Top Lessons For Independent FAs From Our Journey Through The M&A Financing Maze

FA Mag - 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.

On the plus side for our industry, attractive conventional M&A financing options are on the rise from a select group of progressive community and national banks. Indeed, the recent expansion of conventional financing may signal why the top SBA lenders have stalled lately. In addition to lower rates, more conventional loans mean that advisors can get liens removed from their homes and break through the $5 million cap that covers all SBA loans.

Thanks to the expanded funding options we ultimately obtained, we are on track with our acquisition-based growth strategy and are planning to close our fifth acquisition in early 2019. Most importantly, we have a healthy capital base and cash flow that allows us to continue focusing on the well-being of our clients instead of being preoccupied with our own debt.

As any financial advisor knows, excelling in this industry requires total concentration and long-term commitment to the clients. What too often goes unsaid is how much something as common as securing a business loan can become a hindrance on the business itself. Thanks to our decision to refinance, we were able to avoid what could have been a real distraction.

Our experience tells us there is a substantial need among financial advisors for more favorable conventional loan structures, superior distribution and service compared to current industry participants. Fortunately, there is a way out of this maze, with the rise of correspondent lenders who combine a deep knowledge of our industry with access to enhanced service as well as conventional loans with superior terms for borrowers.

To view the original article written by Matthew Davis & Meredith Huff, please visit: