Planning the Perfect Exit: A Guide to Selling Your Investment Advisory and Wealth Management Businesses

With nearly $144.6 trillion in assets under management for approximately 68.4 million clients, registered investment advisory firms (RIAs) and wealth management firms are gaining increased interest and attention from private equity funds and strategic financial services firms looking to establish or expand their foothold in this growing industry.[1] The RIA and wealth management industry is diverse and can include traditional wealth management firms, bank and trust company private banking groups, broker-dealers, financial planners, investment advisers, private fund managers, family offices, and various asset management platforms. It is projected that 2025 will have been the most active year for RIA wealth management transactions, with a record 440 deals expected to have closed, representing an expected 31% increase from 2024.[2] This trend is expected to continue as firms grow through investment organically and through M&A. As a result, wealth management firms should consider the following when contemplating selling their business.

1. Choosing the Right Partner

The M&A activity in this industry includes both private equity sponsors and financial institutions alike. Given their recurring and predictable client revenue streams and high margin and cash flows, all with a fragmented and disparate market, RIA firms are appealing targets to private equity sponsors looking to acquire a platform to implement a roll-up strategy with additional RIA firms in anticipation of a future exit opportunity. Buyers who are financial institutions range from small to mid-sized wealth management shops looking to manage more assets through their existing, largely fixed-cost, platforms, to larger regional and national financial services organizations that offer wealth management as part of a broader range of banking, trust, and investment services. The larger financial institutions often service both retail and institutional customers alongside their high-net-worth wealth clientele.

Given the wide array of potential buyers, the first step in preparing a sale transaction is to self-evaluate and give consideration as to the ultimate vision of the future of the potential seller’s wealth business, the projected needs of its client base, and the goal of any potential transaction. The more concrete a potential seller’s thinking regarding objectives, the clearer the decision points become about what kind of buyer and future partner in the business would be best. Are sellers looking to continue to operate the business under the umbrella of a larger firm or platform? Are they looking to retire and get out of the business entirely? Perhaps they seek a middle ground where they can slowly transition their business to the next generation of advisers.

Other business factors to consider when determining the right partner, particularly when evaluating a transaction that involves another firm, include:

• client retention prospects and the related analysis of client relationship and investment needs and preferences;
• whether the firms’ products and services complement one another and increase either firm’s ability to retain, service, and attract assets under management;
• potential overlap with and/or broadening of each firm’s strategies for growing its client base and assets under management;
• potential economies of scale from combining cost centers and infrastructure;
• impact on contractual relationships with key service providers (especially custody, clearing, settlement, and execution providers);
• differences and similarities in the teams’ skill sets;
• compatibility of the firms’ cultures;
• prospects for the teams’ career and ability to share in the firms’ success; and
• potential to increase compliance effectiveness, capabilities, efficiency, and sophistication.

All of these play a key role in choosing the right partner in a sale transaction. Legal counsel and investment bankers can often assist in developing the strategy for the sale transaction and serve as a sounding board for sellers in determining the right partner (which can be an evolving process).

2. Due Diligence

To ensure a smooth transaction, sellers should prepare themselves early for buyer due diligence. During the due diligence phase of the transaction, the buyer will investigate the target company prior to signing of the definitive documentation. The purpose is to confirm that the business meets or exceeds the buyer’s expectations, that the deal continues to make sense for the buyer, and that no unforeseen liabilities, risks, or other surprises exist. In addition to reviewing the financials of the target company, the buyer will also review legal, tax, regulatory, operational, and other aspects of the business.

When the target is an RIA, regulatory due diligence is particularly important. Depending on the target’s wealth management business model, it can cover, among other things:

• investment adviser representative (IAR) qualification (e.g., Series 65 examinations), licensing, and registration;
• RIA and IAR regulatory, disciplinary, and legal history and correspondence;
• suitability and portfolio management policies, procedures, and controls;
• investment advisory agreement provisions and client investment guidelines;
• conflicts of interest, including for recommendations of products and services that result in affiliate compensation and 12b-1 fees;
• custody arrangements for client assets;
• best execution;
• high-risk, exotic, and emerging investment products;
• portfolio diversification and concentration risks;
• personal trading and Code of Ethics;
• documentation of portfolio management decisions, investment advisory recommendations, powers of attorney, investment management discretion, and letters of authorization for trading and money movement;
• political contributions;
• anti–money laundering and sanctions;
• business continuity; and
• Rule 206(4)-7 annual reviews and regulatory compliance generally.

