Tax Implications of Selling a Financial Advisory or Planning Practice

Selling a financial advisory practice — or a financial planning practice — involves more than simply agreeing on a price and signing documents. One of the most significant, and often unexpected, factors that both buyers and sellers face is the tax impact of the transaction.

From deal structure to the treatment of goodwill, every decision can affect how much each party keeps after taxes. Whether you are selling your practice to retire, merge with another firm, or expand your client base through acquisition, understanding these tax implications is essential.

For a comprehensive breakdown on how to prepare for the sale, including timing, valuation, and buyer selection, check out Selling Your Financial Advisory Practice: How to Exit Smart.

To shed light on the most important considerations, we spoke with Alan Salomon, CPA/ABV, CVA, who provided an overview of what buyers and sellers can expect.

Deal Structure When Selling a Financial Advisor Book of Business

When structuring the sale of a financial advisor book of business, there are typically two approaches. The first is an asset sale, where the individual assets of the practice are sold (minus any liabilities). In financial services, this usually means goodwill, since there are often few tangible assets. The second approach is an equity or ownership transfer, such as stock or LLC membership interests. However, because most advisory practices operate as sole proprietorships or simple LLCs, equity transfers are less common compared to asset sales.

An optimized deal structure not only impacts how the transaction is valued but also directly affects the taxes paid by both buyer and seller.

Understanding Enterprise vs. Personal Goodwill in Practice Sales

Salomon goes on to indicate that there are two types of goodwill and breaks down the differences below:

1. Enterprise Goodwill: The goodwill that stays with the business, regardless if the current business owner were to leave that business. This type of goodwill is applicable to situations where someone connects with a business because of familiarity with the name of the company, location, or systems that it has in place. For example, someone may stay with a financial advisor book of business simply because they like the firm’s established reporting process or brand recognition.

2. Personal Goodwill: This type of goodwill attaches to the individual business owner simply because of his/her good name, reputation, or personal relationship. Clients of financial service businesses generally are consistent with this type of goodwill.

Because personal goodwill is common in this industry, buyers should include a covenant not to compete to protect against the seller opening a competing business. Additionally, when selling a financial advisor book of business, correctly classifying goodwill can have a significant tax impact. Enterprise goodwill may qualify for favorable capital gains treatment, while personal goodwill may shift more value into ordinary income categories if not carefully structured.

Proper documentation and third-party valuation of goodwill help protect both buyer and seller, ensuring the tax allocation stands up under IRS scrutiny.

Tax Implications of an Asset Sale for a Financial Advisor Book of Business

Financial advisor book of business sales are usually structured as asset sales, since few firms have significant tangible property. In this structure, the purchase price is allocated across individual assets, which heavily influences both buyer and seller taxes. In order to arrive at a defensible value, a formal business valuation should be obtained from a qualified third party. Salomon explains that the buyer and seller must also agree to the allocation of value among the assets, which are then recorded on IRS Form 8594 and included in each party’s tax returns for that year. Each asset class is treated differently from an income tax perspective.

For the buyer, tax considerations of each asset type include:

1. Fixed Assets: Office equipment, furniture, or software licenses. These can generally be written off in the year of purchase with IRS Section 179 or bonus depreciation (previously limited for used assets). Alternatively, depreciation can be spread over 5–7 years depending on the type of asset.

2. Intangible Assets: Goodwill and covenants not to compete. These fall under Section 197 intangible assets and must be amortized over 15 years. Correct classification here is essential when purchasing a financial advisor book of business, since it impacts long-term tax deductions.

For the seller, goodwill is generally treated as a capital gain, which can be highly favorable. However, funds received for a covenant not to compete are taxed as ordinary income. Additionally, prior depreciation recapture may trigger ordinary income taxes. These distinctions make pre-sale tax planning critical for anyone selling a financial advisor practice.

For more guidance on structuring a sale and choosing expert support, see our article on choosing the right help for your succession.

Consulting Agreements to Support Client Transition After a Sale

In order to improve the transition of clients and ownership of the relationship, many transactions include an agreement to retain the services of the seller for a specific period of time. Salomon states that those agreements are generally restricted to 1-3 years. He also adds that “consulting agreements are tax deductible to the buyer in the year the fees are paid. They are taxed as ordinary income to the recipient, in addition to having to pay self-employment tax on the amount received.

Seller Financing and Payment Structures in Financial Advisory Practice Sales

If the buyer is making payments to the seller over time, Salomon says they must include interest. The interest paid is tax deductible to the buyer and “should be considered as taxable income to the seller at ordinary income tax rates.”

Below we have a chart which breaks down the key elements of a transaction and the tax implications for each the buyer and the seller.