Selling My RIA as a Financial Advisor, Prioritizing Client Fit Over Highest Offer
Selling My RIA: How I Found Peace Of Mind In the Process For many business owners, the thought of selling the company they’ve poured their lives into is overwhelming. I get it – for me, when thinking of selling my RIA, there was more to consider than just the financials. It was a deeply emotional process, one that required balancing personal priorities, finding the right partner, and ensuring that my clients and legacy were left in good hands. As the former owner of an RIA who recently went through this very journey, I thought it might be useful to share some powerful lessons about the experience, and how I made peace with my decision to sell. My story is unique to me, but not far removed from that of many financial advisor business owners who will all eventually ponder this same leap in the coming decade. The Moment I Realized What Truly Matters For years, I had juggled the demands of my business with my personal life, always trying to give everything I could to both. While I was still healthy and could likely continue, my wife’s health began to decline. There came a point when I had to ask myself a hard question: What am I willing to sacrifice? For me, the answer was clear. I couldn’t sacrifice my relationship with my wife. As much as I cared about my clients, my family had to come first. I realized, “I can’t do right by my wife and do right by my clients. One of them has to give, and it’s not going to be my wife. And so then the anxiety I had was simply about the fact that I didn’t know if I’d be able to find people that I would feel good about handing my clients off to.” That realization was a turning point. It wasn’t easy to admit that I couldn’t do it all anymore, but I knew I had to take a step back to honor the people who mattered most. If you’re in a similar place—feeling torn between your personal and professional obligations—let me assure you: it’s okay to choose your family. It’s okay to step back and say, “I’ve given all I can, and now it’s time for a new chapter.” This was the first step in my exit planning journey, and while it brought anxiety, it also brought clarity. Building Confidence in the Process Once I made the decision to sell my RIA, the next challenge was finding the right buyer—someone I could trust to take care of the clients I’d built relationships with over the years. That uncertainty weighed on me. How could I be sure I’d find the right people? At first, I wasn’t sure I would. But as I worked with my advisors and started the process, something shifted. I began to see that there were good buyers out there, people who shared my values and who I’d feel proud to recommend to my clients. “Once we went through the process far enough for me to realize that I am going to find somebody… SRG did a good job of generating interested parties…And then together we narrowed that list down. And, you know, coming to the realization that, yes, there are good people here that I will be absolutely delighted to write strong recommendations to my clients saying, these are good people and they’ll take care of you.” That was a game-changer for me. I went from feeling anxious about selling to feeling confident that I was doing the right thing, not just for myself, but for my clients. If you’re considering selling, my advice is simple: Trust the process. Start early, work with people you trust, and take the time to really evaluate your options. The right partner is out there, you just have to be willing to find them. Why Fit Matters More Than the Highest Offer When it came time to choose the buyer, I had one priority: I needed to know, without a doubt, that my clients would be in good hands. “My only real priority was I needed to have somebody that I could feel confident handing my friends and clients off to, knowing they’d be well taken care of. The vetting process was about understanding their investment process, but most importantly, who they were as people. Can I trust them to truly put my clients’ interests first? Are they personable enough to make my clients comfortable? That became the lead criteria for me. Ultimately, I chose the buyer who fit these values, even though their offer wasn’t the highest, because it was the best fit. And everything I’ve seen in the past year proves I was right.” In the end, I didn’t choose the highest offer. I chose the buyer who aligned with my values, someone I trusted to care for my clients and carry on the legacy I’d built. A year later, I can say with confidence that I made the right call. For anyone going through this process, let me share this: Fit matters. Numbers are important, of course, but they aren’t everything. When you’re handing over something as personal as your business, you want to know it’s going to the right people. Trust your instincts and choose the partner who feels like the best fit for you and your clients. Key Seller Takeaways: The Bottom Line: Start Early, and Choose Thoughtfully Selling my RIA was one of the hardest decisions I’ve ever made, but it was also one of the most rewarding. Along the way, I learned that prioritizing my personal life, trusting the process, and focusing on fit over numbers were the keys to finding peace in letting go. If you’re a business owner thinking about selling, here’s my advice: Start early. Give yourself the time you need to think through your priorities and explore your options. Trust the process. Work with trusted advisors who can guide you introduce you
