ADVISOR LOANOLOGY

70% of our lending is for acquisitions and partner buyout/ins. Essentially, sell-side factors are something we are always accounting for, examining, and working with. We see the sell-side factors from a unique perspective, from the how does this get financed and does it make sense to do” lending perspective. A perspective which is that we are happy sellers are cashing out at premium levels right now, the deal needs to make sense from a cash flow and ROI level if you want to minimize seller financing. If you’re strongly considering selling in the next year consider calling us today just to talk through optionsbased on your scenario and situation.

Selling to Successor:
What to Know

Selling to an internal successor is what most advisors prefer or plan.

It might be to an existing partner, junior or associate advisor, or even a family member. In most cases an internal advisor can qualify for an acquisition loan for the full purchase price.

  • Can I spread out payments over multiple years without seller financing?

    Yes. Part of the purchase can be placed into escrow and then disbursed over multiple years.

  • Can they get a loan for the down payment and then do an earn-out for the rest?

    If they qualify for a conventional loan they can. Any form of an earn-out is not allowed with an SBA loan.

  • Can I help my successor avoid a down payment?

    Other than guarantying the loan, they would need to be 1099 for one year prior to the purchase and own enough assets to value at just over 10% of the purchase price.

  • Can I lend successor money for a down payment?

    You can’t lend it to them.

  • Can they use the phantom stock I gave them as a down payment?

    Conventional: If the buyer is doing a conventional loan, no problem.

    SBA: The equity owned needs to be reported on their last two years tax returns to qualify. If the equity is phantom stock, a verbal agreement, or equity that you gave that has no benefit unless you sell someday, then lenders typically will not view that as eligible equity ownership that could be applied as the down payment.

  • What's this SBA equity injection seller financing all about?

    For advisors with no equity ownership, no 1099 income, and no clients owned, then a 10% down payment would be required. Of this you can choose to seller finance 5% but the note would be on a 10 year standby note.

    This means that while interest can accrue the buyer would not be able to make any P&I payments on that 5% note while the SBA loan is still active. SBA acquisition loans (without property) are 10 years.

    For a lot of internal successors there is a big difference in their ability for coming up with a 5% down payment vs. coming up with 10%. With a little planning you can help your internal successor in this situation either prepare for a down payment or avoid a down payment all together.

  • Should I ever consider guarantying the loan?

    As a general rule, no. However, there are circumstances that could warrant it. If you do guaranty then you will likely only be able to protect yourself in clawing back the equity that was sold.

  • What does it cost to see if my successor qualifies?

    Nothing, AdvisorLoans provides pre-approvals for free.

Why it matters what kind of loan your buyer qualifies for

External financing is likely to play a key role in your buyer’s ability to finance the acquisition of your practice.

Your buyer is likely going to use a conventional or SBA loan to finance the purchase. Each one has different qualifying requirements and restrictions in acquisition or equity buyout structures.

While sellers and buyers have a lot of flexibility in how a deal is structured, if financing is needed, the flexibility can’t expand beyond the allowable limits of the specific loan program and lender.

  • 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 it’s important to you to have an earn-out structure, or want to sell equity in tranches over time, or want to stay in a key role years after the sale then you need the buyer to be able to qualify for a conventional loan, which has a higher qualifying bar than with an SBA loan. None of these are allowable with an SBA loan.

  • When how you get paid is as important as how much

    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.

  • Consider buyers that qualify for the loan that allows for the deal structure you want

    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.

  • Seller guaranty

    If your buyer is doing a conventional loan and does not qualify on their own then a seller guaranty may be required.

    Internal successors who do not currently own sufficient equity or clients assets and employee based successors will typically require a seller guaranty. For SBA loans there is no seller guaranty but a 10% down payment.

    See Guarantors & Liens page for more details.

FINANCING CONSIDERATIONS

If the acquisition needs bank financing, then if it can’t get financed, what’s the point of everything else? 

Address Financing Before Solidifying Deal Terms

If external financing will be required for the advisor acquisition then the deal must match bank requirements, not the other way around. Acquisition deals can implode in the end when lending due diligence isn’t done in the beginning. If the acquisition deal or structure can’t get financed, what’s the point of everything else?          

This scenario plays out regularly in the industry: Buyer and seller have already worked out the acquisition deal structure and terms, hired a lawyer to develop the purchase agreement, paid for a business valuation, and set the closing date. Then, after all that time, money and effort was spent, they look into the financing only to find out that the deal can’t be financed at all, or that it needs to be re-structured in order to comply with the financing option or lender the buying advisor qualifies for and with.

If external financing will be needed for the acquisition deal to close, then external financing becomes one of the most important aspects of the acquisition deal. Buyers getting pre-qualified at the beginning of the process is critical for both buyer and seller.

External financing will heavily influence the acquisition terms and structure. External financing will dictate requirements around loan amount, cash injection requirements, promissory note amount, type and structure, closing timeline, retention provisions, and more.

Financing Touches Everything

For an acquisition loan the lender touches about every aspect of the deal. Borrower qualification, loan amount, deal and payment structures, down payments, seller financing and seller note standby and subordination, purchase agreement, collateral, business valuations, insurance, and lien requirements, to just name a few items the bank is involved with in some way.

If an advisor buyer only qualifies for an SBA loan then the deal has to comply with not only SBA requirements but also any additional requirements a willing SBA lender has as well.

Conventional lenders have their own set of requirements that in some cases are more lenient than the SBA and in other cases, are not. SBA has their policies and then each SBA lender adds their bank policies on top of the SBA policies.

Whether you are a buyer or seller, the first step of acquisition deal due diligence should be focused on the financing component. The acquisition deal viability and structure can then be determined and developed in compliance with the financing requirements.

Buyers need to know what purchase amount they are able to finance and if they would be likely an SBA or conventional loan before jumping into bidding or sourcing potential sellers.

Preventing lending M&A requirements from preventing your desired deal structure

Loan programs and lenders impact deal structures

External financing is likely to play a key role in your buyer’s ability to finance the acquisition of your practice.

Your buyer is likely going use a conventional or SBA loan. Each one has requirements and restrictions in the kind of acquisition or equity buyout structures for the loan to qualify.

While sellers and buyers have a lot of flexibility in how a deal is structured, if financing is needed, the flexibility can’t expand beyond the allowable limits of the specific loan program and lender.

AdvisorLoans works with sellers to match which loan programs and corresponding lenders will be able to accommodate the loan amount and structure the seller is seeking.

Guide your buyer to the appropriate loan program

The deal structure sellers develop have a direct impact on the lending options the buyer would need to select and qualify for.

A seller may be looking to stay on in a key role after the sell for longer than 12 months, would like to sell equity in tranches over time, would like to maintain some ongoing level of equity, would like to completely avoid seller financing, or may prefer a down payment with an earn-out period.

In all these cases, conventional and SBA loans and corresponding lenders have different rules and capabilities. Sellers who are set on specific ways they want to exit and get paid should insist that their potential buyer can qualify for the loan program that allows for the seller’s ideal structure.