Common Deal Structures for Buying or Selling a Practice

For an advisor, the decision to sell or purchase another financial practice is a big step and requires a lot of thought, research and even more patience. There is no one-size-fits-all deal structure when it comes to acquiring or transferring ownership of a business. Whether you are selling a financial practice, or buying a financial practice, each deal structure is unique and involves a variety of aspects. Fortunately, many of these aspects are discussed early during the negotiating of deal terms and purchase price determinations—usually followed by thorough business valuations or business appraisals.

However, deal negotiations will likely revolve around more than just numbers and transition dates. They may also involve conversations around succession planning, a practice’s current or future staff, and how communications with clients will be handled during the ownership transition. And while deal structures may vary in the details, the overall initial sale structure still predominantly consists of a down payment and some form of seller financing through an asset purchase agreement and promissory note.

It’s common for most down payments to range between 25% and 40% of the total deal price with seller financing making up the balance of the sale price. This seller financing is usually placed on a performance-based promissory note utilizing some form of look-back mechanism or contingent consideration.

The Three Most Popular Methods of Acquiring or Selling Your Practice:

While the specific agreement and deal structure will depend on the situation, a strategic buyer, or advisor engaging in a practice acquisition, will consider a few common methods of ownership transition. These deal structures include:

Outright Purchase

This type of deal is the most frequently sought deal structure for a variety of reasons. First, it’s more straightforward for both buyer and seller.. Second, it involves both parties reaching a mutual agreement on the purchase price and conditions of the sale, as well as an agreed-upon date of ownership transfer. As with most deals, conversations around past, present and future revenue, profit margins, debt payments and costs of operating the business will contribute to the ultimate valuation of the firm. While determing fair market value is a key step for buyer and seller, the ultimate purchase price could be higher or lower based intangible factors and market conditions.

While an outright purchase is a straight forward approach with buying and selling a financial advisor practice, it still requires many conversations,  behind-the-scenes research and due diligence to ensure a smooth transition for the practice’s future financial health, growth and overall business value.  In fact, these conversations usually happen over the course of several months or years before the final purchase agreement is executed and ownership fully transitioned to the buyer.. Through an outright purchase deal structure, the new practice owners obtain the clients from the former financial advisor’s book of business. Over the months leading to the transfer, the new practice owner will likely conduct introductory meetings with the clients which allows them to connect, build rapport and establish trust prior to their advisor-client relationship becoming formal.

During these advisor-client conversations, clients may share more about their investing goals and discuss any operational concerns or comments regarding the future transition. Apart from client conversations, both current and incoming owners will discuss and address all staffing, real estate, and technology questions to name a few. Active communication and planning helps ensure a smooth transition in practice and day-to-day operations ahead of the final transition date.

Gradual buyout by third party

Through this practice deal structure, the seller has an option to remain the majority owner of the practice being sold, in most cases over the course of several years. During this period of time, the seller gradually monetizes more of the practice’s value and begins ceding more responsibility over to the buyer of the practice. Similarly to an outright purchase, this extended time allows for incoming owners to familiarize themselves with the transitioning clients, build their confidence and strengthen the stability of the practice well in advance of the future transfer of ownership.

An extended time of transfer also allows advisors to assess current client relationships, evaluate day-to-day operations of the firm, and have ample time for the process of financing the purchase. Unlike the outright purchase, the conversations and decisions that occurred before the sale date actually take place throughout the transition period of a gradual buyout. This allows much more financial flexibility for a strategic buyer and provides the selling advisor an opportunity to extend their working time prior to retirement.

During this type of deal structure, special care should be taken to ensure clarity for both parties. It’s not unusual for both parties to have attorney representation. The seller and the buyer should fully understand what is actually being acquired and how, if necessary, the transaction can be restructured or even unwound if there are issues tied to the joint ownership of any assets in question.

Internal succession

This type of financial practice deal structure involves years of mentorship, training, and relationship building. It’s often chosen by practice owners who aren’t yet ready for retirement but want to take a pro-active approach to the future transfer of their practice through succession planning. Engaging in succession planning may often feel more personal for some practice owners. It allows selling advisors to feel assured that their practice’s values and culture can continue when their successor eventually is running the business in their absence. It also allows them more time when navigating the decision of when to sell their practice. 

The more personal nature of this deal structure is part of what makes it a long-term sale option. To begin this process advisors typically choose a junior advisor to mentor within their business in preparation for their eventual takeover. And, while some business owners may choose to use a business broker or business intermediary to find a successor, many may choose to personally reach out to their network in order to find the right fit. During this mentoring, the junior advisor will meet the current clients and begin slowly taking on more responsibilities in running the business. This type of structure also allows a successor to take an active role in growing a firm's market value for the future.

The financing for this type of deal structure may resemble that of a gradual buyout since the seller may choose to continue receiving compensation. The agreed upon compensation varies and is usually based around a multiple on the earnings of the practice. In some cases, and depending on the nature of the relationship between seller and advisor, outgoing owners may continue nurturing relationships and supporting the practice through a more limited capacity and in a business advisory role.

For advisors seeking guidance in a potential sell of their practice, LPL has a team of experienced experts across valuations, deal structures and the best paths forward for your business goals. Learn more about Selling Your Business.