New York State Society of Certified Public Accountants: Structuring the Deal: Taxation When Selling Your Financial Service Business
December 15, 2020 By: David Grau Jr., MBA, and Nicole Frey, CFPPublished Date: Oct 1, 2020 For professionals planning to purchase or sell a financial services book of business, the most common negotiating points are the purchase price, deal structure, timeline, and financing considerations. These are critical points to discuss and finalize before signing on the dotted line. It’s also important to be aware of the effect of the tax treatment on the deal and know the different tax structures commonly employed. If not structured purposefully, the tax treatment of a deal may unintentionally favor either the seller or the buyer and can have a significant impact on the total value received/paid. Depending on what’s been negotiated, the majority of the sale proceeds may be classified as ordinary income or long-term capital gains. Negotiating this early in the process will ensure that the purchase price can be adjusted up or down to balance the benefit. As a result, the tax allocation of the sale proceeds is one of the key elements of a deal structure and should be considered carefully by both parties. Potential Deal Structures To decide which tax structure works best for the deal, the parties will enjoy some level of flexibility as long as they remain within the boundaries of current tax laws and the objectives of the transaction. The first decision that must be made is what exactly is to be sold (assets and/or equity) before discussing how the purchase price should be allocated to a particular asset or equity or both. The following are the two most common considerations: Asset sale In an asset sale, the buyer selects certain individual business assets to be purchased from the seller, with each asset having a specific dollar amount of the purchase price paid for it and allocated as such in the purchase agreement. This includes the following primary categories (in addition to any tangibles that may be acquired): Personal goodwill: client relationships, rights to revenue, the reputation of the business (i.e., the book of business) Restrictive covenants: nonsolicitation, noncompete, and/or no-serve agreement with the seller. Post-closing transition assistance: services provided by the seller, such as assistance with client meetings, phone calls, emails, letters, etc. Equity (stock) sale Rather than buying individual assets, the buyer and seller may elect to make the seller’s business entity (e.g., corporation or LLC) the subject of the transaction and enter into a sale of the seller’s ownership interest in the entity. The transfer of the ownership in the entity allows the seller to transition all assets and the liabilities of the business to the buyer, including all— contracts, permits, licenses, and registrations. Since both an asset sale or stock sale may ultimately result in long-term capital gains tax treatment for the seller, the choice is influenced greatly by the buyer’s preferences and whether there’s perceived value in buying the business entity. Asset Sale: Categories and Tax Treatment The most common deal structure when buying or selling a financial services practice is a sale of assets, versus an equity-based sale. This does vary based on the size of the transaction; deals involving larger firms will more often employ an equity-based strategy to ensure the acquired business remains a going concern. When purchasing the assets from a seller, it’s important to ensure that both buyer and seller agree on how the purchase price will be allocated for tax purposes, and such meeting of the minds should be included in the purchase and sale contracts. Personal goodwill The majority of the purchase price is typically allocated to personal goodwill—an IRC section 197 intangible asset consisting of the seller’s client relationships, reputation, expertise, and abilities. Year-to-date 2020, the average transaction for financial service professionals allocated 93% of the purchase price to personal goodwill, up from 91% in 2019. For the seller, the sale of personal goodwill should generate long-term capital gains tax treatment and be amortizable over 15 years by the buyer. Post-closing transition support Depending on the extent of the seller’s services to the buyer post-closing, compensation for these services can be either included in the purchase price (typically for limited services such as introducing the buyer to the transferred clients) or be paid in addition to the purchase price (for the seller’s expanded involvement post-closing beyond just transitioning clients). As shown in Figure 1, the average transaction allocated 3% of the purchase price to the seller’s post-closing support, though this allocation tended to be greater on smaller deals. For the seller, they want to ensure only a de minimis portion of the purchase price is paid for their transition assistance, as this portion is labor and taxed as ordinary income, subject to Social Security and Medicare taxes. The buyer, however, generally seeks to allocate more of the purchase price to the transition support, as this portion provides them a tax write-off in the allocated amount, pro-rated for the year in which the services were provided. Restrictive covenants To protect the buyer’s investment, the seller will commonly be required to enter into a restrictive covenants agreement (similar to personal goodwill, this too is an IRC section 197 intangible asset), whereby they promise not to compete with the buyer, solicit the buyer’s employees or vendors, or serve any of the clients the buyer purchased from the seller. In exchange for this promise, the seller will receive a portion of the purchase price as consideration, resulting in ordinary income for the seller and a 15-year amortization by the buyer. Because this asset doesn’t produce a tax-favorable outcome for buyer or seller (relative to the alternatives previously described), neither party seeks to allocate any more than would be required to ensure the buyer has an enforceable contract. Year-to-date 2020, the average transaction allocated 3% of the purchase price to restrictive covenants. Not allocating a portion of the purchase price to restrictive covenants may render the provisions unenforceable and otherwise confuse the intended tax
RIA Intel: Big Winners in Wealth Management if Biden Weakens Noncompete, No-Poaching Agreements
December 15, 2020 Biden wants employees to have more freedom to seek new jobs. Financial advisors stand to gain. A new White House administration might make it easier for financial advisors to switch employers. President-elect Joe Biden has signaled in the past that his administration would go after noncompete and no-poach clauses that are ubiquitous in financial advisory contracts. “Companies should have to compete for workers just like they compete for customers,” Biden said in 2019. These clauses “suppress wages” and impede the ability of employees to change jobs, he said. However, indications suggest that the incoming administration won’t take a sledgehammer to these restrictive clauses, instead retaining some “that are necessary to protect a narrowly defined category of trade secrets,” according to a SHRM (Society for Human Resource Management) report. Most advisory firms use these clauses to keep employees from taking their most valuable asset — clients’ contact information and assets — with them to competitors. Hence, the non-solicitation clause, which prevents them from luring clients elsewhere for a year. [Like this article? Subscribe to RIA Intel’s’ twice-weekly newsletter.] Wealth management executives told RIA Intel that alterations to these noncompete and other clauses could encourage valued employees to switch jobs. Alterations, however, could result in contractual changes that limit employee mobility. If these contractual clauses are weakened by the incoming administration, as expected, financial advisory firms will likely boost pay, encourage equity participation, and do everything in their power to retain staff. Valued employees, especially those with an enviable roster of clients, will be more marketable and able to more easily switch firms. They also may receive more perks from their current employer to stay. Several sources contacted by RIA Intel recommend a wait and see approach. Louis Diamond, an EVP with Diamond Consultants, a Morristown, N.J.-based recruiting and consulting firm, specializing in the financial industry, says it’s difficult to predict the effect of potential changes in financial employment contracts because “the devil is in the details.” Diamond questions if proposed adjustments will apply to “only new agreements or existing ones and what the loopholes are.” Noncompete clauses are often nearly unenforceable because their ultimate effect is to prevent an advisor from plying her trade and that often entails legal push-back, he adds. Diamond says non-solicitation clauses, in which employees are prevented for a year from reaching out to current clients to bring them to a new firm, play a more pivotal role at most wirehouses and RIAs. But if these clauses are reduced or limited, it could curtail future M&A activity, predicts Diamond. “If I sold you my firm, and you paid me money for it, I’d sign a noncompete and non-solicitation clause because that’s the only way a buyer can protect his investment.” Bob Cooper, a partner at King & Spalding, a Washington, D.C.-based law firm specializing in antitrust issues, notes that challenges to these noncompete clauses have existed for years, citing high-profile civil settlements in tech and healthcare. He notes that employment law varies state to state. “If there is a conflict between federal and state laws, federal laws control.” These issues don’t usually involve a conflict of law, but are more concentrated on regulatory enforcement. Some states will be more aligned with the Biden administration and some will contest these clauses. David Grau Jr., the president and CEO of Succession Resource Group, a Lake Oswego, Or.-based firm that helps individual advisors evaluate the equity in their practices, says changes could pressure advisory firms. If employees can switch firms more easily because of less restrictive employment clauses, “It’ll stifle the industry’s ability to scale their business.” As a result, most owners will be more reluctant to “expose their book of business to additional risk” and be “less interested to train the next generation of professionals. And we already have a succession planning crisis.” Grau expects that independent financial firms will lose value if these measures are implemented. “It will make businesses less scalable, because of the risk of staff leaving and taking confidential information with them.” However, Grau sees a potential benefit. More firms will be encouraged “to share equity so your employees never want to leave.” Advisors who are more experienced with the largest roster of clients will be most in demand, Grau expects. Those in large financial centers like New York City and San Francisco will be most affected since there’ll be ten other shops in proximity vying for them. “But you have less risk of being poached, if you’re based in Wichita, Kansas.” Diamond expects adjustments will be made to minimize contractual changes and that savvy attorneys will develop new clauses that restrict the ability of employees to jump ship. A change would greatly affect the RIAs and advisors with the most clients, and the most lucrative ones, Diamond asserts. They would be more in demand without these restrictions. Grau expects that changes would affect both larger and smaller firms. “Their most valuable asset is the client list of your relationships. If you make it easier for someone to take your most valuable asset away, it will affect everyone, big or small,” he asserts. If consulting the Biden administration, Grau would advocate for eliminating noncompete clauses so employees could change firms more easily. But he’d maintain the non-solicitation agreements because “firms should have a right to protect their trade secrets.” Diamond favors changing these clauses. “Advisors being able to move freely is a positive. Of course, there are bad actors. But if an advisor is acting in the best interests of their clients, they should be able to freely find better work.” He acknowledges that his outlook could be self-serving since limiting these clauses could lead to more work for recruiting firms like his. Diamond, however, doubts that a major overhaul would allow advisors to freely take clients elsewhere. Attorneys, he predicts, would draft contracts differently and establish new loopholes. Although changes to these clauses will likely
Inside Information: Valuation in a Down Market
August, 2023 Click here if you don’t see the article Disclaimer This article was first published by Bob Veres. The original article can be found here. All rights to the original content are held by Inside Information.
Balancing Act | Exploring Value and Terms in Deals
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The Seller’s Playbook What to Know Before You Let Go
Learn what it takes to successfully sell your financial advisory practice. This session walks through the key steps to prepare your business, navigate the sale, transition clients and staff, and avoid common mistakes. Whether you’re planning to exit soon or just getting started, this webinar offers practical guidance to help you plan with confidence. Watch the Replay Related Resources 10 Tips for Selling Your RIARead the Article → Selling Your Practice with Expert AdvocacyWatch the Replay → Employee Retention Guide for Advisors Read Now → Grab A Valuation We offer a variety of solutions and turnaround times to fit your needs. Join myCompass Our membership club grants you inside tips and opportunities to grow. Review our Seller Services We’re here to ensure you secure the best buyer, price and terms.
Empowering Advisors, Enhancing Transitions
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Selling to Your Kids? Why Family Deals Demand Extra Scrutiny
Selling your RIA practice to a son, daughter, or other family member might feel like a natural, low-stress transition, because there’s trust and familiarity. Many advisors assume they don’t need the same level of formality required of an outside RIA sale transaction. As a result they may skip a formal valuation, because they aren’t aiming for full value, or considering gifting equity. But this relaxed approach can open the door to tax exposure, compliance pitfalls, and long-term misunderstandings. In fact, intra-family sales demand more structure and care—not less—from both a practical and technical perspective. Here are five details and considerations to keep in mind that make these deals uniquely complex and why they deserve extra attention: 1. Third-Party Opinion of Value Is Non-Negotiable Family transactions are subject to close IRS scrutiny, especially when there are gifts involved or the sale price appears below fair market value. A credible, independent valuation is critical for: Establishing a supportable value of the business. Reporting a defensible value for gift tax purposes Supporting installment sale terms Managing the optics with non-involved heirs or business partners Using a third-party valuation firm ensures the agreed-upon price holds up under audit and provides a solid foundation for tax planning strategies. There are still tools at one’s disposal to influence or control the value, but doing so with an objective starting place—and with the correct strategy—will help ensure the RIA for sale is not recharacterized post-transition. Even if valuation isn’t the founder’s focus, it is still advisable to receive a formal valuation to avoid common post-sale pitfalls. Occasionally, advisors operating under an independent broker-dealer (IBD), inquire about simply ‘putting’ the business in the name of their son or daughter for no additional compensation to avoid formally “selling” or gifting. While it is possible to do at the IBD level, transferring an advisory business that has produced hundreds of thousands or millions of dollars of taxable income over the past decades, especially in an industry with a very active and well-known M&A market, is simply asking to be audited. 