay.

Susie McEuen: A succession plan is where, Bridget, I know that you would be a great successor for my business.

Bridget Haight: Right.

Susie McEuen: And a little bit about my book of business. We've worked together maybe. We're independent of one another, but we have very similar styles as far as investment philosophies, and so I've put a formal succession plan together. And it spills out that there's a plan that perhaps you might buy into my RIA in tranches. And that is critical too. There are owners of RIAs that have a tendency to wait until the last minute. So, I guess my word of wisdom is start sooner than later. And the reason is, if you're my successor, I want you to be able to forward to buy my book of business or buy my RIA. And the sooner, the better, just so I can get my return on my investment.

Bridget Haight: And what constitutes sooner? It can't just be age, right? It's also just where they are in life, and what else? How do you do that?

Susie McEuen: Yeah, great question. I just closed on, this is a really good example, an RIA that the owners are actually in their forties, the two.

Bridget Haight: Wow.

Susie McEuen: And that's still fairly young, late forties. But what they wanted to do is sell some ownership to six key either advisors and employees, it's kind of a mix, and it's the next gen. And they see this group being their successor. And I was really impressed with that because they're thinking long term to make sure that the legacy passes on and their clients are going to be taken care of. And so, sooner than later. And they can buy incremental shares, and it becomes affordable. And we here at Oak Street Funding, that's something that we can do. We're a conventional lender and we have the capacity to lend up, not that anybody would ever need 50 million to do succession planning, but we can help these individuals that either their key employees or advisors be able to afford to buy into a practice. And we make these loans to the individual. We don't encumber their homes. We don't in involve their spouse. It's a business loan. And I think we have a really good program to help. And I'm actually doing another set with another RIA with six key employees that are... I think they're all pretty much advisors. So, it seems like we're getting a lot of these lately. And I think it's just because people are realizing they need to start sooner than later.

Bridget Haight: And it's the mark of a steady business as well, knowing that you're going to be there and stand the test of time and you're going to pass this on to your next generation.

Susie McEuen: And clients love it because they get to know all these other people on that team instead of, I just know Susie. And what if something happens to Susie?

Bridget Haight: Right.

Susie McEuen: And that's really critical for success of the business.

Bridget Haight: That's great. Thanks, Susie. So, what should advisors prioritize during succession to ensure continued growth of their business?

Susie McEuen: Well, first of all, definitely for firms, a lot of firms are doing this more so than ever before, they work in teams.

Bridget Haight: Okay.

Susie McEuen: So, maybe Mrs. Jones or Mr. Smith is in the office, and Bridget, you and I, I may be a financial planner, but you're the portfolio manager, we work as a team to help meet their goals. They don't just know me, but they know you. That's got to be probably one important priority. The other thing is that if I'm selling my firm or selling shares to you, is to have you involved the operations of the business. And another good example is I worked with a team on the east coast. Two founders sold their RIA to the next gen. And what was really inspiring about this particular situation, I worked with the two buyers, the gen two for probably 18 months-

Bridget Haight: Okay.

Susie McEuen: ...and got to really know them.

Bridget Haight: Yeah.

Susie McEuen: They got to know us at Oak Street. And instead of them just coming to me on day one saying, " Hey, I'm ready to do the financing," we got a chance to know each other and make sure we were the right partner for them. And as I got to know the buyer, the gen two, they shared with me how the founders had them kind of take hold the reins as far as operating and running the business. That is important, along with those relationships. So, it takes time to get to know these clients, and also how to run the business. And the next gen is... Your question about organic growth with succession, new leadership, new opportunities, new style, new ways of doing things, that can lead to a positive growth situation in a business.

Bridget Haight: That makes total sense. So, what are some core aspects to set up a smooth succession?

Susie McEuen: Definitely have a plan, obviously.

Bridget Haight: Right.

Susie McEuen: Work with your advisors, being your banker, your CPA, your attorney. Have a transition plan, have something definitely in writing. There's consultants out there that can help make sure that's kind of formalized as far as planning on how to reach out to the clients, communication pieces as far as marketing letters, dinners, state of the union events. I've heard so many different ways that our clients have actually planned this to make sure successful transition during succession.

Bridget Haight: Okay. So, do you have any last piece of advice to business owners planning a succession in 2023?

Susie McEuen: It's always good to start working with your lender. We like to be able to get to know our clients so we can be helpful as far as structure. As a conventional lender, every deal that we work on is different, M&A or succession. And that's the fun that I have as far as helping my clients, as far as helping them with the structure, that's going to meet their needs and the cash flow of their business.

Bridget Haight: Okay. Well, Susie, at the end of a show, we like to ask a fun little question. And the question we have for you today is, if you could choose to live in any other time, which period would you like to experience firsthand and why?

Susie McEuen: Oh, wow. Okay. I got to be careful with this just because-

Bridget Haight: It's a good question.

Susie McEuen: No, it's a great question. I would say probably sometime before social media-

Bridget Haight: Yes.

Susie McEuen: ...internet.

Bridget Haight: I can get on board with that.

Susie McEuen: As a child, for a few reasons, the pressure of being somebody or looking a certain way. Also, the ability to play outside and not feel a threat of any issues. So, as a child. But as a woman, I would say today is the day because there's so much more opportunity for professional women. And then I would say also, the seventies and eighties have great music, so-

Bridget Haight: Okay.

Susie McEuen: ...I'll leave it at that.

Bridget Haight: I love your answers. Thank you very much, Susie.

Susie McEuen: Thank you for the time. I appreciate it.

Bridget Haight: Yes, thank you. I learned so much today.

Susie McEuen: Thank you.

Bridget Haight: So, thank you all for listening to On Point, a podcast by Oak Street Funding, where we bring research and data backed insights to dig into the minds of industry leaders to learn how to stand out, to navigate, and break through this ever- changing industry. I'm Bridget Haight. Tune in next time wherever you listen to podcasts as we get on point. And don't forget to subscribe and leave us review.