Sellers should start early to prepare for the due diligence process. This includes setting up an electronic data room to hold all responsive materials relating to the due diligence process and identifying those individuals internally and externally who will be responsible for answering the buyer’s questions on certain topics (e.g., employment, data privacy, commercial contracts, regulatory, real estate). This also includes addressing early any items that a seller expects will raise questions. For example, if the target company has any litigation or if there are ongoing regulatory investigations or disciplinary actions, it is best to identify those sooner rather than later to prepare for the questions from the buyer and mitigate any concerns. A key challenge in such scenarios is balancing the need for transparency and disclosure to prospective buyers and the need to maintain attorney-client and work product privileges. The seller should also review its contracts with custodians and other third-party business partners to identify and develop a plan and timeline to satisfy any consent requirements (client consent is discussed further below). The due diligence process can be strenuous and demanding, but by preparing early sellers can limit the operational impact and ensure a smooth sale transaction process.

3. Structure

One of the threshold questions for those selling their RIA business is how the transaction will be structured. The answer to this question will drive the bulk of the decisions in the transaction and should be given careful thought. The options for the structure are listed below. Often the decision is driven by tax considerations that can impact both the buyer and the seller. Therefore, in addition to giving consideration to the points below, sellers should consult their tax counsel early and often in a sale transaction.

I. Merger

In a merger transaction, two distinct legal entities combine into a single entity that holds the combined assets and liabilities of the original companies. Mergers can take different forms. They are generally either a forward merger where the selling company merges into the purchasing company with the purchasing company surviving the merger, or a reverse merger where a wholly owned subsidiary of the purchasing company merges with and into the target company with the target company surviving as a direct wholly owned subsidiary of the purchasing company. Buyers often prefer this latter approach since it provides for the target company to continue to exist as a legal entity and maintain its goodwill with clients and customers. While the target company will continue to exist, the buyer ends up with effective control of the target company since the target company will become a wholly owned subsidiary of the purchasing company as a result of the merger. At the closing, all of the ownership interests of the target company held by its equity holders will be cancelled and exchanged for the right to receive closing consideration in the form of cash and/or equity of the buyer.

In addition to preserving the goodwill of the target entity (in a reverse merger), another benefit of a merger is that unlike an equity sale (described below), typically the merger can take place without needing to solicit and obtain 100% of the approval of the equity holders of the target company. The approval threshold is subject to state law and the corporate governance documents of the target company, but often all that is needed is the approval of the holders of a majority of the outstanding equity interests of the target company.[3] Therefore, a merger can be beneficial for RIA firms with a large number of partners who all have ownership positions. Another advantage is that a merger can make it easier to plan and execute post-transaction consolidation of infrastructure and support functions.

Because a merger is the result of a combination of two distinct legal entities, one disadvantage of a merger is that it requires a variety of additional steps and state filings, which can result in additional time and expense. Also a merger may, depending on the circumstances, require additional federal or state regulatory filings and assignment or amendment of the target company’s business partner contracts.

II. Equity Sale

In an equity sale, the buyer will acquire substantially all of the equity interests of the target company. The target company will continue to exist as a separate entity for corporate law purposes but will be owned by the buyer. Since the buyer will typically want to acquire 100% of the equity interests (subject to any rollover), all of the equity owners of the target company will need to approve the transaction. Similar to a merger, the assets and liabilities of the target company will remain post-closing. Buyers and sellers often prefer an equity sale since it allows the target company to exist post-closing and continue its operations closer to the way the sellers have traditionally done business. Equity sales are also desirable from a tax perspective since sellers typically receive long-term capital gains treatment on the sale of the equity if they held their equity for more than a year. To the extent the target company is a C corporation, which is unusual for an RIA itself (but not necessarily for an RIA’s ultimate holding company), an equity sale is also beneficial from a tax perspective since it avoids the issue of double taxation that exists in an asset sale (described below).

In an equity sale there is no combination or change in legal entity. Since the target company will continue to exist, there may be little impact on third parties since only the ownership of the target company will have changed. Unlike a merger, there are also no state filings, such that an equity sale is typically a more streamlined approach. One concern in an equity sale is hold-out owners. Target companies with multiple owners run the risk that one or two of the owners may not be on board with the sale transaction and withhold, delay, or condition their consent, increasing deal consummation risk.

III. Asset Sale

Unlike in a merger or equity sale, in an asset sale the buyer does not acquire ownership of the target company. Instead the buyer decides which assets and liabilities in particular it wishes to acquire. There may be some assets — such as benefit plans, certain contracts, real estate, lines of business, etc. — that a buyer does not want to acquire and will choose to exclude from the sale transaction. If an RIA business has multiple business lines (e.g., research, institutional, private wealth, brokerage, fund management, insurance) an asset sale may be beneficial since it will allow the seller to sell one part of their business while continuing to operate the others.

