Historically, a significant majority of independent and registered investment advisers have exited the industry without experiencing a liquidity event at retirement. Restrictive financing options may be to blame.
The introduction of Small Business Association funding for financial advisers in 2013 was the first step toward improving that bleak landscape. Six years later, the marketplace for adviser financing is growing dramatically in total funding and the options available, thanks to the emergence of conventional bank loans.
Both conventional loans and SBA loans have advantages and disadvantages. SBA loans offer longer terms of up to 10 years; conventional loans typically have a maximum term of seven years but may have a 10-year amortization schedule. SBA loans are typically funded at a floating rate and conventional loans at a fixed rate. Advisers must evaluate which loan structure — SBA or conventional — best aligns with their transaction and timeline.
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Seller survey results
In January, our firm conducted a survey of advisers over the age of 60. We inquired about the importance of cash available at practice sale closing and the availability of bank financing for prospective buyers.
Over 90% of respondents felt that cash at closing was "important," "very important" or "crucial" when contemplating a sale at retirement. Zero respondents said cash at closing was not important.
Potential buyers' access to bank financing was "very important" or "crucial" for over 83% of prospective practice sellers at retirement, and again none of the respondents said access to bank financing was "not important."
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The abundance of content around what matters to selling advisers in a hypercompetitive environment suggests they are not merely considering factors like "cultural fit." Prospective sellers are also evaluating the creditworthiness of prospective buyers and how it affects their ability to obtain bank financing.
Banks like their borrowers to "have skin in the game." Depending on the bank and the loan structure (conventional versus SBA), buyers typically need 5% to 10% of the purchase price in cash at closing.
Sellers may have an interest in the buyer's culture, but tomorrow's buyers may find themselves producing credit scores and bank statements.
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Expert guidance
Prospective sellers interested in a liquidity event at retirement must find a creditworthy buyer and structure a transaction that is eligible for bank financing. Yet buyers and sellers oftentimes structure transactions that preclude bank financing.
Seller financing for a portion of the purchase price can be problematic. Seller notes are often structured over short time horizons (three to five years), resulting in cash flow projections that are less favorable.
Complexity kills every transaction. Transactions that are structured with a lot of moving parts are less desirable to bank credit personnel underwriting the transaction. In addition, bank underwriters frown upon contractual creativity around questionable tax-avoidance strategies.
Buyers and sellers need separate outside counsel and should consider retaining an M&A consulting firm that can structure a transaction that's eligible for bank financing.
When buyers outnumber sellers 50 to 1, increasing prospective buyers' chance of acquiring one or more practices depends on access to bank financing to facilitate a meaningful portion of the purchase price, in cash, at the close.
(More: Transaction loans for independent advisers seeking a partial business sale)
Scott Wetzel is founder and managing partner of SkyView Partners, a correspondent lender and investment bank focused on supporting independent financial adviser M&A transactions.
