Buying Equity Tranches Over Time
Buying Equity Tranches Over Time
A Path to Ownership for Key Staff and Superstar Advisors
As the 100% (or majority) owner of your RIA or IBD practice, you’ve built something special, but now you’re eyeing a succession plan. Selling equity in tranches—small, scheduled portions over time—lets you transition ownership gradually while keeping your practice humming. Whether it’s a top advisor buying 20% annually over five years or a key employee acquiring 10% every two years, an SBA or conventional equity buy-in loan can finance these deals. Here’s how tranche-based equity buy-ins work and how we help make them a reality.
What Are Tranche-Based Equity Buy-ins?
A tranche-based equity buy-in allows a non-shareholder, like a key staff member or superstar advisor, to purchase equity in your practice in stages over a defined period. Instead of buying a large stake upfront, they acquire smaller portions (e.g., 10%–20% per tranche) at set intervals, spreading the cost and aligning with your succession goals. For example:
You, the 100% owner, sell 15% equity to a star advisor every year for four years, totaling 60%, funded by a $600,000 7(a) loan for a $1 million practice.
A key employee buys 10% every two years over six years, reaching 30%, using a $150,000 conventional loan for a $500,000 practice valuation. This approach keeps your practice stable, rewards talent, and ensures a committed transition team.
How Tranche-Based Buy-ins Are Financed
Each tranche is treated as a separate equity buy-in, requiring:
Business Valuation: An independent appraisal sets the price for each tranche, ensuring fairness across purchases. For a $1 million practice, a 15% tranche is valued at $150,000.
Equity Injection (SBA Loans): Buyers need the lesser of a 10% cash injection per tranche (e.g., $15,000 for a $150,000 tranche) or an amount to maintain a pro forma debt-to-worth ratio of 9:1 or lower (total loans ÷ total equity, e.g., $900,000 ÷ $100,000 = 9:1). Cash, HELOC, or gift funds qualify; seller financing doesn’t count toward the injection but can be part of the deal.
Exemption: No injection is needed if the buyer has 10%+ ownership for 24+ months and the practice keeps a debt-to-worth ratio ≤9:1.
Guaranties: Post-tranche, buyers and owners with 20%+ equity provide unlimited personal guaranties. Sellers with <20% equity after a tranche guarantee SBA loans for 2 years post-disbursement.
Collateral: A UCC lien covers all practice assets for each tranche. For SBA loans >$350,000, personal real estate (25%+ equity) may be required if assets are insufficient. Conventional loans typically skip personal property collateral.
Cash Flow (DSC): Cash flowing the loan is based on net distributions against annual debt service per tranche.
Owners Retaining Equity: What to Know
If you retain equity during tranche sales, lender requirements impact you:
UCC Lien: Both SBA and conventional lenders place a blanket UCC lien on the entire business, even if the loan is for a small equity buy-in. This lien includes the equity of non-borrowing partners and all current and future business assets.
Conventional Loan Guaranties: For equity owners with 20%+ stakes, conventional lenders usually require a grantor agreement or similar. Borrowers are personal guarantors, and 20%+ partners also sign grantor agreements.
SBA Loan Guaranties: Post-buyout, owners holding 20%+ equity must provide unlimited personal guarantees. Partners with less than 20% ownership must guarantee the loan for two years post-disbursement. SBA loans also include a six-month look-back, requiring personal guarantees from prior owners who held 20%+ equity within six months of the application unless fully divested.
Cash Flow and LTV: Tranche deals face the same debt service coverage ratio (DSCR) and for conventional loans are subject to loan-to-value (LTV) scrutiny as well.
AdvisorLoans is Ready to Help
Need help buying or selling partial equity? Want guidance on structuring equity tranches or succession-based financing? Want to talk through equity vs. asset tranches? We deliver independent lending advice we believe serves the best interests of the advisors we work with.
Our consulting is relaxed, unbiased, and straight-up candid. We’ll give you an instant read on your loan request’s viability, highlight any workarounds or red flags, and ensure the loan aligns with your strategic goals or future financing plans. We can help you compare SBA and conventional options, address equity injections, and share the best solution for your goals.