Questions To Ask Before Selling Your RIA Practice

Are you considering selling your RIA practice?  It can be a great way to transition to retirement or pursue other objectives. However, it’s important that you understand the implications of selling your practice, first. That’s what makes it important to ask yourself specific questions before you commit to putting your practice on the market. 

If you’re looking to retire, the upsides and downsides for you may differ from those of someone looking to transition out of day-to-day operations and focus on higher-level management tasks. Knowing what you want out of the process, overall, can lend clarity to the other decisions you’ll have to make as a result.

This article discusses these criteria:

• What are my primary reasons for selling the firm?
• Have I considered all the possible alternatives?
• Do I understand the tax consequences of selling?
• Are my business interests aligned with the buyer’s?

1. What Are My Primary Reasons for Selling the Firm?

Selling an IRA firm can be a great decision for many financial advisors. At the same time, leaping without looking can cost you. That’s what makes conducting a mental review of your chief reasons worthwhile: the time to discover something that would’ve made you hesitate is not after you’ve signed the forms.

A bear market and increasing competition can lead some advisors to consider their options, but in many cases, age and motivation also play a role. Unfortunately, market volatility may reduce the value of an IRA firm, potentially leading to lower profits from a sale. This, alone, shouldn’t be your only reason to list the practice, but it’s a factor no one should ignore.

Meanwhile, ever-growing competition in the financial advice industry makes it harder and harder for some smaller firms to survive. This often compels the owners of local firms to look for different ways to make money. 

Some advisors are motivated to sell their firms because they’re approaching retirement age. Understandably, they want some extra security in their retirement plans. Others have even far different reasons: they’re simply looking for new challenges or dreaming of using the sale funds as a starting point in something more profitable or personally fulfilling in nature. 

None of these possible reasons are right or wrong. Nevertheless, without a working mental inventory of yours, it can be alarmingly easy to lose track of your goals before the post-merger dust has settled.

2. Have I Considered All the Possible Alternatives?

Weighing the pros and cons is more than an important step in answering the should-I-sell question. It can yield vital direction with regard to how you should move forward. It could be best to partner with another RIA practice, for example, if they have the resources and capabilities necessary to take your firm to the next level. 

Alternatively, a merger may be preferable if it could expand your service offerings or clientele. If neither of these are feasible options, you could consider other ways, such as a structured buy-sell arrangement or even selling the business outright. 

Rolling some of the purchase price into the equity of the purchasing firm might be worth considering, if it’s an option. You could continue to work as a part of the new, acquiring firm, for that matter—or you could simply retire. The important thing is that your decision is well-researched and considered thoroughly.

Are You Maximizing Your RIA’s Value or Simply Selling? Here’s How To Tell the Difference.

3. Do I Understand the Tax Consequences of Selling?

It’s no secret: The sale price of an RIA firm is typically taxed as a long-term capital gain, so it’s taxed at lower rates than ordinary income. This means that any profits made from the sale of an RIA firm will be subject to either 0%, 15%, or 20% depending on your income level and filing status.

However, certain factors could increase your taxable gain, such as depreciation taken on assets used in the business during your ownership. The 2023 tax brackets are a little different from last year, as well. This makes considering the tax consequences of selling your RIA vital. Many firms opt for a 1031 exchange, which allows them to defer the capital gains until they eventually sell their replacement property. 

This can help a lot if you intend to reinvest your proceeds from the sale into another investment opportunity or property down the line. Additionally, you may want to consider strategies like cost segregation analysis, which can help reduce your taxable gains from selling your RIA firm.

Another strategy some RIAs use when preparing to sell their firms is gifting shares of stock before the sale takes place. Gifting shares can help reduce taxable gains because any gifted shares are exempt from taxation up to $15,000 per person per year (or $30,000 per couple). This can allow you to pass on more wealth without having to pay taxes on those assets immediately after selling your business.

4. Are My Business’ Interests Aligned With the Buyer’s?

Before you sign, make sure to carefully assess the alignment of interests between yourself and the prospective buyer. Make sure that both parties have a shared understanding of the goals and objectives of the sale. There are key observable factors that can verify a genuinely mutual alignment.

One of the first things to consider is whether or not you and the prospective buyer align, financially. Is the price they are offering a fair market value for your RIA firm? Does it accurately reflect its potential growth prospects? Do they have any hidden fees or other costs associated with the sale? Ensuring that these questions are answered up front can help protect both parties down the line.

Another factor may be the prospective buyer’s corporate culture. Are their values and mission statement aligned with yours? Do they have similar philosophies on how to execute their business strategy? A good match in this area can help ensure a smooth transition for both sides. It also means that you won’t have to worry about adjusting your own operational processes or procedures if needed.

Finally, it’s important to review all legal terms and conditions that apply to the sale. Make sure that the documents clearly outline what happens if either party fails to meet their obligations, or unforeseen circumstances arise during/after the sale is complete. ViaWealth LLC is ready to talk when you are. Schedule an appointment today. 

ViaWealth, LLC is a Registered Investment Adviser. Information in this article is for educational purposes only and is not intended to be an offer or solicitation for the sale or purchase of any specific securities or other types of investments. Investing in the securities markets involve risk of principal and unless otherwise stated, returns are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before making any financial decisions. Past performance is not indicative of future performance.