SBA Levels the Financing Playing Field, Empowers Succession Advisors
Fish buying whales with 100% Financing
The new SBA rules going into effect January 1, 2018 is going to turn acquisition lending upside down in several key ways. For more information about the new rules read our AdvisorLoans Insight Article. SBA Paves Way for More Flexible M&A: New acquisition rules: The Beauty and the Beast
SBA Levels the Lending Playing Field, Empowers Succession Advisors
Associate Financial Advisors (AFA) and Investment Advisors (IA) who are affiliated with another, typically much larger, advisor’s practice, can make ideal successor advisors. Advisors who have proven promise, has their own small book of business, and perhaps also acts as a service advisor for a segment of the senior advisor’s clients.
Many sellers have spent years grooming and coaching these advisors and if financially feasible would like to be able to sell their practices when they retire to these succession advisors. However, the SBA financing with these types of deals, required the seller to finance at least 25%, often more, and then have to wait two years to receive any seller note payments because of the SBA seller standby requirement. Not as attractive as the plentiful 100% deals with no seller financing that larger producing advisors could qualify for.
New SBA Rules Shakes Up the Acquisition Financing Balance of Power
Now, a $300K revenue advisor with no significant business debt, can qualify for a 100% deal for a loan up to as much as $5MM, the SBA 7(a) loan limit, just like the million and multiple million revenue advisors can.
Sellers of course like 100% financing, but a SBA rule clarification makes it a lot easier now for the selling advisor to stay on as an advisor, in a different capacity, for more than 12 months. Not as a key employee role or a manager, but still as an advisor who can help out from time to time if necessary.
Fish buying whales with 100% financing
- AFAs and IAs with their own book can potentially qualify for these examples:
- 100% financing is no out of pocket dollars from the buyer and no seller financing from the seller.
- Claw back or retention provision with 90% benchmark typically required by SBA lenders.
100K producer = $1,300,000 loan
- Buyer recurring revenue: $200K
- Buyer value multiple 2 times
- Buyer value: $200,000
- Seller value: $1,300,000
$200K producer = $2,700,000 loan
- Buyer recurring revenue: $200K
- Buyer value multiple 2.2 times
- Buyer value: $440,000 value
- Seller value: $2,700,000
$300K producer = $5,000,000 loan
- Buyer recurring revenue: $300K
- Buyer value multiple 2.5 times
- Buyer value: $750,000 value
- Seller value: $5,000,000
Variables for above examples:
- SBA fee and closing costs all included
- Credit score over 625
- 50% of either buyer or seller revenue is recurring
- No significant buyer business debt
- Third party valuations for both buyer and seller
- Buyer DSCR for last full year and T12 at 1.15 or higher
- Seller DSCR for last full year and T12 at 1.15 or higher
- Other SBA requirements are met
Conventional Loans Not as Friendly to Successor Advisors
Conventional lenders have different leverage (total loan to EBITDA) and LTV (Loan to Value) requirements than SBA lenders typically deal with. There is also a minimum 5 year experience requirement. While the SBA loan process is more burdensome than with a conventional loan, the path for successor advisor’s qualification for larger loan amounts with 100% financing is much wider.
Lending Guide eBook
For more details see our Lending Guide eBook for independent advisor acquisition loan details and structures.
Don’t Go It Alone, call AdvisorLoans
If you are a buyer or seller, and would like to discuss the lending options for your situation, just call us. We are Loan Advisors and can answer your questions, structure the most ideal loan, and navigate the process. We’re not sales people (Loan Officers) for any lender or program. We have an open architecture of lending programs and lenders to choose from. We are only interested in the best interest of our advisor borrower clients.
Posted by Darin Manis
Equity Injection Workaround Disclaimer
- This is not an official or endorsed SBA strategy, promoted workaround, or formula for determining equity injection requirements for the new 2018 rules.
- This workaround and formula will not be implemented by every SBA lender and should not be considered an SBA lending standard (yet).
- Different SBA lenders interpret the SOP differently.
- SBA lenders will differ in determining “assets other than cash” requirements and procedures.
- When significant new SBA rules are added to the SOP, some SBA lenders are leaders in quickly developing and adjusting their internal policies to comply. Other SBA lenders will wait to see what the leading SBA lenders implement and how the SBA responds, and then copy for their own policy.
- This workaround formula is not absolute and is not independent of other important qualifying factors.
- The formula is only a tool used by some of the SBA lenders we work with and not a rule.
- The SBA itself does not explicitly require a valuation on the buyer’s practice. Some SBA lenders will determine a valuation is required in all or in selective circumstances.
- A borrower’s credit, cash flow, DSCR, LTV, and overall quality of the loan have a profound effect on an SBA lender’s requirements.