FREQUENTLY ASKED QUESTIONS

"Typical" Acquisition Loan:

What do most advisor acquisition deal payment structures look like today?

There are many ways to structure an acquisition deal and each are different. For context, AdvisorLoans only sees the acquisition deals that need bank financing. Of the loans we have faciliated over the last year, most acquisition deals requiring less than $5 million in financing and trying to minimize or elliminate seller financing a "typical" deal can look like:

• 100% bank financing (no buyer down payment and no seller note)
• 50% to 80% of purchase paid to seller at closing
• 20% to 50% of purchase placed into escrow for claw-back provision
• After 12 months, retention of revenue is measured and the claw-back formula stipulated in the escrow agreement is applied. The seller receives all, part or none of the escrow and any unpaid portion is applied to the buyer’s loan balance. A minority of deals will have longer retention periods or multiple claw-back periods.
• The seller typically provides transition support for up to 12 months with the heaviest involvement during the first 6 months.
• It’s also typical for the buyer and seller to have a 6-12 month consulting agreement that pays the seller a reasonable compensation for their time.

However, we do a lot of deals where the seller receives 100% of the purchase price at closing and those with seller financing.

Why aren’t sellers typically financing any portion of the purchase anymore?

• In 2018, the SBA changed their acquisition equity injection rules. Before the change, the SBA used to require the seller to finance 25% of the purchase price. The new equity injection rule no longer requires (but allows) seller financing.

• Most seller notes are structured from 2 to 5 year terms compared to the 10 year terms offered by conventional and SBA loans. Borrowers often prefer the additional cash flow generated from the lower payments of the longer amortization of the bank loan.

• In the competitive M&A landscape, where there are many buyers and few sellers in comparison, buyers utilizing external financing are able to utilize 100% financed loans as a competitive advantage in their offer. With all else equal, most sellers would rather accept the offer where they get most all of their money upfront and bear little risk other than the portion set aside for limited attrition protection.

• Any seller promissory note has to be subordinated to the lender note regardless of the percentage of the purchase the seller finances. This is extra risk to the seller since they would not be able to collect in a default scenario until the bank is satisfied. The bank can also halt their borrower (the seller’s buyer) from making the seller note payments if cash flow gets tight causing the borrower to struggle to make the monthly bank payments.

• For acquisition loans today, the escrow agreement has mostly replaced the seller note for a claw-back provision. The escrow structure allows for the amount to be set aside and disbursed according to the time tables and claw-back formulas laid out in the agreement. The seller often prefers this since they know the money is in an account waiting for them.

What are the M&A scenarios that are not 100% bank financed?

• The broker dealer is lending up to 50% of the acquisition to the buyer and the seller finances the rest in either a fixed note or earn-out.

• When two advisors that know each other and goes old school where a small percentage is paid in cash and the seller finances the rest with a promissory note.

• When an advisor uses a lender that just isn’t comfortable with 100% bank financing.

• When the buyer is W2, novice, or without production.

• Buyer whose practice has too low of a business value compared to the seller practice value being acquired.

• When the deal doesn’t cash flow strong enough, the LTV is too high, or the lender has other concerns about the deal.

• When the purchase price is higher than the valuation, the difference must be structured in a seller promissory note for SBA loans.

• The seller insists on having a seller note in place because they want to receive payments over many years.

• The buyer insists on paying an initial cash down payment.

Are cash down payments typical?

For the expansion acquisitiosn, cash down payments are usually not required for most acquisitions loans today. See Equity Injection.