Transitioning Business Ownership

Structuring the Deal

June 12, 2017

LPL Financial

If you’re looking to sell your practice, or if you’re potentially in the market to buy one, be prepared to do your research, engage in long-term planning, and rely on a lot of patience. Set yourself up for potential success by familiarizing yourself with these common methods to transition the ownership of practice or book of business.

Discover the three most common methods to structure a book of business or practice acquisition deal.

Common Methods of Transitioning Ownership

If you’re looking to sell your practice, or if you’re potentially in the market to buy one, you may find yourself wondering where to start. Every acquisition deal is unique, taking price, staffing, and transition timeline into account. While there are multiple ways to finance and structure a deal, the most common sale structure still consists of a down payment and some form of seller financing via an asset purchase agreement and promissory note.

In our experience, down payments typically 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.

While the specific agreement and deal structure will depend on the situation, here are the three most common methods to transition the ownership of practice or book of business you may encounter.

Outright Purchase

This deal is fairly straightforward and is the most frequently sought structure for several reasons. In this arrangement, the buyer and seller come to a mutual agreement on the price and conditions of the sale, and at the agreed-upon date, ownership of the practice will transfer.

However, there are many conversations that happen over the course of several months (or even years) leading up to that date. These include introductory meetings with clients, which will allow them to get to know their new advisor and explain more about their financial goals, and extensive operational discussions. All staffing, real estate, and technology questions will be addressed and absorbed if appropriate, and operations will continue under the new owner.

Gradual Buyout by Third Party

In this sale structure, the seller may remain the majority owner of the practice over the course of several years, gradually monetizing more of the practice’s value and ceding more responsibility over to the buyer. This allows the purchasing advisor to have a progressive introduction to building client relationships, running the firm, and financing the purchase. The conversations and decisions that occurred before the sale date in the outright purchase scenario will take place throughout the transition period.

This arrangement gives financing flexibility to the buyer, and also allows the seller to delay retirement by providing them a source of income and insurance before beginning to withdraw from their retirement accounts. Special care needs to be given in this situation to what is actually being acquired and how, if necessary, the transaction can be unwound if there is joint ownership of any assets in question.

Internal Succession

This structure involves years of mentorship, training, and relationship building. Internal succession is a long-term sale option that may be ideal for advisors who aren’t yet ready to retire, but are planning well in advance for the future of their practice. An internal succession plan involves finding and grooming a junior advisor, introducing them into existing client relationships, and gradually moving responsibility to them. Financing for the deal will likely resemble the gradual buyout scenario, allowing the seller to move out of the practice over time while still receiving compensation. An added benefit of this scenario is choosing a successor who will fully understand and will continue in the practice’s values and culture.

For strategies to improve the valuation of your book in advance of a sale, download the white paper, 5 Strategies for Improving Business Valuations.