A 1099 next-gen advisor who qualifies for an SBA expansion loan can avoid a down payment. The W2 advisor can establish their new 1099 advisory business and do an expansion loan while maintaining W2 income. A W2 advisor whose loan does not qualify as an expansion loan can avoid a cash down payment if the seller does the 10% two-year standby note.

SUCCESSION THROUGH EQUITY IS THE ONLY WAY TO TRANSITION TO NEXT-GEN ADVISOR OVER TIME

It's one way but not the only way. Partial asset tranche sales and a converger plan where there is a structured buy-transition-buy model are two structured ways (with a lot of benefits) whereby a seller can sell to their internal or next-gen advisors over a defined period without convoluting equity shares and ownership.

SELLERS HAVE TO GUARANTY ANY NEXT-GEN LOAN

Being "next-gen" has nothing directly to do with a seller guarantying your loan. It's all about if the acquisition is an equity buy-in or a book, the ownership makeup after the sale, and the same fundamentals all other loans are judged by like cash flow, equity injection thresholds, and credit policy. There are no seller guaranty loan options.

SELLERS CAN ALWAYS GET A BETTER DEAL IF THEY SELL TO A PEER

Really? Full valuation price, 90% paid up front, and no clawback is a pretty strong offer out there. When selling to a qualified internal employee who has strong existing relationships with the clients, the seller would not usually have to finance more than 10% of the purchase price. And the only reason they need to do this is to get the buyer out of the 10% cash down payment requirement.

SELLERS HAVE TO FINANCE A BIG PORTION OF ANY NEXT-GEN LOAN

If the next-gen advisor is 1099 and owns a book then they could qualify for a complete or partial book acquisition without any seller financing required. If the W2 next-gen internal has 10% cash down payment then the same applies.

THERE IS NO WAY A $50K GDC ADVISOR CAN GET A $1M LOAN WITH NO DOWN PAYMENT OR SELLER FINANCING

Yes there is, maybe, most likely. If the advisor has 5+ years experience, a decent PFS, clean U4, great credit, and has a $50,000 recurring revenue book they own and receive 1099 compensation for, then yes this is possible through an SBA loan.

When you realize you can buy that book with no cash down payment required.

Next-Gen & W2 Advisor Lending

How does financing work for a W-2 advisor seeking to buy out their book of business and transition fully to a 1099 compensation structure, or possibly a hybrid W-2/1099 role?

What steps must the W-2 advisor take to gain ownership of their book while compensating the practice or senior advisor with an override, platform fee, or overhead fee for the support provided?

There are options.

W2 & Next-gen Advisor Buying Their First Book/Assets

Financing partial and complete books and practices is entirely possible for W2 advisors and depending on your perspective, this model offers its own set of benefits.

Can sell partial books of assets as one time events, then more maybe later as a we'll-see-how-it-goes future sale, or sell assets in structured tranches over time.

Unlike selling partial equity, selling partial assets avoids personal or corporate guaranties on the selling side.

The equity injection requirement for W2 advisor buying a book is 10% which can be cash down payment or seller financed on a two-year standby note. But the equity injection for an expansion loan is waived. So if the W2 advisor first becomes an established advisory business then it could be structured as an expansion because it in fact would be. These are looked at on a case by case basis but bottom line is that the SBA makes it viable to get loans at 90% and 100% LTV compared to a 75% typical LTV conventional loan.

W2 Advisor Qualifying Varies

Qualifying Variances Depending on the W2 Advisor

W2 advisors qualify differently and each deal can have variance from other deals.

For instance, let’s consider a W2 advisor with 10 years of experience in an advisory business This advisor has a decent personal financial statement (PFS) and good credit, indicating they practice what they preach from the bank's viewpoint. If the advisor has only five years of experience, the bank might set a higher threshold for the initial GDC required and a lower loan limit they feel comfortable approving.

In short, an advisor with three years of experience and a PFS that reflects this as well, is unlikely to secure a $3 million loan, even with positive cash flow. In banking, the individual’s experience and personal financial statement play a crucial role. The bank assesses whether the advisor can manage payments and avoid default during downturns. In the worst-case scenario, they consider if the advisor has the means to cover payments if a default occurs.

