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How To Do A Claw Back On An Advisor Acquisition

In a previous post we discussed a few of the protections buyers can put in place to preserve their interests during an acquisition. The primary purpose of the protections is to minimize client attrition and preserve the value of the practice being acquired. One of those protections, a claw back, is one that M&A experts most highly recommend for protecting buyers and ensuring seller participation in the transition of clients. In this post we will discuss the mechanism for how a claw back works on an advisor acquisition.

As a rule of thumb, a claw back clause states that if a certain percentage of assets aren’t transferred within the claw back period (usually 12 months), then the purchase price is adjusted to reflect the attrition of client assets. Buyer and seller can agree to any percentage, but the industry standard is a 90% retention rate (so maximum 10% decrease in assets) within the 12-month period.

In terms of the actual mechanisms of the claw back, there are a few approaches you can take. One popular approach is to attach the claw back clause to the seller note. If at the end of the look back period the attrition rate exceeded the agreed upon percentage, then the principal amount of the seller note would be adjusted down accordingly. Another option is to fully fund the loan and put a hold-back amount in an escrow account for the look back period. If the claw back is triggered it would give the money back to the lender to apply toward the principal of the note. If it’s not triggered, then the seller would receive the escrow funds as the remaining proceeds on their practice sale. In both cases the seller is incentivized to help the buyer transfer as many clients and client assets as possible to avoid losing that money.

Often buyers will pair a claw back with other protections such as a non-compete clause or another agreement that would provide the buyer with a legal course of action if the seller somehow undermined or inhibited the transfer of clients and assets. When it comes to doing a deal, it’s always best to work with an experienced acquisitions expert and/or lawyer who can advise you on specific deals and protections. It’s also good to speak to a lender before agreeing to a deal so that you can know what deal terms they recommend and if anything would hinder your ability to secure financing.