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Forgivable Loans: A Lifeline or a Leash?
“If they’re giving something away for free… You just might be the product.”
We’ve all heard that phrase before, usually when talking about social media or some shady subscription offer. But here’s the thing, it applies just as much to the world of financial advisors changing firms.
I’ve seen a pattern: an advisor gets an enticing offer from a large firm. “We’ll give you $500,000 up front to help you transition,” they say. “No strings attached, well, except for that little detail where you commit to staying for 7 years and hitting production targets, or we’ll come knocking.”
This isn’t free money. It’s a forgivable loan, and it comes with a price that many advisors don’t fully understand until it’s too late.
Let’s break it down.
It Feels Like a Bonus, But It’s a Loan
The forgivable loan model is simple: the firm gives you a lump sum (usually a multiple of your trailing 12-month revenue), and over time (5 to 9 years, typically), they forgive chunks of the debt. But only if you stick around and perform.
Miss a production hurdle? Leave early? Decide their platform isn’t right for your clients? The BD gets sold to a third party you don’t like?
You’re on the hook to pay it back. Suddenly, that free money looks a lot like a mortgage on your freedom.
And Here’s the Tax Kicker…
Each year, as part of the loan is forgiven, it’s treated as ordinary income. So instead of capital gains treatment (15–20%), you’re paying your full income tax rate. That means you’re losing another chunk off the top without selling your business or capturing its true value.
Let that sink in: you just took on a 7-year debt for cash that gets taxed like a paycheck, not a sale.
The big firms aren’t rewarding you for building value; they’re buying your service and future production.
If you run the math, you might realize that you just gave away access to your business for a fraction of its true worth. You’re now generating revenue for their platform, tied to their products, and dependent on their rules, possibly even paying more in platform fees or passing hidden costs to your clients in the form of markups or limited offerings.
And for what? A check that sounds big but might be less than a third of what your business could command in a real valuation.
What Should You Be Asking Instead?
If you’re going to make a change, why not start by knowing what your business is really worth?
- What are your recurring revenues?
- What’s your client retention rate?
- What kind of EBITDA multiple would an outside buyer offer?
These are the metrics that matter when you’re thinking like an owner, not just an employee with a payout dangling in front of them.
There Are Better Ways to Monetize1
A forgivable loan might sound appealing in the short term. But long-term? You may be far better off exploring:
- Mergers with like-minded RIAs
- Selling part or all of your book to a strategic partner
- Equity-based deals that offer real upside
- Succession plans that generate capital gains, not ordinary income
These structures often give you a better tax outcome, more control, and a clear path to exit (or evolve)—without the handcuffs.
Final Thought: Is the Juice Worth the Squeeze?
It’s easy to get dazzled by a big number. Firms know this, that’s why they lead with the check. But before you sign, pause and ask yourself:
Is this loan a lifeline… or a leash?
That big check is a payday… or payback?
Those “production goals” benchmarks… or ball and chain?
That loyalty bonus, a reward… or a ransom?
You’re not just signing a note; you’re selling years of freedom, flexibility, “ownership”, and growth potential. You’re not just taking a loan, you’re handing the keys to your future revenue to someone else. Before you sign on the dotted line, get a value from a competent M&A firm, talk to your accountant, understand YOUR value, and check with someone who has been there before.
And maybe, just maybe… It’s time to stop letting someone else tell you what your business is worth.
- *in my opinion ↩︎
