The Easiest Acquisition Loan is a Partial Client Acquisition

A Partial Client Acquisition (PCA) is when the buyer is acquiring a partial client list, typically less than 50% of the seller’s revenues or assets, rather than acquiring the entire practice.

PCAs provide many benefits to both the buyer and seller, and can also provide an ideal path for implementing succession transition strategies.

PCAs provide buyer borrowers with the path of least resistance in obtaining third party loans from banks and other lenders.

PCA Lending Considerations:

Partial Asset Purchase vs. Partial Equity Buy-Outs
From a financing perspective, partial asset purchases are better than partial stock (or equity) acquisitions. The SBA does not allow for partial stock acquisitions, only partial asset purchases.

While conventional lenders in our niche love partial equity buy-outs these loans are typically provided to the junior partners of a firm rather than just junior advisors. AFAs and IARs may have a difficult time qualifying for and obtaining a conventional loan for a partial equity buy-out or buy-in.

Fewer SBA Requirements

SBA loans are the typical financing option for AFAs and IAs seeking to acquire their principal’s practice. Many of the more restrictive SBA requirements apply to 100% ownership transfers and do not apply to partial client acquisitions.

Down payment equity injection rules, seller financing requirements, seller subordination, 12-month post sale seller key role restriction, business valuation(s), and personal property collateral requirements don’t apply to PCAs for example.

The SBA SOP (Standard Operating Procedures) is interpreted differently by different lenders and lenders vary in their policies regarding PCAs.

Minimal Seller Financial Documentation

For 100% acquisitions, lenders will typically need the seller’s last 3 years tax returns, last calendar year and YTD financials, business valuation and a 4506-T form (allowing the lender to verify tax returns). A PCA doesn’t require any of these items.

The typical required documents for a PCA simply consists of a spreadsheet of the household clients being acquired with each client’s corresponding AUM, revenue, recurring revenue, years as client, age, and any client accounts under the household account.

Most lenders will also require a broker dealer or custodian report showing the total assets managed and revenues generated. This is required to prove that the PCA is truly a PCA and not a 100% ownership transfer, or essentially a full acquisition.

Easier to Qualify

With PCAs, the loan amount needed is a fraction of a 100% acquisition of course. And as equally as obvious is lower loan amounts are easier to qualify for than higher ones. For junior experienced advisors, Associate Financial Advisors, and Investment Advisor Representatives who have assets under $30MM and revenues under $250,000, PCAs provide a more affordable way for buyers to begin acquiring.

Add Revenue Not Expenses

PCAs typically do not come with additional overhead and operating expenses for the buyer other than the debt service for the PCA. PCAs allow a buyer to acquire revenues without the additional overhead and operating costs that may be required in a 100% acquisition.

Adding revenues without adding additional costs results in the buyer being able to best cash flow the PCA. One of the most critical qualifying criteria in achieving a loan is the Debt Service Coverage Ratio (DSCR) comparing net income with fixed debt. The higher the DSCR, the easier it is to qualify.

When the only additional expense incurred in a PCA is the loan payment then the acquisition is cash flowing right out of the gate and the acquired revenue cash flow can typically pay for itself in under 4 years.

100% Lender Financing Typical for PCAs

It’s common for lenders to provide 100% financing for PCAs. That is, the lender will loan the entire amount of the PCA price without the buyer having to make a cash injection or requiring the seller to finance part of the PCA.

Seller Financing Easy for a Lender to Refinance

Some sellers will be more willing to finance some or all of a partial acquisition if it is to their designated successor. For sellers who decide to finance part or all of a PCA, the seller note can be refinanced and rolled into a future loan from the same buyer.

Lenders like refinancing PCA seller notes because it is a legitimate business purpose loan and represents a prior successful acquisition between the buyer borrower and seller. Lenders like to lend to buyers who have already acquired a partial client list, has demonstrated a high retention rate, and can show all payments have been made on time.

Save for a Down Payment So You Won’t Need One

Even if a buyer down payment is not required, a lender still likes to see that the buyer has it available.  In cases where the underwriting package is borderline on lender approval, the lender may require a buyer to make a 5% or 10% cash injection. In many cases when this is required lenders will offset this requirement by adding the same amount of the down payment to working capital to the loan.

If you are required to make a $10,000 down payment for example and the lender adds $10,000 to the loan as working capital, you still need to come up with the $10,000 in advance. Lenders also want to see that whatever the down payment amount is that it has been in your bank account for the 2 months prior to loan closing.

Investment portfolios can also be used as a form of down payment injection requirement through assigning the portfolio as a pledged security. You don’t have to sell the securities but you would no longer be able to withdraw from the portfolio while it is being used as collateral.

PCA Lending Considerations for Servicing Advisors:

Advisors who are currently servicing clients owned by another advisor are often interested in acquiring these clients. While having personal production is the most important qualifying factor for a buyer, servicing advisors have a path to gaining personal production from PCAs.

  • Lenders love lending to an advisor acquiring clients they are already servicing. The risk of attrition is minimized even more when the borrower already has the existing relationship with the clients being acquired.
  • W-2 advisors should convert to 1099. Business loans are only provided to 1099 advisors not W-2 employees. If acquiring clients is a top priority but you are currently a W-2 advisor, consider discussing with the practice’s principal the option of moving to a 1099 structure. It is much easier to qualify for financing when you have already been servicing the clients under 1099 than transitioning from W-2 to 1099 as part of the PCA process.
  • The most confusing lender underwriting issue with PCAs is for the lender to be able to determine and distinguish revenue streams from the serviced clients being serviced.
  • When a servicing advisor buys 100% of the clients they are servicing it is still a PCA as long as the clients being serviced and acquired are just a partial client list of the selling advisor.
  • When possible, servicing advisors should have their own rep code applied to the clients being serviced and being developed for a future PCA. Having split rep codes applying to the serviced clients most easily demonstrates to a lender the revenues being acquired.
  • For example, the owner advisor and servicing advisor may have a split rep code applied to 20 clients where the owner advisor gets 50% of the revenues and the servicing advisor receives 50% to their rep code. In the PCA the servicing advisor is buying the other 50% that will then be applied to their rep code post sale.

Partial Client Acquisition Loans

For non-lending information about partial client acquisitions see Advisorbox article:

Using Partial Client Acquisitions as a Succession Transition Tool

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