AFH, which describes itself as a Financial Planning led investment management firm, announced the acquisition of Independent Financial Services this morning.
IFS has 35 financial advisers and numerous national affinity group relationships.
The Stroud company becomes AFH's tenth acquisition since its June 2014 AIM listing, taking the company's total FUM to approximately £1.7 billion.
Alan Hudson, chief executive of AFH, said: "Today's acquisition signifies another key milestone as both our largest to date and our first of a national firm.
"Independent Financial Services represents a significant paper-based transaction with protection for existing investors against excessive dilution and provides excellent geographical synergy to the company's current advisers."
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For the year ended 28 February 2015, IFS's revenue amounted to £3.09 million, of which £2.6m was recurring, and profit before tax was £0.23 million. The net assets of IFS were £0.24 million as at 28 February.
Regarding the takeover fee, a Stock Exchange statement read: "Under the terms of the acquisition, the maximum consideration payable by AFH is £4.1 million based on the performance of IFS over the next 30 months and it is estimated that a further £500,000 of restructuring and integration costs will be incurred by AFH in the current financial year.
"The consideration of the acquisition is to be satisfied through a combination of cash and the issue of new ordinary shares in AFH over the 30 month earn out period. The initial consideration has been satisfied by a cash payment upon completion of £450,000, funded from the company's existing cash resources.
"Further deferred consideration of up to £3.65 million will be payable, 50% in cash and 50% in consideration shares.
"These are to be issued at the average market price of the 5 business days prior to each payment date over the next 32 months in three tranches and dependent upon set performance criteria of IFS over the period."