Jinks of Raymond James on Ins and Outs of Advisor Acquisitions

How does the process work? Jinks reports on one of his six pending deals where he's working with a current Raymond James advisor looking to acquire an independent practice not affiliated with Raymond James. He is working with the prospective buyer through the valuation of the firm for sale and coaching them as the buyer conduct his due diligence, and then through the process of integrating the two practices.

Since we are, after all, talking about independent advisors, each deal is different, but Jinks says it usually involved three variables: an initial down payment that can range from 20%  to 50%; a contingent earn-out, based on firm revenue, that can last from three to five years; and a contingent note that includes a guaranteed amount based on the all-important metric of client retention, but can also be adjustable based on the firm's income.

While other consultants and industry observers like to say that most sellers have an inflated view of what their firms are actually worth, Jinks says that most buyers and sellers have a pretty realistic understanding of a firm's valuation. He admits that often there's an emotional component to a seller's sense of his firm's worth, so it's important for a seller to "take out the emotional component."

Jinks makes one more point about acquisitions and deal structure: the importance of the tax consequences. When one independent contractor financial advisor buys another's practice, "the predominant structure I've seen is almost always an asset sale." Pending the terms of the deal, the buyer can depreciate or amortize those assets over an amount of time following IRS prescribed regulations, and the seller's proceeds are likely predominantly a capital gain, again pending the terms of the deal. A wirehouse broker who wants to sell his book of business to another wirehouse broker, by contrast, faces the prospect of having proceeds from a sale being treated as ordinary income by the IRS. A wirehouse broker, he suggests, might do better to join an existing independent contractor firm, even for twelve months, before selling their book of business. In either case, Jinks recommends that both buyer and seller receive independent tax advice before a deal is made, saying it can be "a huge differentiator."