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Top Seller Considerations for Internal Succession Plan Transactions

Internal deals typically involve a higher level of knowledge and awareness of how the practice is structured and operates among both transaction parties.

By Patrick Farrell

Despite the return of market volatility, when it comes to independent financial advisor transactions, it continues to be a seller’s market, with buyers continuing to outstrip sellers by a wide margin.

While many of these transactions are between two advisors that are not part of the same practice, it is also not uncommon to see internal succession planning deals, which typically involve a senior advisor selling to someone who is already in his or her business.

In-House Upside

There is never a one-size-fits-all approach in terms of what kind of succession planning transaction works best for any given buyer or seller.

One advantage of internal succession planning deals is that these transactions typically involve a higher level of knowledge and awareness of how the practice is structured and operates among both transaction parties. A colleague who is part of an existing advisor team is keenly aware of how a seller from that same group has run their business, requiring much less effort to get up to speed than someone coming in from the outside.

For independent advisors who have decided to sell their business to an in-house advisor, there are certain top considerations to bear in mind.

Valuation Method

First, consider the valuation method that will be used to determine the sale price. At a high level, the two most common valuation methods are industry comparables and internal growth rate.

Industry comparables are popular because they remove a lot of complex math and opinion from the process, provided you can find a reliable source for the average price of similarly sized deals. Whereas an external buyer has a clear incentive to seek the help of a third-party transition consultant, an in-house advisor might see arriving at a valuation method as something the two parties can figure out themselves.

The alternative, internal growth rates, is calculated either by assuming steady growth or by discounting cash flows over the next five to ten years. While growing forever is unrealistic, the assumption benefits sellers confronted with a potential near-term market downturn.

Heavily discounted cash flows benefit an internal buyer if a seller’s clients are acutely susceptible to market losses. However, discounted cash flow models are typically applied to public companies instead of small, private advisory practices.

Personal Considerations

Next, be sure to think through the personal considerations involved with an internal succession planning transaction.

Establishing the proper deal valuation is frequently less personal when negotiating with external buyers. In-house advisor transaction partners tend to receive additional care, with purchase prices and financing terms often being far more favorable than comparable deals.

Even the most hard-nosed seller is bound to be inclined to grant special concessions to someone who has served him or her well throughout the years — especially if the only barriers are that they lack the resources or borrowing capacity that an external buyer may have.

Preserving Your Professional Legacy

These kinds of personal considerations could potentially result in a lower sale price, depending on the exact situation, but with the possible tradeoff of having added peace of mind in knowing that the succession plan will unfold in an easy and orderly manner that preserves the selling advisor’s professional legacy and positions the business he or she built to deliver continued strong service for clients.

Patrick Farrell is CEO of Investacorp, a Miami-based independent advisory and brokerage subsidiary firm of Ladenburg Thalmann Financial Services.

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