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 that requires a lot of thought, research, and patience. Whether you are selling 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 using some form of look-back mechanism or contingent consideration.

These considerations are especially timely given the number of financial advisors nearing retirement with no formal succession plan in place. In fact, Cerulli estimates that one in four advisors retiring in the next 10 years—who collectively control $10.4 trillion, or 40% of total industry assets—have yet to finalize their succession arrangements. It’s time to take a deeper dive into this topic and explore the how-tos of structuring the sale or purchase of a financial advisory book of business.

The Three Most Popular Methods of Acquiring or Selling a Financial Advisory 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 the following.

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, assets under management (AUM), profit margins, debt payments, and costs of operating the business will contribute to the ultimate valuation of the firm. While determining fair market value is a key step for both the buyer and seller, the ultimate purchase price could be higher or lower based on intangible factors and market conditions.

While an outright purchase is a straightforward approach with buying and selling a financial advisory 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. 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 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. Similar 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, and have ample time for 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 attorneys. 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 proactive 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 the business owner 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 to find the right fit. During this mentoring, the junior advisor will meet with 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. </p>

<p> 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 on a multiple of the practice’s earnings. In some cases, and depending on the nature of the relationship between the seller and advisor, outgoing owners may continue nurturing relationships and supporting the practice through a more limited capacity and in a business advisory role.

Need Help Selling an Advisory Practice?

Seeking guidance in a potential sale of your practice? LPL has a team of specialists who are experienced in valuations and deal structures, and can help you determine the best path forward. Learn more about Selling Your Business.