2. Alternative Financing Solutions For family business sales, there are unique financing options that can and should be considered. Self-Cancelling Installment Notes (SCINs) can be a powerful estate planning tool when selling to a family member. These notes are similar to a traditional promissory note, with the buyer/family member making payments of principal and interest out of cash flow, over some agreed-upon period. But, SCINs have a unique feature – the note can automatically terminate upon the seller’s death, potentially removing any unpaid balance from the seller’s taxable estate, without creating a tax liability for the buyer (the remaining debt outstanding at the seller’s passing isn’t forgiven, it simply terminates and ‘goes away’). SCINs can be a useful tool for family succession, but their structure must be airtight: SCINs need to include a “mortality risk premium” to offset the note’s cancelable feature – for example, a slight premium on the interest rate The valuation of the premium must be actuarially sound and based on health-adjusted life expectancy The term of the SCIN should be within the actuarial life expectancy of the seller – for example, a note shouldn’t be 20-years for a seller that is 85 years old The SCIN should be properly documented in value. The IRS will challenge and recharacterize notes that lack documentation or are undervalued For sellers with impaired health or shorter life expectancy, this can be an efficient way to reduce estate tax exposure, but it must be coordinated with a valuation professional and tax counsel. 3. Gifting Equity to a Family Member – Employee Gifting the business, partial or full, to a child who is also a key employee raises serious issues under both the gift tax rules and compensation regulations. To qualify as a gift by the IRS, the gift should be detached and disinterested generosity – a tough argument to make when the family member is on payroll. If an owner gave equity to anyone else on payroll, it would clearly be treated as a grant, thus making the argument that a grant to an employee related to the owner should in fact qualify as a “gift” is problematic/risky. Key considerations for gifting: Is the equity truly a gift, deferred compensation, or a grant of non-cash compensation? Is the employee/family member receiving equity for “less than adequate consideration?” Can the gift be split with your spouse? Can a minority interest be applied? Many family businesses are surprised by the gifting/granting considerations and thus get blindsided. Even well-intentioned, informal transfers can trigger unintended tax consequences if not properly documented. 4. Formal Governance Protects Relationships and the Business A key mistake in family transitions is letting relational trust substitute formal governance. When sharing ownership, with ANYONE (especially family), you need: A detailed Partnership Agreement, Operating Agreement, or Shareholder Agreement A buy-sell agreement with clear terms Defined roles and responsibilities for both generations A succession plan that survives death, disability, or divorce Mechanisms for resolving disputes (especially if other siblings are involved) Even if the culture is close-knit, legacy issues, entitlement perceptions, and money create a combustible mix. The hope is that you will never need to consult any of these agreements, whether selling to a family member or anyone else, but it is advisable to have well-thought-out governance documents you don’t need, than the inverse. Clear documentation avoids family blowups later. 5. Don’t Assume One Buyer = One Option In some cases, it may be advantageous to split ownership. For example, gifting minority interests over time while selling controlling interest later or using a grantor retained annuity trust (GRAT) or family limited partnership (FLP) structure to transition wealth gradually while maintaining control. Each of these has technical hurdles but can open up estate planning advantages that a straight sale misses. Bottom Line: Treat a Family Sale Like the High-Stakes Business Deal It Is Selling an RIA to a family member is not a shortcut—it’s a high-wire act, with
Inside a Real-Life Succession Plan-Lessons from Start to Finish
Get the unfiltered truth from Horizon Wealth Partners’ Chris Pazienza and Patrick Carpenter as they reveal how they navigated ownership transition, leadership handoff, and the lessons they learned along the way—hosted by SRG’s Parker Finot. Watch the Replay Related Resources Succession Readiness Quiz Take the Quiz → Succession Role Transition Planner Tool Prepare Your Transition → The Fine Print: Succession Planning and Scaling Listen Now → Grab A Valuation We offer a variety of solutions and turnaround times to fit your needs. Join myCompass Our membership club grants you inside tips and opportunities to grow. Review our Seller Services We’re here to ensure you secure the best buyer, price and terms.
