How to sell your practice to your team

Thinking about the benefits of selling your practice to your team? Here’s how to take the first steps towards that rewarding future.

Advisors pour their time, heart, and energy into a financial venture that becomes more than a passion project; their practice is the very enterprise that defines their careers. Part of the vision required to run a business is to have the foresight to plan what will happen to it when you’re ready to retire or just step away.

Lead advisors often envision a succession plan where the team they’ve hand-picked and mentored would take over and extend the practice’s success. Wirehouse advisors may think of this plan as “selling their practice,” but, because they’re employees, they can only transition clients to a successor. They can’t actually sell the practice to their team because they don’t own it. The team may pay for it, but they can’t buy it.

A typical “sunset program” at a large institution might be maximized at a 260% payout over five to eight years. That’s a healthy payday and, frankly, a relatively easy process (though it is taxed as ordinary income.)

Your team – the “inheriting” advisors at the wirehouse – will be on the hook to pay back 80% or so of your payout amount over five to eight years. They’re boxed in, and they won’t “own the clients” any more than you do now. A simple example says: If you get a $10 million payout, your team will be paying $8 million to the company for an asset they don’t own.

In addition to basically “paying rent” on their book of business, the other negatives include the inability to negotiate the terms of the transaction – by the team or by you. Neither party has any control in designing the deal. You might like some flexibility because a good number of “retiring” advisors aren’t really ready to walk away from the business completely. Some would be interested in selling only a piece of their practice – not an option at a wirehouse. Some would be interested in staying involved, after the payout, maybe managing a few clients. Again, not an option at a wirehouse.

How can you design and control your own retirement to achieve your preferred objectives – without financially harming your team’s future? How do you gain the freedom to make these decisions?

The answer is to first go independent and take ownership of the asset that you built.

To ultimately hand the reins to your current partners, you must become an independent firm – a true business owner. This path to a preferred future exit strategy is especially appealing to those advisors who are genuine leaders – the type of people who put their team above themselves, who care about each team member, and want what is best for them.

Once independent, you will have the freedom and flexibility to sell your new firm to your team with total control of the conditions, including the timing and the price. In planning your exit strategy with colleagues, you can surely agree on a fair price and other equitable terms. It’s important to note that the sale of your independent firm is capital gains, a more favourable outcome than being taxed on an employer’s payout as ordinary income.

You would also be able to negotiate to retain some type of an ownership stake if that’s important to you.

The structure of the transaction, the tax implications of exiting with a 1099 vs. a W2, and the absence of payback on an “un-owned” asset can create a net effect worth millions more to both you and your team.

Taking this two-step exit strategy – to become an independent firm with the ultimate goal of selling to your team – can be an easy path to pursue as some of the leading providers of supported independence, including Sanctuary Wealth, coach and guide advisors on deal structuring and negotiating terms – and even facilitate financing and/or provide capital.

When comparing this strategy to the option for a wirehouse advisor to “retire-in-place” and have the team “pay back” the company for the book of business, it’s possible that the team may pay a higher price. However, because payouts as an independent are so much higher, the result is a bigger pool of money to be split between the buyer and the seller, creating a win-win for both parties.

Think of it like this: The buyer is paying a higher price to the seller but is paying for it with a more valuable currency. Plus – and this is critical – with this strategy of going independent first, your team would ultimately own the firm, an asset that would sit on their balance sheet. The opportunity to pour your time, heart, and energy into a venture that you can own outright will always offer greater rewards.

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