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Steps to Consider in Authorizing an Agreement to Purchase/Sell a Stockbroker’s Book of Business

When a stockbroker decides to sell their book of business, it is often due to retirement or a shift in career focus. Conversely, a financial advisor may look to purchase a book of business to expand their client base and grow their practice. Bakhtiari & Harrison represent and guide stockbrokers and financial advisors in these significant transitions, ensuring all legal and financial aspects are meticulously handled. Below, we outline the critical steps and considerations involved in the process.

  1. Letter of Intent
  2. Essentials

The Letter of Intent (LOI) is a foundational document that sets the preliminary terms of the transaction. It ensures that both parties are on the same page before moving forward with more detailed agreements. Key elements of the LOI include:

  1. Basic Terms of the Transaction
  • Identification of Parties: Clearly state the names and details of both the buyer and the seller.
  • Description of the Book of Business: Provide a detailed description of the assets being sold, including client lists and revenue streams.
  • Purchase Price: Specify the agreed-upon price and payment terms.
  • Timeline: Outline key dates, including the expected date for signing the final agreement and closing.
  1. Respective Parties’ Obligations
  • Access to Information: The seller must provide the buyer with necessary information and documents.
  • Confidentiality: Both parties must agree to maintain confidentiality regarding the LOI and any shared information.
  • Good Faith Negotiations: Commit to negotiating the final agreement in good faith.

iii. Imposition of Obligations

  • Exclusivity: Implement a no-shop clause to prevent the seller from negotiating with other potential buyers during the negotiation period.
  • Break-Up Fees: Specify fees payable if the deal does not close under certain conditions.
  1. Identification of Expenses and How They Will Be Allocated
  • Due Diligence Costs: Outline the costs associated with due diligence, such as legal and accounting fees.
  • Regulatory Filings: Include fees related to regulatory filings or approvals.
  • Other Transaction Costs: Detail any additional costs and how they will be divided between the buyer and seller.
  1. Setting Parameters

Setting clear parameters in the LOI helps define the scope and limitations of the negotiations, including:

  • Scope of Due Diligence: Define the extent and timeframe for due diligence.
  • Confidentiality Agreements: Establish the terms for maintaining confidentiality.
  • Non-Binding Nature: Clarify which parts of the LOI are non-binding and which are legally binding.
  1. Best Practices

Adhering to best practices ensures that the LOI serves as a solid foundation for the final agreement.

  1. Due Diligence

Conduct thorough due diligence to verify the accuracy of the information provided by the seller, including:

  • Financial Records: Review financial statements, tax returns, and other financial documents.
  • Client Information: Verify the client list and revenue streams.
  • Legal Compliance: Ensure the business complies with all relevant laws and regulations.
  1. No-Shop Clause

Include a no-shop clause to prevent the seller from negotiating with other potential buyers during the negotiation period, providing the buyer with a level of security and exclusivity.

iii. Material Terms

Ensure all material terms are clearly outlined in the LOI, including:

  • Purchase Price and Payment Terms: Clearly define the purchase price and payment terms.
  • Assets and Liabilities: Specify which assets and liabilities are included in the sale.
  • Conditions Precedent: Outline any conditions that must be met before the final agreement can be executed.
  1. Agreement to Agree

While the LOI is not a final agreement, it should include an agreement to agree on certain key terms, demonstrating a commitment from both parties to move forward with the transaction.

  1. Operating Agreement

The Operating Agreement governs the operations and management of the business after the transaction is completed.

  1. Buy-Sell Agreement

The Buy-Sell Agreement is a crucial part of the Operating Agreement, especially when merging or integrating the seller’s book of business with the buyer’s existing operations. Key components include:

  • Triggering Events: Define events that can trigger the buy-sell provisions, such as death, disability, retirement, or voluntary sale.
  • Valuation Methods: Establish how the value of the book of business will be determined in the event of a buyout.
  • Buyout Terms: Specify the terms and conditions of the buyout, including payment terms and financing options.
  1. Purchasing Agreement

The Purchasing Agreement finalizes the transaction, including detailed terms and conditions and addressing various legal and operational aspects.

