Competition and an expanded landscape of options have resulted in a variety of deal structures for transitioning advisors. Advisors today are in an enviable position: They have numerous ways to monetize their life’s work while also leveraging new opportunities for growth, both in the short and long term.
One of the most common ways advisors financially de-risk a move is through a transition deal, traditionally structured as a forgivable loan. This type of agreement typically binds the advisor to a firm for a set length of time. However, the paradigm has evolved significantly in recent years due to the industry’s growth and heightened competition for top talent.
Advisors now have access to a much wider array of legitimate options across different models and firms, as well as a greater variety of deal structures beyond the traditional forgivable loan.
So how should an advisor evaluate these options and determine which deal structure makes the most sense for their business? Let’s explore the pros and cons of the three most common deal structures:
🔒 The Traditional Forgivable Loan
What it is: This structure—also called a promissory note—is the standard method many traditional firms (e.g., wirehouses and regional firms) use to recruit advisors. Typically, the firm provides a total package between 150-300% of the advisor’s revenue to incentivize a move. These deals are usually based on top-line revenue, are treated as ordinary income, and include upfront and back-end earnout components.
Pros:
- 💼 At the end of the loan period, advisors retain full ownership of their book of business, allowing them to move again.
- 📈 Top-line-based deals mean advisors don’t need to worry about expense management.
- 🚀 Flexibility to leave mid-term if comfortable repaying the unvested balance.
- 🌟 Opportunity for additional monetization via sunset or retire-in-place programs without a future transition.
Cons:
- 📉 Taxed as ordinary income, which can significantly reduce take-home earnings.
- ⚡️ Advisors must repay the outstanding balance if they leave or are terminated before the loan is forgiven.
- ⚔️ Full deal value often requires achieving specific growth targets.
💸 The Asset Purchase/EBITDA-Based Structure
What it is: Commonly used by RIAs, private equity firms, roll-ups, and aggregators, this structure involves the buyer applying an industry-competitive multiple to the seller’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or EBOC (Earnings Before Owner’s Compensation).
Pros:
- 🏦 Taxed at long-term capital gains rates, which can result in significant savings.
- 🚀 Typically includes a mix of cash and equity, offering both liquidity and potential future upside.
- 📊 Equity participation allows advisors to benefit from the firm’s growth post-transaction.
- 🌐 Advisors retain control over operating leverage, boosting equity value as their business grows.
Cons:
- 🔒 Restrictive selling agreements may limit future transactions.
- 💰 Lower ongoing payouts post-transaction (typically 30-35%).
- 🛠️ Requires successful client retention and asset portability to maximize deal value.
🌟 A Hybrid Approach
What it is: A combination of the above two structures, this model includes elements of both. For example, a deal may be structured as a forgivable loan but include an equity component. Advisors might receive a total transition package of 300%, with 100% of the deal paid in equity.
Pros:
- 🌹 Combines upfront monetization with long-term growth opportunities.
- 📈 Equity ensures the firm is aligned with the advisor’s ongoing success.
- 📦 Less upfront capital is required from the firm, making it an attractive option for both parties.
Cons:
- 📅 Reduced cash compensation upfront compared to a pure forgivable loan.
- 📉 Cash components are still taxed as ordinary income.
How UpTick Can Help Advisors Transition Successfully
Navigating these deal structures and deciding on the right path can be complex. That’s where UpTick comes in.
🔧 Personalized Guidance: Our team of experts helps you analyze and compare deal structures to ensure they align with your goals, both financial and professional.
📢 Comprehensive Support: From identifying the ideal firm to negotiating terms, we’re with you every step of the way.
📊 Maximizing Value: We’ll ensure you maximize your earning potential while securing the best possible terms for your transition.
💡 Strategic Insight: UpTick’s deep industry knowledge allows us to provide insights on trends and options you may not have considered.
Transitioning your career is a big decision, but it’s also an incredible opportunity to align your work with your long-term vision. Let UpTick guide you to the right deal and the next stage of your success
Ready to Take the Next Step?
Making the transition to a new firm can be overwhelming, but you don’t have to do it alone. Contact us today to explore your options and discover how UpTick can empower you to achieve your professional and personal goals.
📧 Email: marc@uptickrecruiting.com
📞 Phone:646.734.0334
Let’s make your next career move the best one yet!
