IBD Buyers Outnumber Sellers 50-1;
Are Sellers Really at Fault?

Historically, 90% of IBD advisors do not sell their practice at retirement.  Instead, the senior advisor slowly decreases their time, service, terminates client relationships, maintains a few select households during retirement and never receives a retirement liquidity event commonplace for wirehouse advisors.  This practice may seem imprudent, yet considering historic succession funding options (seller’s financing/note only), it’s completely empirical. 

Envision the following example: The senior advisor is producing $1 mil in revenue resulting in an approximate valuation of $2 mil.  Seller’s notes commonly have very limited terms over 4-5 years. Let’s assume that a four-year term is utilized, the seller receives approximately $500,000 per year for four years.  If the seller is running an efficient practice, they are probably producing around $500,000 annually in income. Why would the seller accept a succession proposition with seller financing when they will:

  • retain repayment risk for four years,
  • increase workload to transfer the book to a new buyer,
  • not receive any incremental annual income, and
  • be forced to walk away at the end of four years?

When offered the opportunity to sell utilizing seller financing, sellers are not at fault for not selling, they are logical.  Today’s buyers need to approach prospective sellers with a new message where buyers commit to:

  • transferring the risk of the transaction from seller to buyer by utilizing bank financing,
  • provide sellers with a manageable workload (10-15 hours per week to merely make initial client introduction meetings) over 12-24 months to mitigate client attrition, and
  • provide cash at close for 70% - 80% of the purchase price, with the remainder escrowed for client conversion hurdles.

Attractive financing options lack for independent and registered investment advisors, which yieldsinsight into why buyers of wealth management practices significantly outnumber sellers, amidst the inevitable demographic forces.  Buyer education around new conventional financing options, as well as repositioning to sellers, is required for the number of advisors selling their practice at retirement to increase.

For additional information on wealth management practice financing options visit us at www.SuccessionLending.com.