Two ways to sell
In an asset sale, the buyer purchases your book of business and the revenue stream that comes with it. Succession Resource Group (SRG) calls this the most common structure in advisory practice sales. [1] Because the buyer is buying assets rather than the company, it generally does not take on the practice's liabilities or debts. [5]
In an equity sale, the buyer purchases ownership of the firm itself: its stock or membership interests. SRG notes that equity sales can bring higher client retention, but buyers are often hesitant because they inherit the firm's liabilities. [1]
Client consent
Under the Investment Advisers Act, an advisory contract must provide that the adviser will not assign it without the client's consent. [2] The Act defines assignment to include a direct or indirect transfer of the contract, or of a controlling block of the adviser's voting securities. [6] An SEC rule adds that a transaction that does not change actual control or management of the adviser is not an assignment. [7]
So consent comes up both when contracts move to a buyer in an asset sale and when control changes hands in an equity sale. Whether a particular deal is an assignment, and how consent is obtained, are questions for your counsel.
Registration filings
Form ADV's instructions cover two cases. An adviser not registered with the SEC that takes over substantially all the assets and liabilities of an SEC-registered adviser's business files a new application within 30 days after the succession. [8] A new adviser formed only by a change in form of organization or a reorganization, with no practical change in control or management, may amend the existing registration instead, also within 30 days. [8] The instructions have a separate section for state-registered advisers. [8]
Taxes in brief
- When a business's assets are sold, each asset is generally treated as sold separately for determining gain or loss. [9]
- Buyer and seller generally both file Form 8594 when a group of assets making up a trade or business changes hands. Goodwill and going concern value are their own class (Class VII); covenants not to compete fall in Class VI. [3]
- The buyer amortizes goodwill, customer-based intangibles and acquisition-related non-competes over 15 years. [10]
- Selling stock usually produces a capital gain or loss, and a partnership interest is treated as a capital asset when sold. [9]
- In the deals FP Transitions describes, goodwill averages 92% of the purchase price and is predominantly taxed at long-term capital gains rates for the seller; the rest is typically split between a consulting agreement (on average 6%) and a non-compete (on average 2%). [4]
How the price is allocated changes both sides' taxes, so have a tax adviser review it before you sign.
Next: how the price gets paid, or estimate what your practice is worth.