The more seasoned the W2 advisor, the stronger their personal financial statement tends to be. Credentials such as CFP (Certified Financial Planner) or CFA (Chartered Financial Analyst) also carry weight in this evaluation, though they are not decision factors. Advisors with more experience and impressive qualifications will generally have access to more favorable loan scenarios than those with less experience or weaker financial profiles. Each case is unique and requires individual negotiation.

…as Do the SBA lenders

1. SBA has Policies.
2. Lenders have policies in addition to SBA policies.
3. Lenders policies differ from each other.

SBA Has Policies and Then SBA Lenders Each have their Own Policies
When it comes to SBA lending, it’s crucial to note that while the SBA has its own set of rules and policies, many issues are subject to the individual bank’s non-SBA (conventional) policies. Each bank also has its distinct policies and qualifying criteria, which are layered on top of SBA regulations. This means that an advisor who qualifies for an SBA loan might not necessarily meet the criteria for a specific loan with a particular bank for reasons unrelated to the SBA itself.

SBA Has New Rules
The last time the SBA drastically change acquisition based ruled like this was in 2018 and everyone in the SBA lending business had to think a different way. In October 2023 this happened again and now many of the things you used to do you can't and things you couldn't do you can. SBA is also deferring more and more decisions to the individual bank's policies. You won't see this anywhere else (except copied and modified versions of this). Now, let's explore creative strategies that W2 advisors can use to leverage SBA loans.

W2 Advisor Book Buyout SBA Loans

W2 Advisor Buys A Book

Asset Purchase / Book Buyout

No Down Payment Option
This can be paid 10% cash down but is not required if seller instead does the 10% two-year standby note.

10% Seller Standby Financing
The seller can eliminate the need for the buyer to come up with a 10% cash down payment with a two-year full standby seller note. The 2 conditions is the note can't have a balloon payment and must not have any payments (P&I) paid during the first 24 months. These are typically 7-10 year terms with the first 2 years on standby.

No Seller Guaranty
This is a simple asset/book sale and there is never a seller guaranty in an asset sale, especially a partial book buyout.

W2 Advisor Who Also Has 1099 Business Buys a Book

Expansion Acquisition

No Down Payment
There is no down payment required by the SBA and it will only be dependent on the bank feeling comfortable with the experience and credit of the advisor in relation to the size loan they are seeking.

No Seller Financing
Since there is no equity injection requirement then there is not a down payment or seller financing requirement. The only seller financing required is when there are qualifying or cash flow issues.

No Seller Guaranty
This is a simple asset/book sale and there is never a seller guaranty in an asset sale, especially a partial book buyout. SBA seller guaranties come on the partial equity buy-in side but not partial asset side.

W2 Advisor Converts to Expansion Loan Eligibility...

Expansion Through Acquisition: When an established business starts or acquires a business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion, and SBA will not require a minimum equity injection.

If W2 Advisor Also Becomes a 1099 Advisory Business

1. Entity

Can technically do as a sole proprietor but let's start off right with s single member LLC.

2. Start Book

Don't need much but $25,000 to $50,000 in GDC/revenue depending on the acquisition amount objective. Seller transfers these clients and their ownership to successor new rep code.

3. Agreement

Seller and successor advisor have entered into a service agreement which shows the clients owned, that they are owned, and the payout which will be received. W2 income can continue but acquired assets must be paid 1099.

4. Expansion Ready

The next-gen advisor still has the W2 income they have been relying and living on but now also owns a fledging 1099 advisory business and is ready to expand. SBA doesn't have time periods which have to be met prior. You're ready to acquire as an expansion loan.

W2 Advisor Partial Book Buyout Loans

Partial Books to One Advisor

Partial books can now be sold to the W2 Advisor who also owns 1099 business with no down payment, seller guaranty or seller financing. You can sell assets to a W2 advisor, pay them 1099 for that business, and charge a platform fee option to provide the home office services you cover as their principal firm or RIA. The W2 buying advisor can transition fully to 1099 replacing or increasing current salary income (after debt service) or they can continue to receive W2 income and 1099 income (for what was acquired).

Partial Books to Multiple Advisors

An advisor can sell $250K GGC/revenue to one advisor or each to 4 advisors all in this same structure. A $1.5M revenue advisor ready to slow down can sell $1M in 4 different asset tranches to 4 different advisors and sell the last $500K when ready to retire. The advisor buyers do not guaranty each other loans in this example as they are assets purchased separately. In partial equity buy-ins any remaining partner with 20% is required to be a personal guarantor.

