How financing options can help advisers drive growth

When it comes to growing your business, advisers tend to concentrate on organic methods, such as garnering referrals and introductions to new clients and gaining more assets from existing clients. But as business valuations approach historic highs and more advisers approach retirement, it has become a seller’s market. And the uptick in advisers thinking of selling their businesses has prompted younger advisers to change their growth strategy to focus on mergers and acquisitions.

Many firms, including Commonwealth, offer in-house valuation services that can give advisers a ballpark idea of what their firm or practice might be worth. This is helpful to sellers and vital to those advisers who need capital to finance an acquisition. Additionally, we’re seeing exciting developments in terms of partner firms offering loans and equity options that can help advisers with the capital they need to realize their business growth goals. Moreover, for advisers thinking about succession, the combination of financing and valuation guidance can help ensure a smooth transition.

With many popular loan options, advisers at wirehouse firms may find it hard to benefit from many of the loan and financing options available. Since they don’t own their cash flows (technically, the firm does), it can be difficult to borrow money. The exception is for breakaways — there are loans available to help wirehouse advisers pay back forgivable loans when leaving a firm.

For independent advisers, RIAs, and hybrids, there are a variety of financing options for evolving your business.

• Traditional loans for expansion. There may be times when an adviser could use a cash infusion to help them reach their goals. A traditional loan can help an adviser fund real estate or an office expansion, as well as provide capital for mergers or acquisitions. This loan works as if an adviser went to a bank — funding provided in exchange for regular payments with interest, but it’s usually much easier, faster and cheaper within your firm. After all, they know you! While terms vary, the best-of-the-best of these loans will offer standard durations, such as 24 to 60 months, and provide a low rate, such as prime plus 2%.
• Bridge loans to accommodate unique situations. An adviser may have a short-term project, a special circumstance, or want to consolidate debt. With a bridge loan, they can receive funding in exchange for interest-only payments — often without any additional fees — and for a short duration, such as 12 to 24 months. Since these loans are accommodations for existing advisers, low rates (prime plus 2%) are the goal.
• Jumbo loans for broader funding needs. If advisers have a larger project or ambitious expansion plans, they may need more money than a standard loan. Jumbo loans can help advisers invest in more resources or staff, plan for retirement and fund a large merger and acquisition. Advisers can typically receive more capital (up to 100% of firm revenue, although that would be unusual) and finance it over a longer period (up to 7 years) than a traditional loan. Because the stakes and risks are higher, a competitive underwriting may be prime plus 3%, with a 2% underwriting fee.
• Equity options in exchange for financing. If advisers want a partner to invest in their firm, they may want to consider a preferred minority stake. With this option, advisers can receive a capital investment in exchange for a percentage of the firm’s revenue. This option could be ideal for advisers looking at longer-term strategies for their business, as there is typically no duration on the investment. They can receive a capital investment of 20% to 40% of the firm’s valuation, usually tied to earnings, in exchange for a percentage of firm revenue. This option offers an incentive for advisers to continue to grow their business since the advisers’ percentage share of earnings will increase if earnings grow faster than revenue.

SUPPORTING A GROWTH MINDSET

For advisers looking to raise additional funds to grow, evolve, acquire, or transition their businesses, financing options offer both cash infusions as well as flexibility and could be a great assist to their long-term business plans. It’s critical that advisers have the freedom to pursue their vision and plans for the future while continuing to run their businesses the way they want.

[More: How advisers can drive growth in any environment]

Kristine McManus serves as chief advisor growth officer at Commonwealth Financial Network.