Committed to the End

A successful practice sale doesn’t end when the buyer signs the purchase agreement. It ends when the entire practice, including all of its clients, successfully transition over to the new owner. The process includes many elements, but to truly keep a seller committed to the end requires clearly defined responsibilities, a written plan, and proper incentives. One key incentive that keeps a seller committed to the end is an Attrition Clause.

How an Attrition Clause Keeps the Seller Engaged to the End

An Attrition Clause is a section of the sales contract that defines the seller’s commitment to helping transition their clients to the new financial advisor. It also stipulates that a portion of the funds for purchasing, usually 20-25 percent, are kept in escrow until the seller has met all terms of the transition process. This includes but is not limited to facilitating introductions and meetings with clients to ensure client retention and a set date or point at which the seller will formally disengage from the client relationship.

The escrow portion of the Attrition Clause provides a financial motive above and beyond the desire to remain compliant with the contract. That, plus a commitment to the client experience, really help to facilitate a smooth transition for a firm’s clients and significantly reduces attrition. We include an Attrition Clause in all of our contracts, even though we generally represent the seller. We find it to be in the best interest of both contracting parties and to the stability of the practice being purchased.

It’s also a key element to upholding one of our core company values, which is to always act with integrity in all relationships and interactions. We analyze our actions and decisions with what we like to call “the grocery store test.” To apply the test we ask, if five years from now you ran into the other person in a grocery store, will they be happy to see you? Will they think that you were fair, honest, and acted with class?

We use it to evaluate not only how we treat our clients, but also have our clients use that as a benchmark when planning for and executing their succession. You may be leaving the practice, but you want to leave with your reputation intact. Ask yourself, did I act in the best interest of my clients, staff, and partners throughout the transaction? Will I be able to face them years from now, in Aisle 5, with my head held high?

Including an Attrition Clause in Your Purchase Agreement

In terms of drafting up your purchase agreement and including an attrition clause, we always recommend working with a succession expert. They already have templates in place and legal advisors who specialize in financial advisor successions. They are also experienced at formatting agreements to meet the rules and regulations of your specific broker-dealer or custodian, ensuring your transaction is complaint from all angles. It’s not something you want to DIY or cobble together from the internet. You don’t know what you don’t know, so seek out advice before creating or signing any agreements.