Shocking though it may seem, Hurley argues that banks are surprisingly savvy buyers. In particular, they realize that the firm's future success depends far more on the professionals who will run it going forward than on the sellers. The report says that banks often insist that the sellers pay a substantial portion (25% to 33%) of the transaction amount to the professionals who will take over the firm (usually taken from the seller's earn-out payments and paid to the professionals in retention bonuses). This means "reducing the consideration received by the firm's owners," the report states.

Banks typically structure transactions so they can recoup, or self-fund, their investment outlay in a very short period of time. During negotiations with RIAs, banks will typically demand that a high market-level wage for owners must be deducted before arriving at a cash flow figure. They do so for two reasons. First, it lowers the price. Second, it sets more consideration aside for the next generation who will determine the future success of the business.

Then there is the problem of small bank stock valuation. Hurley notes that many small banks are started by entrepreneurs seeking to exploit "temporary dislocations" in the economy and credit markets. Times like the present, when the economy is just emerging from a nasty recession and existing banks are still saddled with bad loans from the last boom, are perfect, since customers are underserved. When these small banks go public, as many do, they can command lofty price-earnings multiples, which they can then use as a currency to make acquisitions.

That's fine for entrepreneurial banks, but it also means the advisor could receive an overvalued stock for his firm. Small bank shares are just as likely as big bank stocks to collapse when the economic cycle turns.

Since these banks are considered small enough to fail, federal bailouts are not happening. "If they go into receivership, you don't get your earn-out, and they still own you," Hurley explains. It may not be fair, but that's the law.

Another problem is the failure of so-called cross-selling synergies to materialize. Advisors are entrepreneurial by nature, and many are inclined to take a dim view of stodgy, bureaucratic bankers, so the relationship required for a successful referral network isn't there. Moreover, bankers' relationship with clients is often transactional, while advisors tend to have more personal connections.

Hurley believes advisors selling their firms to banks should hold onto any profitability from their ownership if they have not been paid in full for it-if they get paid in stages, they should only cede their claim to profits proportionately. Any stock in the bank that they get should be sold immediately. Finally, advisors should demand contractual governance protections for their own autonomy, with earn-out accelerators if the contract is violated.

Internal Transitions
Even if the firm's founders don't want to give up ownership control of their business, they need to spread the equity among key personnel if the firm is to create any sustainable business value. Legal ownership simply doesn't convert into economic ownership even if a control-driven founder might wish it did.

"A buyer isn't buying you [the founder]," Hurley says. "He is buying your successors' services."

While internal transitions are sometimes characterized by pricing disputes and cultural issues, a transition plan allows a firm flexibility, stability for clients and a way to retain key employees. If the other financial metrics were equal, a firm with widely dispersed ownership would have significantly greater value than one with highly concentrated equity.