More On Tax Planningfrom The Advisor's Professional Library
- Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
As a CPA at Grant Thornton, Patrick Jinks consulted with many business owners, including those who went through the process of selling those businesses. Jinks has brought that expertise to his new position at Raymond James Financial Services as director of practice planning and acquisitions. Jinks joined Raymond James in April 2011 and took on his new title two weeks ago.
The coaching and consulting that Jinks (left) and his team provide to advisors at Raymond James Financial, RJ’s independent contractor broker-dealer, starts in some cases before a representative even joins RJF. “I have conversations around what it takes to be a sound business entrepreneur, to make decisions before your doors open,” Jinks said in an interview Thursday. Once they do join Raymond James, Jinks and his team’s job is to help those advisors grow their firms through coaching and consulting, partly through Raymond James’ Practice Intelligence program (see April 2011 Research magazine article on that program), and to be “good stewards of their businesses,” which includes succession planning help and, when desired, help with acquiring other advisory firms as part of their growth strategy.
The Wednesday announcement of Jinks’ new title said that included in the support services provided by Jinks’ team will be financing from Raymond James “for the purpose of providing liquidity for practice sales and/or acquisitions.” Jinks says that process begins with a determination by an advisor that he wants to grow by way of acquisition, but “everything is based on an individual’s circumstances,” and that “we don’t force them” into making any deal.
Jinks says that at the moment he’s consulting on a “half-dozen strategic acquisitions” among Raymond James advisors. He consults on the “art of the deal,” on valuations and on evaluating a target firm’s client bases. Client retention, he says, is the most important part of any such acquisition, both from a cultural-fit point of view but also, often, financially. As for deal structures, Jinks says “we don’t dictate what they should be.” Rather he “ensures that they are making a sound business decision” and then provides coaching and guidance on best practices around a deal.
How does the process work? Jinks reports on one of his six pending deals where he’s working with a current Raymond James advisor looking to acquire an independent practice not affiliated with Raymond James. He is working with the prospective buyer through the valuation of the firm for sale and coaching them as the buyer conduct his due diligence, and then through the process of integrating the two practices.
Since we are, after all, talking about independent advisors, each deal is different, but Jinks says it usually involved three variables: an initial down payment that can range from 20% to 50%; a contingent earn-out, based on firm revenue, that can last from three to five years; and a contingent note that includes a guaranteed amount based on the all-important metric of client retention, but can also be adjustable based on the firm’s income.
While other consultants and industry observers like to say that most sellers have an inflated view of what their firms are actually worth, Jinks says that most buyers and sellers have a pretty realistic understanding of a firm’s valuation. He admits that often there’s an emotional component to a seller’s sense of his firm’s worth, so it’s important for a seller to “take out the emotional component.”
Jinks makes one more point about acquisitions and deal structure: the importance of the tax consequences. When one independent contractor financial advisor buys another’s practice, “the predominant structure I’ve seen is almost always an asset sale.” Pending the terms of the deal, the buyer can depreciate or amortize those assets over an amount of time following IRS prescribed regulations, and the seller’s proceeds are likely predominantly a capital gain, again pending the terms of the deal. A wirehouse broker who wants to sell his book of business to another wirehouse broker, by contrast, faces the prospect of having proceeds from a sale being treated as ordinary income by the IRS. A wirehouse broker, he suggests, might do better to join an existing independent contractor firm, even for twelve months, before selling their book of business. In either case, Jinks recommends that both buyer and seller receive independent tax advice before a deal is made, saying it can be “a huge differentiator.”