What is a 100% bank financed acquisition loan? 

A 100% bank financed acquisition loan is when all of the purchase price is secured through a bank loan. The borrower doesn’t make a cash down payment and the seller doesn’t finance any portion of the purchase. 

100% bank financing started to become a mainstream option in wealth management M&A in 2018, when the SBA modified their rules for acquisition loan requirements. The significant rule change replaced the 25% seller financing policy with a 10% equity injection requirement. The SBA provides 3 ways the 10% equity injection requirement can be satisfied: cash, assets other than cash, and allows (not requires) up to 5% to be satisfied with standby seller financing (standby means no payments can be made during the term of the SBA loan). 

For independent advisors in the wealth management industry, the “assets other than cash” can be based on the value of the advisor’s business or book. If the borrower’s business value is high enough compared to the business being purchased, then the borrower is able to satisfy the equity injection requirement with assets other than cash. 

This provision is ideally suited for acquisitions in the wealth management industry. As a general rule, most advisors with $250,000 in recurring revenue would have a business value high enough to satisfy the equity injection rule for the maximum $5 million SBA 7(a) acquisition loan amount. An advisor with $100,000 recurring revenue could get a 100% bank financed deal for up to $2 million. 

100% Bank Financed Acquisition Loan Payment Structure 

There are many ways to structure an acquisition deal. For context, AdvisorLoans only sees the acquisition deals that need external financing. Over the last few years we have seen more and more deals where the seller receives 100% of the purchase price at closing. These deals have been when both advisors are at the same broker dealer or custodian and have been during a time when markets where trending up and not down.

Acquisitions requiring less than $5 million in financing which have an attrition clawback provision generally 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 client transition attrition clawback 

There can be multiple clawback periods over different timelines but for the deals we see it’s typically one clawback one year after closing. The attrition/retention of revenue is measured and the clawback formula stipulated in the escrow agreement is applied.

How Escrow Replaces a Seller Note for Clawback Provisions

Escrow agreements are typically utilized in 100% financed loans for a clawback provision. The seller will typically receive most of the purchase price at closing wired from the lender. 

The portion set aside (usually from 20% to 50%) for the clawback provision, is wired into the escrow account when the loan is closed. Some lenders will handle the escrow internally and others will require the borrower to find their own escrow firm. In either case, there is an escrow agreement between the buyer and seller. 

The agreement spells out when the funds will be distributed and the formula that will be used to calculate the distribution(s). If the retention provisions are met, then all of the proceeds will be delivered to the seller. However, if after the look back period the agreed upon attrition delta is triggered, then the seller receives the adjusted amount and the balance is “clawed back” and usually applied to the buyer’s loan balance. 

The Key Reasons Why Seller Financing Has Diminished in Wealth Management M&A

• 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 on a two-year standby note. The new equity injection rule no longer requires (but allows) seller financing. However, if the seller does assist the buyer with seller financing 5% of the equity injection requirement with a seller note, the note has to be on standby for the life of the loan. For more details about SBA rules regarding seller financing see our article: What to know about seller financing for wealth advisor acquisitions.

• 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 lower loan payments (especially in the first years of an acquisition) from longer amortization bank loans.

• 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 or all of their money upfront and bear little risk other than the portion set aside in escrow for limited attrition protection. 

• Seller promissory notes have to be subordinated to the lender 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 (even though this is very rare in our industry niche) until the bank is satisfied. The bank can also halt the borrower (the seller’s buyer) from making 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 replaced the seller note being required from the borrower for an attrition/retention clawback period. The escrow structure allows for the amount to be set aside and disbursed according to the time tables and clawback formulas laid out in the agreement. The seller often prefers this since they know the money is in an account waiting for them. 

Do all SBA lenders offer 100% bank financing? 

Not all SBA lenders will offer 100% bank financed acquisition deals. The SBA has specific rules around acquisition loans regarding down payment, seller financing, and payment structures. But, just because the SBA rules allow for something, it doesn’t mean all SBA lenders will offer it to their borrowers. Each SBA lender has their own policies and preferences that are in addition to those required by the SBA, and different from each other. 

If an advisor approaches their local bank about an SBA acquisition loan they will usually be told that a 10% cash injection (down payment) will be required. If the local bank is familiar and comfortable with acquisition loans they may allow the seller to finance 5% of this requirement reducing the borrower’s cash injection to 5%. In our experience, it usually takes an SBA lender that has expertise in wealth management industry lending (and comfortable with advisory business valuations) that allow an advisor’s practice to be utilized as “assets other than cash.” 

Most banks that offer SBA loans don’t do a ton of SBA lending annually. In 2021 there were 1,622 SBA lenders who approved an SBA 7(a) loan. Of these, 20% only approved one SBA 7(a) loan. 50% approved 5 or less. In 2021 only 4.5% (73) approved a loan for the wealth management industry space of which 68% (50) only approved one SBA 7(a) loan to a wealth advisor. For context, AdvisorLoans had 60 SBA loans to advisors in 2021. We have a very high success rate of getting 100% bank financed acquisition loans for the advisors who want or need this structure.

The Primary Acquisition 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 goes old school where a small percentage is paid in cash (10% to 25%) and the seller finances the rest with a fixed promissory note or an earn-out. 

• When an advisor uses a lender that just isn’t comfortable or experienced with 100% bank financing for acquisition loans. 

• When the buyer is W-2, novice, or without production, or enough production. For these advisors on a SBA loan, at least 5% cash injection would be required if the seller is willing to seller finance 5% (on a 10 year standby note) of the purchase price.

• 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. 

• For SBA loans, when the purchase price is higher than the valuation, and the buyer is still willing to pay the purchase price, the difference must be either paid in cash by the buyer/borrower or structured in a seller promissory note.

• 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. 

Do you qualify for a 100% bank financed acquisition loan? 

There are several key factors and many nuances for each deal to determine if the borrower and loan qualifies for 100% bank financing. Call AdvisorLoans to discuss your situation and we’ll be able to tell you with a high probability if you would qualify, and if not, what would be needed to get you there.