Convert Your Practice from Ordinary Income to Capital Gains
Your firm wants nothing more than to keep you as a W-2 servant to their enterprise, but recent IRS rulings are allowing Advisors to value their practices under Cap Gains taxation.
Stop giving half your T-12 to your firm and the other half to the IRS.
VALUATIONS ARE HIGHER
The Street values wealth management practices as a multiple of top-line revenue, and that's always been the standard. But there is a better, more realistic metric. It's the same one your clients use to value, position, and sell their entities: EBITA.
This metric introduces two new dynamics: 1) what is the percentage EBITA on a wealth management practice, and 2) what is a reasonable EBITA multiple to apply when selling that practice?
The Opportunity
Metrics in the world of Capital Gains valuations for wealth management practices can often be much higher than what the Street typically offers.
Private Equity has stormed Wealth Management
P/E firms love annuity income, and they have recently "discovered" the predictability of our fee models — to them it's analogous to insurance premiums. The broker-dealers that exist within these top-notch P/E firms, e.g., Blackstone, are being increasingly led by Street veterans — people you know — with Goldman, Schwab, Fidelity, and BNY Clearing.
WHO'S PLAYING BALL?
P/E Firms were the first to value wealth management practices using a Cap Gains analysis. Mature and top-tier RIAs with legendary management are now acquiring practices without the 'Year-and-a-Day' waiting period.
The New Metric
When you started your practice way back when, it was just you, a desk, and a phone. Remember? Back then you needed the name of your firm — the House — for credibility. As you look at your practice today, think of the 'Goodwill' you have created — and "Goodwill" is now a tax term that the IRS recognizes. Ask yourself: how much do I really need the name of my firm right now if I can get all the Alts and Lending I need under a Capital Gains Structure?
Remember, you are paying handsomely for the name of your firm. Maybe it's time to re-think.
Absolutely. There are now wealth management practices that have adopted Cap Gains valuations — all scrutinized by top attorneys and CPAs nationwide. The reason this is not happening all over the Street is primarily by design. This is the opposite of what the major firms want, which is to lock
Advisors like you into long-term contracts and pay them over time with forgivable loans. That helps their balance sheet, but it costs Advisors millions. Shed the W-2 stigma and start looking at your practice in a new light.
The IRS Already Agrees
The IRS recognizes that Advisory businesses qualify for Capital Gains treatment through a framework called multi-period net excess earnings (MEEM), which is rooted in goodwill. The difference is substantial.
Under ordinary income treatment, selling your practice means paying 37% or more in federal taxes. Under a Capital Gains structure, that drops to 20%. For a $25M sale, that's a $4.25M difference — money that stays in your pocket instead of going to the IRS.
What Is Goodwill?
Your Advisory book's value comes from goodwill—the intangible worth built over time. It's the spread between your original cost-basis and fair market value at sale. That delta can be substantial.
According to the IRS, "Goodwill" valuation has two primary drivers: prestige and brand ownership. Prestige is institutional credibility. Brand ownership is your name—and if it means something, it translates directly into value.