3. Focus on the loan guidelines as you develop your plan. In most instances, loan amounts range from $250,000 to $5 million, but the top of this range is not necessarily a “hard cap,” depending on the potential deal size and other situational specifics. Interest rates are generally set at prime plus 2 percent to 3 percent, and to reach completion, deals commonly require at least 25 percent “equity infusion” to fill the gap between the asking price and what the bank will provide. Additionally, the debt-service ratio is usually at a minimum of 1.75 times cash flow, meaning that the advisory business must produce a 75 percent cash cushion after paying its debt, demonstrating to the bank that the borrower can transform a book into a business, revenue into profitability and clients into assets.
4. Look at financing options that go beyond traditional lending solutions. Some bank financing options for advisor deals that exist today were unavailable just a few short years ago, perhaps one of the most important being acceleration options. For existing acquisition plans, or for buyout structures that have already been implemented, a third-party lender can enter the transaction and accelerate the current plan by “cashing out” the seller while providing the buyer with additional years over which to amortize the debt. This means the seller can exit sooner, with cash in hand. At the same time, the buyer, who may have put cash into the deal up front, enjoys added flexibility because a portion of the debt burden gets shifted back to the bank.
All in all, there's no question that bank financing for advisor M&A has come a long way in a short time.
When these enhanced financing options are paired with the right transaction strategy that is part of a broader succession or continuity plan—including detailed valuation data from a trusted third party—this can mark the difference between success and failure in advisor M&A, especially for sellers.
David Grau Sr., J.D., is the president and founder of FP Transitions. The above is adapted and excerpted from his second book, Buying, Selling, & Valuing Financial Practices: The FP Transitions M&A Guide published by John Wiley & Sons in August 2016.