Selling Advisors: How The Buyer’s Loan And Lender Impacts Your Payment Structure
When how you get paid is as important as how much
The lopsided 50:1 estimated buyer to seller ratio combined with the prevalence of external financing options now available in the wealth management industry, has placed today’s sellers in an auspicious position.
For many sellers, it is important not just how much money they are selling for, but also how it is paid. Most sellers want as much as possible upfront at closing. Some will want part of the payment to be received over multiple years. Others will want to include an earn-out where they receive an ongoing percentage of revenues or profits for multiple years.
All of these payment structures are common in wealth management M&A. However, if the buyer is going to need external bank financing in order to purchase your premium priced practice, not all of these payment structures will be available to all buyers.
The buyer’s loan’s impact on payment structure options
Your buyer is likely going to use a conventional or SBA loan to finance the purchase. While sellers and buyers have a lot of flexibility in how the deal is structured, if bank financing is needed, the flexibility can’t expand beyond the allowable limits of the specific loan program and lender.
Payment structures allowed with a conventional loan vary from those allowed with a SBA loan. SBA loans have defined guard rails on acquisition structure types and provisions. This means that the type of loan (conventional or SBA) the buyer gets, and usually the specific lender being used, will dictate the types of payment structures available to the seller.
If an earn-out structure is very important to the seller, then they need the buyer to be able to qualify for a conventional loan, which has a higher qualifying bar than with a SBA loan. Earn-out payment structures are not allowed when using a SBA loan.
If the seller wants to seller finance a chunk of the purchase to spread out payments over multiple years, then both conventional and SBA lenders will happily oblige. Any seller promissory note will be required to be subordinated to the bank’s note. When a seller finances 25% to 50% of the deal, then the bank is in first lien position of the business with a very low LTV.
How important is the payment structure to you?
If a specific loan program doesn’t allow for the structure the seller is looking for, they should consider if their potential buyer qualifies for the loan program allowing for the desired deal structure. Unfortunately, most prospective buyers don’t know.
While there are a lot of buyers out there looking, the vast majority haven’t taken the time to prequalify for external financing. Most first-time buyers don’t know for sure if they can qualify for a conventional loan, an SBA loan, or any bank loan at all.
Just because a “larger producer” is interested in acquiring your practice, it doesn’t mean they would automatically qualify for a loan that will allow for your desired payment structure. Some advisors and firms with sizable AUM and revenue can also have oversized overhead and debt service from previous acquisitions that limits the amount of additional debt they can qualify for.
Just because your potential buyer has had multiple prior acquisitions they financed, doesn’t mean they would be automatically be qualified for another loan for your acquisition. Some advisors in heavy acquisition mode are now leveraged enough from previous acquisitions that it might be another year or two before they could get approved.
If you’re considering selling your practice, consider narrowing your selection of prospective buyers to those who are pre-qualified for financing for not only what you want to get paid but how you get paid as well.
Looking to sell? Give us a call.
Advisor Loans provides free assistance to sellers in 3 primary ways:
Consulting - We can walk you through the steps of selling, allowable acquisition deal and payment structures for loan programs, explain how to avoid seller notes or to best structure them when necessary, the seller facing documents required, and how the process all works.
Matchmaking - We have a stable of advisors and firms who have completed a successful acquisition loan with us already and who are poised and qualified to acquire more. Buyers who had a high client retention rate on their last acquisition and who we’ve already performed a financial colonoscopy on. Most all of these buyers will pay the valuation price with 75% at closing and 25% in escrow to be released after 12 months based on a clawback provision.
Pre-qualification - We can prequalify your buyer(s) against both the loan amount and payment structure you are looking for. If you’re considering selling your practice, seriously evaluating only the buyers who are pre-qualified for the right loan needed is a prudent best practice.