  1. Representations and Warranties of Buyer

The buyer’s representations and warranties typically include:

  • Authority: The buyer has the legal authority to enter into the agreement and complete the transaction.
  • Due Diligence: The buyer has conducted all necessary due diligence and is satisfied with the findings.
  • Financial Capacity: The buyer has the financial resources to complete the purchase.
  1. Representations and Warranties of Seller

The seller’s representations and warranties generally cover:

  • Ownership: The seller has clear title to the book of business and the right to sell it.
  • Accuracy of Information: All information provided by the seller is accurate and complete.
  • Compliance: The business is in compliance with all applicable laws and regulations.
  1. Tax Considerations

Tax considerations are critical in structuring the transaction. Key points include:

  • Allocation of Purchase Price: Properly allocate the purchase price among different assets for tax purposes.
  • Tax Liabilities: Identify any potential tax liabilities and how they will be handled.
  • Tax Elections: Determine if any tax elections will be made, such as Section 338(h)(10) elections for corporate transactions.
  1. Consent of Owners if a Merger

If the transaction involves a merger, obtain the consent of the owners or shareholders of both entities. This may require:

  • Shareholder Meetings: Holding meetings to obtain approval.
  • Voting Requirements: Meeting any voting thresholds required for approval.
  1. Conditions to be Met Before Closing

Outline the conditions that must be met before the transaction can close, such as:

  • Regulatory Approvals: Obtaining any necessary regulatory approvals.
  • Financing: Securing financing for the purchase.
  • Third-Party Consents: Obtaining consents from third parties, such as clients or vendors.
  1. Operations of the Business Between Agreement and Closing

Establish guidelines for how the business will be operated between the signing of the agreement and the closing date, including:

  • Operational Control: Determine who will have control over the business operations.
  • Maintenance of Business: Ensure the business is maintained in its current state and not materially altered.
  1. Employment Agreements and Restrictive Covenants

Address employment agreements and restrictive covenants to protect the interests of both parties:

  • Employment Agreements: Define the terms of employment for key employees who will transition with the business.
  • Non-Compete Clauses: Include non-compete clauses to prevent the seller from starting a competing business.
  • Non-Solicitation Clauses: Prevent the seller from soliciting clients or employees after the sale.
  1. Litigation

Address any potential litigation issues that may arise:

  1. Arbitration

Consider including an arbitration clause to resolve disputes quickly and efficiently:

  • Arbitration Rules: Specify the rules and procedures for arbitration.
  • Arbitrator Selection: Define how arbitrators will be selected.
  1. Court

Outline the jurisdiction and venue for any court proceedings that may be necessary:

  • Governing Law: Specify the governing law for the agreement.
  • Venue: Determine the appropriate venue for legal proceedings.
  1. Closing Procedures

Detail the procedures to be followed at closing, including:

  • Document Exchange: List the documents that will be exchanged at closing.
  • Payment: Outline the payment process and how funds will be transferred.
  • Title Transfer: Ensure that the title to the book of business is properly transferred.
  1. Indemnification

Include indemnification provisions to protect both parties from potential liabilities:

  • Scope of Indemnification: Define the scope of indemnification, including any limitations.
  • Indemnification Procedures: Outline the procedures for making indemnification claims.
  1. Contingent Liabilities

Address any contingent liabilities that may arise after the transaction:

  • Identification of Liabilities: Identify any known contingent liabilities.
  • Responsibility for Liabilities: Determine how contingent liabilities will be handled and who will be responsible for them.

Bakhtiari & Harrison are committed to representing and guiding stockbrokers and financial advisors through the complexities of buying or selling a book of business. Whether you are looking to retire and sell your book or expand your client base by purchasing another advisor’s book of business, our seasoned stockbroker lawyers are here to assist you every step of the way. Visit for more information about our services. Contact us today to ensure your transaction is handled with the utmost professionalism and expertise.