M&A and Lending Myths

It's only the cash flow not the ROI that matters
The thinking that cash flow is all that matters is one of the more consequential myths in the industry. Just because a deal cash flows does not automatically mean it should be done, it only means it's a possibility on the table.
If it takes your current practice profits to make the acquisition deal cash flow then the deal doesn't cash flow on its own. If the deal doesn't cash flow on its own and needs your current practice's profits to contribute to the debt service payment then risk and return expectations are different.
Acquisition aggregation cash flow strategies are very different than an advisor who only intends to make only one or two opportunistic acquisitions in their career. Two totally different approaches to cash flow. See ROI box.
Cash down payment is always required
Reality: Most loans we facilitate involved no cash down payment from the borrower. Advisors who have a book of business rarely need cash down payments for acquisitions.
SBA always takes the house as collateral
Reality: Collateral requirements hinge on the borrower's equity in the property and the loan size. If the equity is less than 25% or the loan is under $500,000 then it is not required by the SBA.
Partial equity buy-ins are not eligible for SBA loans
Reality: This is a myth as of October 2023. new rules allow for the partial equity buy-ins. While conventional lending has dominated this lending purpose over the last decade, the SBA's new eligibility rules will cause a larger percentage of these deals to go SBA (with the much easier and flexible equity injection requirements).
Lenders always require some seller financing
Reality: While all lenders would "like" to have a portion of the acquisition in seller financing it isn't typically mandated, is decreasing in frequency and amount, and as long as the LTV requirements are met only are put in place by the seller's request, not the lender.
Valuation firms and M&A brokers don't get bank referral fees
Reality: We view a kickback when the client (you) is unaware of the arrangement and a referral fee when the client is aware. Some of these firms get kickbacks and some get referral fees but all get paid typically a 1% fee from the bank if you use the lender they recommend you use. That is why they recommended them.
Sellers have to receive all bank proceeds at closing
Reality: It's not uncommon for a seller to receive the payment over two or three years (without seller financing) by funding into escrow and distributing on designated future dates.
All SBA lenders handle M&A loans the same
Reality: SBA lenders vary greatly in terms of additional qualifying criteria, preferences, focus, criteria, and policies.
Multiple concurrent acquisition loans with different lenders is typical
Reality: Most lenders file a UCC-1 lien and insist on being in the first position, making concurrent loans from different lenders requires inter-creditor agreements and while it happens, it's not common and a completely case-by-case basis.
The bank approved the acquisition loan so it must be a good deal
Banks fundamentally differ from borrowers and investors in their approach to evaluating deals. While advisors are focusing on return on investment (ROI), banks rely on historical financial data rather than considering the net present value of future cash flows. Even if a bank conducts thorough underwriting and cash flow analysis, believing you will generate enough cash flow to meet your payments, they often disregard compound annual growth rate (CAGR) as a critical factor in their decision-making process, focusing solely on historical performance.
When a bank underwrites an acquisition they are not evaluating directly if this is a good investment, they are evaluating if you have the cash flow to afford it, risk, and require a business valuation to support price.
The bank doesn't need for the practice you're buying to cash flow on its own, they need for your business combined with the business you're purchasing to cash flow. If an advisor wants to acquire a practice that makes no profit but has some other value, the deal could easily cash flow because of combining with your current business. It's a deal that can get done, because it "cash flows", even though it doesn't.
Valuations are only ordered on seller's practice
Business valuations are only imperative for the seller's practice. Reality: When leveraging non-cash assets, both buyer's and seller's practices may need valuation. SBA loans have a buyer valuation for acquisition loans when there isn't a down payment required in part based on the estimated value of the buyer's business. Conventional lenders may require valuations on buyers for loans over $5 million but these polices are based on the lender.
1.75 or 1.50 DSCR is required for an SBA loan
Reality: This was LOB's old DSCR minimum and if LOB is the only SBA lender you work with then you may think their policies are identical to that of the SBA. SBA's minimum DSC is only 1.15 and LOB has dropped their DSCR to 1.50. Each lender has their own DSC minimum which can greatly impact the loan amount approved (a 50% difference in loan dollars qualified for between this 1.15 and 1.75 range).
