Buying into a practice

[TJurado]

I am currently in the negotiating phase of buying 1/3 of a family-owned S corp.

I am curious if anyone has experience with this. We are going to enlist the help of FPTransitions, but I wanted to get some outside advisor's opinions/experiences. One of my questions is with regards to who "owns" the clients. As I understand it Rep IDs are specific to the individuals. You can't have a corporation own a Rep ID. So if I'm buying into the business but the commissions/fees earned by the "company" are actually being funneled through the current owner's Rep ID, what recourse do I have should he decide to say...have the revenue payments made to a different account?

Thoughts?

[Bradly T.]

We use an operating agreement/contract signed by partners. Each of us has a personal incoming payroll receiver account which is emptied (x a $50 float balance) every cycle into corp. checking. Expenses and payroll are paid out on predetermined split regardless of origination with earnings/profits distributed annually. You are going to have a busy CPA!We also have buy/sell and termination agreement for death, disability, retirement, and sell/buy out. BD is aware of agreements but, like you say, the actual account assignment is between bd and advisor/rep - not subS. Advise you are rep of record on every client you originate and any that partners want to reassign to you. Your originated bd comp flows to your personal account for subS "pourover" for accounting, expenses, and profit distribution. It then becomes a comp split deal for total firm revenue where salaries differentiate seniority, skill, asset gathering, etc. Dissolution and/or termination should be planned events even if they never occur. Never begin without the end planned and contracted - contracts can be renegotiated as needed, but they can never be originated when needed most!!

[TJurado]

Thanks Bradly,

The main issue regarding splitting the revenue btwn Rep IDs is due to breakpoints with our B/D. Flowing the revenue through one ID gets the haircut down to about 4% so we keep 96% of gross revenue. Do you think we could do a similar contract stating that all revenue produced by this one Rep ID must be deposited to the firm's account?

[Bradly T.]

Absolutely....however, you then have the problem of future advisor-of-record if any partner splits from firm. Many BDs will give "production-group" or firm production aggregation for payout....in other words, it is the group or firm's production which determines payout rate. Our firm just moved that way, after many years of advisor by advisor comp. rules. So, if BD won't aggregate, you pick your poisen....less comp with assignment control or more comp with one advisor as "owner" of all accounts. You can, by signed agreement "tag" or earmark each account for different advisors to "take" if there is a future split but you know what they say..."possesion is 9/10ths!!"

[TJurado]

Bradly,

Would you be up for a conversation about this? You are obviously very knowledgeable on this subject and I'd love to pick your brain.

Best,
Tony

[Bradly T.]

TJ - actually, this is my first rodeo of this sort. I have a very good partner who is also CPA and we worked together for years first. Others on this site may have important input too. So, please profile your situation in more detail. Are you joining 2 others already in agreement? or are 2 of you joining solo practice? is there an attorney involved for entity, agreements, dissolution, etc.? whose attorney? is there already a basic outline of comp splits and responsibilities? are the 3 of you clones of each other's skill sets or are each of you bringing specific, integrated skills to a team practice? is there support staff in place or planned? can the current practice support everybody or is new $$ acquisition an immediate priority? will you be indie BD affiliated or RIA only? would firm change BD to one that does allow firm comp aggregation (our firm still pays only to individual reps, they simply aggregate GDC of both of us to determine payout rate - I am not with either firm but I believe that Securities America, LPL, and others allow)? whose rep id is "the" proposed id?


Some of you other indies in group practice speak up and help out here!!!

[TJurado]

Bradly,

Thank you for your response. I didn't reply immediately because the transaction has changed directions. Instead of buying shares of the S corp I am now buying clients from the company and we will each have our own P&L. This allows more options going forward.

Again, I appreciate your insight. Thank you.