The sale of a financial services practice can be a long and complex process. From finding the right match of buyer and seller to agreeing on value to obtaining financing, the process is wrought with challenges. Once a buyer and seller agree on price, however, the process still isn’t over. There’s another element that is possibly the most critical facet of any transaction – payment terms.

Given the volatile nature of the financial services business, it’s rare that a buyer pays cash for a practice. The buyer’s return on the investment is always unpredictable. Some clients may not stay on board through the transition. The market could take a dive right after the sale closes. There are too many wild cards at play for many buyers to feel comfortable with making cash purchases, even if they have the funds available to do so.

An ideal payment structure is one that fairly compensates the selling advisor for his or her hard work in building the practice, but also isn’t so prohibitive that it restricts the buyer’s ability to grow the business. To that end, many financial services practice transactions are made up of three key components:

  • Down payment

  • Promissory note

  • Earn-out

How value is allocated to these components depends on the situation. There’s no boilerplate structure. However, according to, most of the value of the transaction generally comes via a promissory note. The website surveyed transactions in 2011 and found that payment terms were split between the three payment types in the following way:

  • Down payment – 36%

  • Promissory note – 55%

  • Earn-out – 9%



The down payment is often where buyers and sellers clash. Sellers who are retiring want to be compensated as soon as possible for the value of their practice. Buyers are often reluctant to separate with their cash before taking over the practice.

A sizable down payment may also be impractical. Banks are sometimes reluctant to finance financial services practice transactions because the asset is intangible. After all, if the loan defaults, the bank can’t repossess a book of investments.

Fortunately, many broker-dealers and custodians have recognized that their older advisors need realistic succession plans. In response, some have developed programs to help finance down payments for purchasers. While these programs are fairly new, they could be the future of financing practice transactions.


The promissory note is the most common component of a practice sale. The use of a promissory note allows the seller to receive fair value over a reasonable time frame and gives the buyer an opportunity to realize revenue from the practice before making payments. The length of the note and frequency of the payments can be customized to fit the needs of the parties involved. However, most notes in financial services practice transactions are generally paid-in-full within three to five years.


An earn-out is an interesting way to compensate for any unsolvable disagreements over the down payment or promissory note. An earn-out pays the seller a percentage of future revenue based on the practice’s performance. The performance could be measured by gross revenue, assets under management, net acquired assets, or any other metric that the parties feel is suitable. An earn-out clause could also provide incentive for the seller to help with client retention during the transition.

The sale price of the practice is often a fluid number once multiple payment methods are involved. That’s why the structure of the payment terms is so important to both the buyer and the seller. Ideally, both parties will walk away with what they believe are fair payment terms.

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