For any independent financial advisor M&A deal to be successful, it's crucial to start with a detailed plan that outlines what the buying or selling advisor is seeking to achieve, and encompasses the right tactics that support the fulfillment of those goals.
For selling advisors, these transactions should be the product of a comprehensive succession or continuity plan recognizing that—for the vast majority of selling advisors—the stakes can be significant, as their businesses tend to be among the highest value assets they own.
Prior to the last decade, financing options for advisor M&A deals were not as diverse as they are now, potentially limiting the choices for selling advisors who didn't have strong, sustainable businesses.
But over the past 10 years, bank financing resources available for independent advisor M&A transactions have increased meaningfully, and in the process, this has leveled the playing field for smaller practices seeking the best possible transaction based on a thoughtful succession plan.
With this in mind, the following are the top four bank financing tips for independent advisors pursuing M&A to bear in mind, once they have the right plan and detailed valuation analysis in place:
1. Remember that bank financing is a useful supplement, but not a substitute, for traditional acquisition or succession methodologies. Typically, banks will not loan a buyer sufficient proceeds needed to make an all-cash offer. In general, the loan amounts are limited to roughly 75 percent of the value of the targeted practice or business. Thus, bank-financed acquisitions almost inevitably require the seller to underwrite part of the purchase.
Remember, advisor businesses are intangible assets, meaning its cash flow and the seller’s “goodwill” are the two most import factors determining value and, ultimately, the terms of a loan. Therefore, when buyers and sellers have a shared-risk/shared-reward dynamic in place from the very start, there is added comfort for the bank, which is reassured that all parties have an incentive to transition and retain the client relationships.
2. Be aware that very few banks have the expertise to handle this type of loan. Because this process demands close coordination between an experienced lender and M&A consultants, partnering with the right bank is key, often the difference between a deal’s success and failure. This is important to remember because this type of financing typically takes shape as Small Business Administration loans, which are usually wrapped in layers of arcane and highly complex regulations. Indeed, most neighborhood banks, including many authorized SBA lenders, are not qualified to facilitate deals involving buyers and sellers of valuable and highly regulated practices. As a result, it's crucial that both acquiring and selling advisors should first ask about how much prior experience the bank they're thinking of partnering with has established in financing independent advisor M&A, before going too much further with any initial discussions.