From a tax standpoint, to the extent the target company is a C corporation, which is unusual for an RIA (but not necessarily for an RIA’s ultimate holding company), an asset sale creates an issue of double taxation. The deal proceeds are taxed first at a corporate level and then again when ultimately distributed to the individual equity holders. Therefore, between an asset sale and an equity sale, an equity sale is generally preferred from a target / seller’s tax perspective.

Since the assets in an asset sale will be effectively assigned to the buyer, a seller will often need to solicit consent from third parties to assign any respective contracts to the buyer. Most contracts contain a provision requiring consent of a third party to an assignment. Therefore, compared to an equity sale, more third-party consents typically need to be solicited in an asset sale. Buyers often require sellers to solicit and obtain all required third-party consents as a condition to closing. If there are many third parties who need to provide consent, that creates an opportunity for additional risk to closing.

Similar to an equity sale, and unlike a merger, no state filings are required for an asset sale. A review of the relevant state law and the corporate governance documents of the selling entity is needed to determine what, if any, equity holder approval is required, but often it is a threshold less than 100% (i.e., a majority of the outstanding equity interests) as compared to an equity sale where generally all equity holders must approve the transaction. Sellers should also be aware that unlike an equity sale or merger, the target company will continue to exist post-closing and will not be owned by the buyer. Therefore, the seller will ultimately need to decide what to do with that entity post-closing (e.g., dissolve, continue in a new business line).

Unlike equity sales, asset sales necessitate the migration of investment advisory representative registration from the selling RIA to the buyer. Unlicensed officers, directors, or employees of the buyer may need to get licensed in order to conduct or supervise activities relating to the purchased assets. The buyer in an asset sale may also need to revise current regulatory filings or apply for new federal or state RIA or other regulatory registrations (e.g., with the Financial Industry Regulatory Authority or the Commodity Futures Trading Commission) if deploying the acquired assets will cause the purchasing entity to initiate any regulated activities.

IV. Treatment of Personal Goodwill

In addition to the three structuring options described above, an important and often overlooked tax planning tool that relates to structuring is the strategic use of personal goodwill. This concept refers to the intangible value attributable to the selling adviser’s personal relationships, reputation, and client loyalty — distinct from the goodwill owned by the business entity itself. In many RIA firms, particularly those closely held or founder-led, the adviser’s individual client relationships are central to the business’s success and continuity. By allocating a portion of the purchase price to the adviser’s personal goodwill, sellers can potentially achieve significant tax savings, as amounts received for personal goodwill are typically taxed at favorable long-term capital gains rates rather than higher ordinary income rates.

This approach can be powerful for sellers of C corporations, where asset sales can otherwise trigger double taxation — once at the corporate level upon the sale of assets and again at the shareholder level when proceeds are distributed. In the RIA context, where the existence of C corporations is rare, this approach is especially powerful in situations where a key employee is not an equity owner, where the founder wishes to disproportionately allocate the purchase price among the selling company’s equity owners, or to reduce certain state taxes. Regardless of the legal form of the deal — be it a forward merger, equity rollover, or straight asset sale — the key is ensuring that the personal goodwill is separately identified, separately valued by an independent third party, contractually documented, and supported by facts showing it resides with the individual and was not previously transferred to the company through employment agreements or restrictive covenants.

While the sale of personal goodwill can be a creative tool to benefit the sellers, all parties must be mindful to ensure that the personal goodwill is in fact “personal” to the seller and has not otherwise been transferred to the target company. It is crucial to carefully document the seller’s ownership of the goodwill and ensure that it has never been previously contributed to or assigned to the target company pursuant to a legally binding arrangement — whether explicitly through employment agreements or non-compete clauses, or implicitly through long-standing corporate practice. Supporting documentation might include a standalone personal goodwill purchase agreement, an independent valuation allocating value to the personal goodwill, and/or clear statements in the transaction documents distinguishing the sale of personal goodwill from the sale of the target company.

When implemented thoughtfully and in compliance with tax rules, use of personal goodwill can serve as a powerful lever to increase the seller’s net proceeds and optimize the tax outcome in the sale of an RIA business — regardless of whether the transaction takes the form of a merger, equity sale, or asset sale.

4. Client Consents

Typically the structure of the transaction will dictate what consent, if any, from third parties is needed in an ordinary sale transaction. However, an RIA sale transaction differs from the sale of other types of businesses because — regardless of whether a transaction is structured as a merger, equity sale, or asset sale — the target RIA must obtain the consent of its clients to any assignment of the client relationship or change in control of the target company.

