How Personal Goodwill is Impacting M&A Opportunities for Employee Advisors
A hot topic in the RIA M&A market is personal goodwill sales, which are helping employee advisors tap into the same tax benefits as independent RIAs when it comes to monetizing their practices. This new trend is gaining momentum, with investment bankers and M&A lawyers utilizing an advisor’s personal goodwill to structure acquisitions and recruitment deals.
What exactly is personal goodwill? It’s a tax concept that encompasses an individual’s reputation, experience, and client relationships. By selling their personal goodwill, advisors can cash in on their practices, even if they don’t legally own the client relationships through a business entity. Here’s the kicker: if the advisor has been registered with regulators for more than 12 months, the proceeds from a personal goodwill sale are taxed at the long-term capital gains rate of 20%, which is significantly lower than ordinary income tax rates that can go as high as 37% in some cases (although state rates might differ).
This shift towards leveraging personal goodwill is a game-changer for employee advisors looking to make the most out of their practices and secure better tax outcomes. It’s an exciting development in the finance world that’s worth keeping an eye on for anyone in the industry.
