Conventional loans have fixed rates, no residential liens and can process paperwork much faster than SBAs. These are the ideal financing structures for advisors who can obtain them. On the other hand, some would-be purchasers cannot qualify for them due to the condition of their personal finances.
Deal Multiples
Fortunately, bank financing allows advisors to leverage their current books to give them a leg up during a potential purchase. The ability to receive such financing is not based solely on an advisor’s existing book, but the combination of his or her current book and the target acquisition, which together presents a much larger bargaining chip with sellers.
For example, take an advisor whose existing book has no debt against it and is valued at approximately $3 million. If the advisor seeks to purchase another book initially valued at $2 million, with the combined funding ability of both practices she could offer the seller $3 million for the targeted book of business. Combining the value of both practices at $5 million would support $3 million in financing.
Through financing and market competition, even if a seller’s practice is initially valued at $2 million, the seller could receive $3 million for their business. After all, the value of an asset is essentially what someone is willing to pay for it. Now, why would someone pay more than the initial valuation of the practice? A few reasons.
First, competitive advantage is worthwhile in any negotiation. In the Investment Advisor industry, there are approximately 50 buyers to each seller, so buyers must make their offer stand out. Second, the buyer in this scenario has the business capacity to take on all of the acquired clients without taking on an equal increase in costs. Therefore, most of the revenue generated by the acquired business would become profits.
Seller Appetite
All of this should be comforting news to not only exiting advisors ready to sell their practices, but to advisors who have wanted to exit the business for a while but doubted they could find a buyer capable of paying top dollar. Times are changing, and sellers who take the step of putting their practice on the market can benefit from buyers’ increased ability to secure better liquidity through bank financing.
Scott Wetzel, J.D., is founder and managing partner of SkyView Partners, a correspondent lender and investment bank focused exclusively on supporting independent financial advisor M&A transactions.