The requirement to seek client consent to the sale transaction is both a contractual and regulatory requirement. Section 205 of the Investment Advisers Act requires that each investment advisory contract between an RIA and a client provide that the investment adviser may not assign the investment advisory contract without the consent of such client. In the context of the Investment Advisers Act, an “assignment” includes both a traditional assignment of the advisory contract in an asset sale as well as change of control of the investment adviser, including control changes triggered by either a merger or an equity sale. A change in control is presumed if a buyer acquires more than 25% of the voting interests of an investment advisory firm.

There are two types of client consent to an assignment of an investment advisory contract: affirmative and negative. Affirmative consent occurs when the investment adviser notifies its clients of the pending transaction and obtains each client’s written consent to the assignment of the client’s investment advisory contract to the buyer. Under the negative consent approach, the investment adviser notifies its clients of the proposed transaction and typically requests the client’s affirmative consent. If the client does not respond to the initial notice within a set period, a second notice should be sent out where the investment adviser states that the client’s investment advisory contract will be assigned to the buyer unless the client objects by terminating their relationship with the investment adviser.

A more streamlined negative consent approach is sometimes feasible, depending on the client contract. Under this approach, rather than first requesting affirmative consent, the investment adviser provides a notice stating that the contract will be assigned unless the client terminates, and may assume consent if the client does not respond. The time period required for the affirmative and negative consent process varies and is typically no shorter than 30 days. Naturally, the preference is for a shorter period and to use the negative consent process. However, whether negative and shorter timeframes are permissible and feasible under applicable Securities and Exchange Commission guidance will depend on the specific investment advisory contracts in place between the target RIA and its clients and on the totality of the facts and circumstances surrounding the transaction. Due to the complexity of SEC guidance and enforcement risks around using a negative consent approach for a statutory assignment, both purchasers and sellers of RIAs should consult legal counsel with investment advisory sector transactional and regulatory expertise before planning the solicitation and confirmation of client consents.

Sellers typically do not want to solicit their clients’ consent or inform their clients of the pending transaction until they are certain it will actually occur. As a result, client consent is generally not solicited until the definitive documents for the sale transaction are signed. Therefore, regardless of whether structured as a merger, equity sale, or asset sale, the sale transaction will typically end up having to be structured as a staggered signing and closing, with the seller using the interim period between signing and closing to solicit the consent of its clients. Since buyers will want to ensure that they are receiving as much of the target RIA’s assets under management as possible, they will often include a condition to closing of the transaction requiring the seller to have obtained the consent (either affirmative and/or negative consent, as applicable) of a minimum percentage of the seller’s current client base. Often the parties may adjust the purchase price, either positively or negatively, or include earn-out mechanics to incentivize sellers to use their best efforts to try to get as many client consents as possible in advance of closing. Although soliciting client consent is an obligation of the sellers, cooperation between buyer and seller is needed surrounding the messaging of the notice to clients to ensure all parties are comfortable and aligned with how the transaction and resulting post-transaction impact on clients is being described publicly to clients.

5. Restrictive Covenants and Employment Matters

A majority of RIA firms are owner-operated, with at least some (if not all) of the owners of the firm also acting as investment adviser representatives with their own clients. The owners typically play a role in the daily operations of the business. In a sale transaction, it is common for buyers to include restrictive covenants in the definitive deal documentation that prohibit the equity holders from competing with the selling RIA or buyer post-closing. Restrictive covenants may also be included that prohibit the hiring of any current or former employees or soliciting any current or prospective clients. Many buyers of RIA firms that are owner-operated may also require the equity holders to enter into new employment agreements with the buyer that may also have their own restrictive covenants.

Increasingly, the use of restrictive covenants, including non-compete restrictions, has been heavily scrutinized by state and federal courts. As recently as April 2024, the Federal Trade Commission (FTC) finalized a rule banning most post-employment non-competes. However, that FTC rule was struck down by a US District Court. Additional information on the FTC rule and the current landscape of restrictive covenants is available here. While the FTC rule has been set aside, states are increasingly scrutinizing the enforceability of non-competition covenants, with California arguably being the strictest. Sellers should consult their labor and employment counsel when reviewing the proposed employment agreements as well as any other deal documentation that may contain restrictive covenants, given the recent developments in the enforceability of such arrangements.

Looking Ahead

RIAs and wealth management firms looking to sell their business should consider the factors described above before soliciting or negotiating a potential sale transaction. In particular, they should get an early start preparing for due diligence scrutiny and seeking legal advice on the proposed deal structure, client consent, and communication processes to satisfy regulatory requirements and maximize retention of assets under management, and any restrictive covenants or employment agreements that a seller may be asked to enter into in connection with the deal. By planning early, wealth management and RIA firms can best prepare themselves for a smooth sale transaction. 
 

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