How to Finance an Advisory Firm Partner Buyout
Partners in an advisory firm do not stay together forever. One may retire, another may want to pursue a different path, and sometimes partners simply disagree about the firm’s direction. When a partner departs, the remaining owners usually need to purchase that partner’s equity. An advisory firm partner buyout lets the remaining owners keep control of the firm, but the payout can be a significant financial obligation.
This article is written from the perspective of the remaining owners who need to finance the payout of a departing partner. It is not legal, tax or regulatory advice. Ownership changes can affect registrations, disclosures, client agreements and other obligations, so the remaining owners should work with qualified legal and compliance professionals.
Start With the Buy-Sell Agreement
Many firms have a buy-sell, operating or shareholder agreement that addresses what happens when an owner leaves. Before arranging financing, review what that agreement says about:
- Events that trigger a buyout, such as retirement, disability, death or voluntary departure
- How the departing partner’s interest is valued
- Payment terms, including any installment schedule
- Restrictions on the departing partner serving firm clients afterward
- Whether the firm or the individual owners are the buyers
If there is no agreement, or it is outdated, the partners will need to negotiate these terms, ideally with independent advisors on each side.
Valuing the Departing Partner’s Interest
The value of the departing partner’s stake usually depends on the value of the firm as a whole and the rights attached to the stake. Recurring revenue, profitability, client concentration and the departing partner’s personal client relationships all matter. Our guide to financial advisory practice valuation explains these factors.
The Client Relationship Question
A departing partner’s clients are central to a buyout. Clients do not automatically stay with the firm when an advisor leaves. Depending on the firm’s registration, client agreements, any restrictive covenants and applicable rules, the firm may need to communicate with clients, and some clients may choose to follow the departing advisor or move elsewhere. The remaining owners should plan how those relationships will be transitioned and should consider that risk when agreeing on price and terms.
Ways to Finance the Buyout
Installment payments to the departing partner
The departing partner may agree to be paid over time. This reduces the cash required upfront and can tie part of the payout to the revenue retained from that partner’s clients.
Bank financing
A lender may finance the buyout based on the firm’s cash flow after the partner departs, the remaining owners’ credit and experience, and the transition plan. The lender will want to see that the firm can support the new debt even after the departing partner’s compensation is removed and any client attrition is considered.
SBA financing
In some cases, partner buyouts of established firms may be eligible for SBA financing, subject to current program rules on ownership changes and the lender’s policies. Our guide to SBA loans for financial advisors explains when SBA programs may be considered.
Combining sources
Many buyouts use a combination of bank financing, installment payments and the remaining owners’ own funds.
What Lenders Will Review
- The firm’s financial statements and tax returns
- Pro forma cash flow without the departing partner
- Revenue attributable to the departing partner’s clients
- The buy-sell agreement and proposed purchase terms
- The remaining owners’ personal financial statements
- Existing firm debt
You can test payment scenarios with our conventional loan calculator.
Buyouts and Existing Debt
If the firm already carries debt, a buyout can be a good time to review it. In some cases, refinancing existing obligations alongside the buyout may simplify payments, depending on eligibility and lender approval. Learn more about investment advisory debt refinancing.
How a Buyout Differs From a Buy-In or Succession Plan
A partner buyout is a specific event: the remaining owners purchase an exiting owner’s interest. It is different from a financial advisor partner buy-in, where an incoming advisor purchases equity, and from a planned, multi-year transition of ownership and clients covered in our guide to financial advisor succession planning. In practice, firms may experience all three over time.
Protecting the Firm Through the Transition
A buyout that is fairly valued, clearly documented and financed with payments the firm can comfortably support helps the remaining owners keep clients, staff and momentum. No financing can guarantee client retention, but careful planning reduces the risk.
US Professional Funding works with remaining owners of established advisory firms to explore financing for partner buyouts.
