Independent financial planning and investment management firms that have decided to target growth through mergers & acquisitions transactions, but may not be very experienced in this area, need to be especially careful when it comes to navigating the incredibly complex maze of M&A financing for independent wealth managers.
Take our story: In 2015, our team began an aggressive practice acquisition strategy, which led us to allocate significant resources in search of what were then minimal options for financing alternatives available to wealth management practices. This was especially true for a newly formed practice with no historical information to support an ambitious vision and dream.
The Limits Of Small Business Administration Loans
Originally, Small Business Administration (SBA) government-backed loans provided us with a solution to our growing needs when other lending options were not available. However, we realized that SBA lending limits restricted our access to the necessary capital required to continue acquiring businesses after our first few purchases.
Our original bank-financed loans came with standard SBA caveats, namely floating rates and significant time to close, which after a few SBA loan closings, proved to be a common practice. The leading SBA lenders for financial advisors have the vast majority of their loans at floating rates, and we were unable to obtain term sheets that included fixed rates.
Since our initial financing search, progressive lenders, focused on the wealth management space, emerged offering conventional loans at fixed rates. Recognizing the need to scale our enterprise to new heights, we decided to pivot away from SBA lenders and expanded our search to include conventional lending solutions, which in theory would allow us to avoid large guarantee fees, extensive document requests, and personal asset liens.
But through this expanded search, we encountered equally frustrating financing options from the conventional lenders we contacted directly. We still found ourselves saddled with unfavorable terms and repetitive requests, along with a clear sense that many of the conventional lenders out there simply do not understand the independent wealth management business.
Emergence Of The Correspondent Lender Model
After further advancing what had become a very extensive search, we were able to find a correspondent lender to facilitate our SBA obligation refinancing to a lower fixed rate. Moreover, as a correspondent lender, they worked with a network of banks that they had educated thoroughly as to why certain independent financial advisory practices are a good fit for conventional loans. And by offering access to multiple banks, the correspondent lender model dramatically increased our chances of closing on a conventional loan.
This process forced us to learn more than we ever wanted to about the lending environment for wealth management firms. While the biggest names in SBA lending to advisors are Live Oak Bank and Byline Bank, firms offering conventional loans to advisors are very limited and include Advisor Loans, Oak Street Funding, and Succession Lending. Some of these lenders are able to offer fixed-rate conventional loans that are 50 to 60 basis points lower than the floating-rate offers of major SBA lenders, and refinancing from SBA to conventional loans is becoming a big business.