The story of Coldstream, an employee-owned wealth management firm, is a fascinating journey through the world of finance and business ownership. In this article, we'll delve into the unique path Coldstream has taken, the challenges it has faced, and the insights gained from its CEO, Kevin Fitzwilson.
The Birth and Growth of Coldstream
Coldstream's origins can be traced back to the late 1990s, a time when tech giants like Microsoft and Amazon were just emerging. The firm's founders, with their Bank of America background, recognized an opportunity to serve the growing tech industry. Their strategic location near Microsoft's campus paid off, with over half of their initial clients being Microsoft employees.
As the tech industry boomed, so did Coldstream. The firm's first round of succession planning in 2002 presented a pivotal moment. With two founders seeking liquidity, the management team faced a choice: sell or bring in external capital. They opted for the latter, partnering with Boston Private, a publicly traded bank. This move was rare at the time and provided valuable lessons about minority investments and private equity partnerships.
The Journey to Employee Ownership
The Carlyle Group's recapitalization of Boston Private further highlighted the complexities of private equity involvement. Coldstream's management team, including Fitzwilson, learned the importance of financial discipline and long-term relationships. This experience likely influenced their decision to buy out the bank and private equity firm in 2011, returning Coldstream to 100% employee ownership.
From this point, Coldstream embarked on a disciplined growth plan, with a focus on both M&A and organic growth. The firm expanded its service offerings to include tax prep, consulting, risk management, and even investment banking. Today, Coldstream boasts $15 billion in assets and $100 million in revenue, with a diverse ownership structure that includes 170 of its 250 team members.
The Power of C Corp Structure
One of Coldstream's unique features is its C Corp structure, a departure from the typical LLC or flow-through structure in the industry. This choice has allowed Coldstream to involve owners at lower dollar thresholds, making ownership more accessible to younger team members. The C Corp structure also simplifies tax compliance, a significant advantage for those with smaller ownership stakes.
This structure has enabled Coldstream to expand its ownership group significantly, fostering a strong sense of alignment and motivation among its employees. The ability to issue stock options further deepens this ownership culture, creating a powerful incentive for talent retention and attraction.
Succession Planning and the Pressures of Ownership
Succession planning is a critical aspect of Coldstream's strategy. The firm takes a rolling three, five, and ten-year approach, anticipating liquidity needs and potential retirement waves. The goal is to keep ownership stakes below 10% to maintain flexibility and avoid potential cap table issues.
Fitzwilson's own ownership stake of 37% is a testament to his commitment to the firm's long-term success. His transparency with the team about his intentions to remain involved ensures stability and continuity. However, he acknowledges the pressures that come with employee ownership, particularly the need to balance fair value for long-term owners with the demands of reinvestment and M&A.
M&A Strategy: Cultural Alignment and Human Capital
Coldstream's M&A strategy is guided by a focus on cultural alignment and human capital. The firm seeks partners who bring more than just assets and revenue; it wants to enhance its combined organization's intellectual and human capital. This approach is influenced by board members like Rush Benton and Heather Redmond, who bring valuable insights and experience.
By controlling the pacing of M&A and prioritizing cultural fit, Coldstream aims to avoid the pitfalls of forced growth and IRR targets. The firm's stated goal of two mergers per year demonstrates a disciplined approach, with a recent period of three mergers in 11 months highlighting its ability to integrate and expand rapidly.
Conclusion: A Unique Path Forward
Coldstream's journey is a testament to the power of employee ownership and a disciplined growth strategy. The firm's unique C Corp structure and focus on cultural alignment in M&A set it apart in the industry. While the pressures of ownership are real, Coldstream's leadership remains committed to its path, recognizing the benefits it brings to clients, teammates, and the business as a whole.
As Coldstream continues to expand geographically and adapt to wealth migration patterns, its story serves as an inspiring example of how a wealth management firm can thrive through a combination of strategic vision, cultural alignment, and a deep commitment to its people.