Interest rate is the primary deciding factor in banks
Reality: It is obviously an important factor but other factors like qualifying criteria, deal structure, down payment requirements, can be more heavily weighted. If in ongoing acquisition mode amortization is much more important than rate. This is because there is not typically a night and day difference between lenders, just between SBA program loans and conventional.
Conventional loans are always better than SBA
Reality: The appropriateness of loan types varies according to the specifics of the borrower's situation and in many cases the opposite can be true. For deals where the borrower doesn't have a book SBA loans are always better from an acquisition equity injection perspective and for borrowers with and without a book this is often the most critical loan component. When buying bigger and especially much bigger SBA may offer the better scenario.
SBA loans can be refinanced readily with another SBA lender
Reality: Inter-lender refinancing of SBA loans is complex and not commonplace. However they are done sometimes, but it's not a typical thing.
Advisors can't qualify for a loan without life insurance
Reality: While this is mostly true with conventional lending to advisors SBA loans can get around this with rejection letter and documented (and acceptable) continuity plans.
Seller financing is always a good thing for the buyer
Reality: When too much is seller financed for too short of a term (for example 50% seller financed over 3 years) then the pressure on cash flow can cause the bank loan side not to qualify. However, when a seller's note term is 7 years or longer, then seller financing is almost always optimal.
The lender will always provide ongoing financing
Reality: Lender policies on additional loans for ongoing acquisitions can differ significantly. Banks who dip their toe in advisor lending may not be excited as you are about finding another great acquisition so soon after the previous one.
I read this in an article or saw it in a big study so it must be true
It may be true but it also may not be true for you. Our industry has so many different nuances, models, and terminologies for the RIA and IBD worlds and often times the distinction isn't clarified. The advice and best practices being used for multi-billion PE funded RIAs or aggregating multiple flippers, isn't always applicable or even recommended for the typical advisor who doesn't have the same resources nor in the same situation.
SBA loans involve more restrictive ongoing covenants than conventional loans
Reality: SBA loans typically require fewer ongoing covenants.
Seller financing is requisite if there is a claw-back provision
Reality: Escrow agreements have increasingly supplanted seller financing for claw-back arrangements.
Equity in the firm being acquired counts towards the SBA's equity injection requirement
Reality: Equity can count but meeting the criteria to qualify that equity is nuanced.
Borrowers directly receive acquisition funds to pay the seller
Reality: Funds are typically wired directly to the seller or held in escrow, not transferred to borrower to then be paid to seller.
Banks wont touch an advisor loan under $250K
Reality: Obtaining smaller loans, even as low as $100K, can be done through LoanBox.
Buyers "should" make a 25%-30% cash down payment on acquisitions
Reality: While M&A broker firms certainly push this and this may be their reality, this is a unicorn in our world. We believe buyers should pay the least amount as possible in a cash down payment. Any cash down payment requirement from a bank is uncommon for advisors with books of businesses.
Live Oak Bank brought SBA lending to the financial services industry
Reality: While LOB was the first to make a concentrated focus on advisor lending (AdvisorBox played a primary role in introducing them) and while LOB deserves all the pats on the back we can muster because they really did change the paradigm in advisor lending, Live Oak was only established in 2013.
Before 2013 there were 225 banks who provided 1,476 funded loans to financial advisors for a $403K average loan amount. While most loans were under $150K (1,241 of the 1,476) there were 22 SBA loans funded to advisors over $1 million prior to LOB becoming LOB. SBA lending and the wealth management industry is a decades old relationship, not a new trend.
Prior bankruptcy is an automatic denial
If you declared bankruptcy in the last three years…it isn’t a myth because it will be nearly impossible to get a lender to sign off on. And, some lenders will simply not lend to anyone with a prior bankruptcy.
But there are lenders who will make exceptions or have scenarios that will allow for lending to previous BK borrowers. Bankruptcy scenarios that can be potentially be worked around:
• If the BK is older than 10 years for some lenders.
• If the BK is older than 7 years for some lenders.
• The reasons behind the BK are important. Was it caused by a nasty divorce? Was there a serious health issue?
In all cases, if you have a prior bankruptcy a detailed letter of explanation will be required and this is something that should be prepared at the very beginning of the process.

Next-Gen Specific Lending Myths