Buy A Financial Advisor 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:
buy a financial advisor practice
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.
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.
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.
Using a full-service, concierge approach to supporting advisors during key points in their life cycle, our comprehensive and customized solutions enable wealth managers to achieve their goals for mergers & acquisitions, enterprise development, valuation, and growth.
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First-time buyers and sellers are surprised by the many aspects of buying and selling a financial advisory practice. One of the largest, and sometimes most unpleasant, surprises they encounter is the tax implications the transaction has on both parties. Each situation is unique, and it is always best to consult with a tax professional who can review and understand your business, and structure the transaction in the best way to minimize the income tax implications. However, to provide you with a general sense of the income tax implications of buying or selling a financial advisory practice, we spoke to Alan Salomon, CPA/ABV, CVA to give us an overview of what to expect.
Acquiring a practice is one of the best ways to quickly grow your practice. That's why Ameriprise Financial invests in a dedicated team of acquisition specialists with deep experience and knowledge in this powerful and proven way to grow your practice. Your local team is also ready to help you source leads, make introductions and be at the table as you manage negotiations.
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When discussing the purchase or sale of a financial practice, skating to where the puck is going to be, means you have in mind an idea of where it is you want (and need) to be at the end of the transaction. Knowing the result helps guide your decision making. It starts with fully understanding the tax consequences you will face; whether a buyer or seller of the practice. The type of transaction, whether through what are known as Mergers & Acquisitions (M&A), a succession plan, or other acquisition of an independent advisory group will dictate the consequences you face from a tax perspective.
How the practice is organized will give you insight as to the type of tax implications you could face. The acquisition or sale of stock, in the case of a C-Corporation (as organized under 26 USC Subchapter C), or a partnership interest in either a Limited Liability Corporation (which may elect taxation as a corporation through the use of Form 8832), or Limited/General Partnership, bring different tax consequences.
The sum value of these classes establishes the total value that must agree between the buyer and seller. When a value is assigned to an asset listed on the form, it could create a taxable gain. Again, based on the amount of time the asset was held by the practice, the gain could result in a short or long-term capital gain, which are taxed at different rates (see the section above for the specific rates applicable to short and long-term capital gains).
A revenue-sharing arrangement is one in which the seller of the practice seeks to retain some interest in the business concern and may be ideal in a situation where the buyer is acquiring from the seller proprietary software or another unique asset that the seller wishes to continue to profit from. It may also be used in the case of practice where the influence of the seller is needed to retain existing clients or may be used to attract additional business, through referrals. Finally, a revenue sharing arrangement may be used as an incentive by the seller to a buyer where the business may have operating losses that the buyer does not want to absorb but is willing to share (for some period of time) in order to close the deal.
The buyer should look to review any and all employment and consulting agreements and create new ones reflecting the values of the successor practice. Employment agreements results in W-2 income (as reported to the IRS) while any compensation paid under a consulting arrangement will appear on the 1099-MISC.
This article presents different tax consequences that are present when buying or selling a financial practice. The discussion presented here is only a brief overview of what you may face when and should not be viewed as an exhaustive look of all the scenarios you may encounter. A discussion with a financial advisor or other professional who is certified and qualified (i.e. CPA, tax attorney, or other tax professional) can help you navigate the intricacies of the tax code as it relates to your desire to buy or sell. 041b061a72