If you asked us five years ago about financing the acquisition of an advisory practice in the financial services industry, there would not have been much to talk about. Until recently, almost all deals were done using a combination of buyer’s funds and seller financing. Bank financing was not a viable option for most deals because lenders generally struggled with the collateral on the loan – an advisor’s most valuable asset in their business is the client relationship and cash flow those relationships produce. Before the market drop in September 2008, some advisor buyers were able to leverage home-equity lines of credit or large business lines of credit, but most had to use personal funds to finance their deal, which priced many otherwise qualified successors out of the market. Until recently, the typical deal for advisors with less than $5,000,000 in annual revenue involved 20-40% cash down from a buyer, with the balance seller-financed over 4 to 5 years at 5-7% interest. That is changing, and the results seem to be good for everyone involved in the deals.
With third-party lenders now available, buyers can finance the down payment and in some cases, the entire deal. What does this mean for you and the market as a whole?
- Expect more practices for sale – no advisor likes the concept of being the seller and financing the deal. With the availability of external financing, providing a seller the majority of their sale price at closing, more sellers will begin exploring a sale of their business in the coming years;
- Buyers now have the ability to acquire businesses they could not otherwise afford;
- Savvy buyers that are comfortable with the additional risk will:
- Leverage the external capital sources to negotiate a lower sale price and get a better deal. The additional risk is a component of less contingent seller financing;
- Use the longer repayment term with a bank to be able to outbid other potential buyers. For example, using a 10-year amortization has allowed some buyers to actually pay a premium to get the practice, but still have ample cash flow each year as a result of the financing.
In the first half of 2014 for example, Succession Resource Group worked on succession/exit plans for firms with $1.6 billion dollars in total AUM, and of this group, 60% used or sought-out bank financing for their deal. This monumental shift away from 100% reliance on seller-financing seems to be a result of pent-up demand and loan terms that are attractive enough that almost all buyers are exploring the option, often times even in advance of having a deal. This pre-approval process has proven to be a valuable resource for buyers, helping make them more attractive to seller candidates. Typical terms of bank lending range between a 5-10 amortization, with interest rates around 5.25 % to 7.25%, with both variable and fixed rates available, and nominal loan fees.
If you would like additional information on lending, please submit your information to Succession Resource Group using this link (http://www.successionresource.com/lending/) and someone will follow-up with you shortly.