The language used in your financial advisory firm’s buy-sell agreement can make the difference between a transition that proves mutually beneficial to both parties or one that results in costly and frustrating litigation. If you are considering selling your practice, it is in your interest to lean on a proven consultant to prevent potential challenges that chew up your time, patience and money. Our consultants have more than 80 years of combined industry experience helping financial advisory firms of all types and sizes.
The Right Structure for Your Buy-Sell Agreement
The subtleties of this legal agreement’s structure are of the utmost importance. If you are like most financial advisory firm owners, you have been laser-focused on serving your clients in the preceding years. Creating the optimal exit strategy isn’t at the forefront of your mind for good reason. However, even a slight mistake can spell trouble down the line. If you ever have questions about the exact phrasing for your buy-sell agreement, get legal advice from a trusted attorney.
It is best to think of a buy-sell agreement as a schematic that provides guidance for a potential sale, buyout, owner death or even the owner’s divorce. Buy-sell agreements are typically created to provide protection for the family of the financial advisory firm owner in the event that a partner passes away, becomes incapacitated, or departs the business.
The objective of the agreement is to ensure that the owner who remains in place can continue to lead the business without impediment. Such an agreement is also important for a transition in which ownership shifts to a buyer outside of the organization or even to an employee already with the organization.
Essential Components of Your Firm’s Buy-Sell Agreement
Buy-sell agreements should have provisions that state taxes will be paid when the financial advisory firm ownership is transferred to the new owner without subjecting the firm’s cash flow to potential risk. The overarching aim of structuring the agreement this way is to keep the company’s operations humming along without obstruction.
Insured buy-out agreements are also available. This structure is centered on the use of life insurance to guarantee fund availability to cover the agreement’s execution. The typical buy-sell agreement extends to include disability insurance. In short, the best buy-sell agreements account for all potential possibilities, no matter how morbid, depressing or unexpected they are.
Buy-Sell Agreement Types
Combination agreements, stock redemption agreements, and cross purchase agreements are the three most common structures for buy-sell agreements. Stock redemption agreements are structured so that the firm is the primary point of emphasis in the event that ownership shares are exchanged, ensuring the entity can repurchase them as desired. Such a structure provides the RIA owner with an invaluable peace of mind, knowing he or she can sell shares directly back to the entity.
Cross purchase agreements are a structure in which multiple parties obtain a stake in the business in the event of a change in ownership. This structure is named as such as it crosses over shares to additional owners.
Combination agreements are exactly as they sound, serving as a blend of the stock redemption agreement and cross purchase agreement. This unique structure provides the RIA owner with the option of selling his or her stake to another owner or entity. The combination agreement structure shapes the right of first refusal, providing the option of buying and selling shares as desired. Combination agreements are typically used to guarantee shares are held by original owners.
Bridgemark Strategies Is Here to Help Your Firm
The subtle nuances of your financial advisory firm’s buy-sell agreements, and other contracts, ultimately shape your success or failure moving forward. RIA owners and managers who proactively ask for guidance from industry experts enjoy a truly invaluable peace of mind along with a better financial outcome.
Let us guide you through the process of structuring the right buy-sell agreement for your financial advisory firm. Reach out to us today to find out more about how we can help your RIA. You can also reach us on the web to coordinate a confidential, no-obligation consultation by completing our contact form.