From the Desk of Jim Eccleston at Eccleston Law Offices:
According to a report by Mark Elzweig in his Think Advisor publication, there are the five issues:
First, cash down payments: the less involvement sellers have, the more they will want up front. Down payments typically range from 10% to 40% of a practice’s value. The value, of course, is a moving target. In 2013, FP Transitions says that the average cash down payment was 33%. And the true value is determined between a willing buyer and a willing seller.
Second, adjustable rate notes (ARNs) for the practical sellers: ARNs basically are promissory notes issued by the buyer that guarantee the seller payments of principal plus interest. That means sellers will want to keep a hand in the practice, adding as much value as possible by smoothing relationships with existing customers and helping the buyers transition and retain assets. The ARN payouts can vary dramatically both in timing and size. Some are paid annually, others every few years. Interest rates can be adjusted up or down depending upon the buyer’s attainment of asset and/or revenue targets. The incentives need to encourage both buyers and sellers to do more, not less.
Third, earnouts: another incentive for sellers to remain involved. Earn out bonuses mean sellers need to do all they can to encourage the success of their buyers, and like back end bonuses, typically set both gross revenue and asset bogies.
Fourth, taxes: everyone pays them, but only one gets to claim the capital gains rate. Advisors who have owned their practices for more than one year can elect to have the proceeds from a sale taxed at capital gains rates. However, the buyer must agree to be taxed at ordinary income on the same transaction.
Fifth, revenue multiples: what everyone always looks at first. Sellers should seek buyers with similar types of practices and philosophies. Hammering out a deal requires patience and savvy. Before selling their practice, advisors should have inspected potential buyers to be sure they are a good match.
The attorneys of Eccleston Law Offices represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 50 years in delivering the highest quality legal services.
