Potential legal pitfalls for advisers selling their firm

You’ve made the decision to sell your wealth management practice. Letters of intent are rolling in with attractive (albeit, non-binding) offers. You have a sense of which buyer is the right fit for your practice and clients. You believe you’re ready to make your choice, but these indications of interest are short on detail. What important deal elements have not been addressed? And what danger lurks ahead in the next phase of the negotiation?


The letter of intent, or LOI, outlines the key terms of your transaction. LOIs are typically non-binding in many respects, but once executed they provide buyer with limited exclusivity. Your leverage is at its apex during the competitive LOI phase.

Sellers should negotiate as many nonfinancial deal terms as possible, including the terms outlined below, during the LOI phase. Unfortunately, sellers often wait and negotiate these terms after the LOI is signed, when their leverage is significantly diminished.


I’ve found one element of wealth management transactions to be unique from other industries. Nearly the entire purchase price is contingent on certain goals of the acquisition agreement being met. Often, a considerable portion of the purchase price is paid at closing (based on a closing formula tied to client retention) and the balance is paid post-closing (subject to the post-closing business achieving client retention and/or financial goals).

What percentage of client consents should be required at closing in order for seller to receive the full purchase price? Typically, 95% is required, but buyers sometimes offer a more attractive threshold. Should negative consents be included (and are they allowed under your Investment Advisory Agreements)? It’s imperative to agree to the high points of these items in the LOI phase and ensure that your purchase agreement includes precise language on these subjects.


Purchase agreements typically contemplate a deferred closing. You’ll sign the purchase agreement and then close in the future, but only if certain closing conditions are satisfied. Meantime, you’ve advised your clients of the proposed closing.

Closing conditions will include meeting a closing client consent percentage (often 80%), but buyers will sometimes attempt to include more aggressive conditions (such as financing or due diligence conditions) that will effectively allow them to walk away from the deal.

Imagine a doomsday scenario of signing a purchase agreement, delivering your client list to the buyer, marketing the buyer’s platform to your clients, and then having the buyer elect not to close the transaction. It’s critical that your deal include only market closing conditions (and that your LOI preclude any atypical conditions), so that you have enhanced closing certainty before reaching out to your clients.

[More: Lessons learned from 21 deals]


The astute seller that successfully collects all of the purchase price from buyer remains at risk of having a portion of that purchase price clawed back by the buyer after the closing. Fortunately, there are risk mitigation techniques that can be deployed to protect the purchase price you receive (including caps, baskets, time limitations and qualifiers). Be sure your LOI and purchase agreement address these items.

These dangers are manageable with a strategic approach to the LOI and purchase agreement negotiations. You’ve spent decades building your practice and prudently managing your clients’ assets. Be sure to negotiate these pitfalls with similar diligence.

[More: As M&A activity ramps back up, RIAs need to bone up on the details]

Nick Monaghan, a member with the law firm Dykema Gossett, is an M&A attorney and counsels owners in the sale of their wealth management practices.

The post Potential legal pitfalls for advisers selling their firm appeared first on InvestmentNews.

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *