ADVISOR LOANOLOGY

When you realize you can buy that book with no cash down payment required.

Next-Gen Specific Lending Myths 

W2 NEXT-GEN ADVISOR CAN'T BUY ASSETS WITHOUT A DOWN PAYMENT

A 1099 next-gen advisor who qualifies for an SBA expansion loan can avoid a down payment. The W2 advisor can establish their new 1099 advisory business and do an expansion loan while maintaining W2 income. A W2 advisor whose loan does not qualify as an expansion loan can avoid a cash down payment if the seller does the 10% two-year standby note.

SUCCESSION THROUGH EQUITY IS THE ONLY WAY TO TRANSITION TO NEXT-GEN ADVISOR OVER TIME

It's one way but not the only way. Partial asset tranche sales and a converger plan where there is a structured buy-transition-buy model are two structured ways (with a lot of benefits) whereby a seller can sell to their internal or next-gen advisors over a defined period without convoluting equity shares and ownership.

SELLERS HAVE TO GUARANTY ANY NEXT-GEN LOAN

Being "next-gen" has nothing directly to do with a seller guarantying your loan. It's all about if the acquisition is an equity buy-in or a book, the ownership makeup after the sale, and the same fundamentals all other loans are judged by like cash flow, equity injection thresholds, and credit policy. There are no seller guaranty loan options.

SELLERS CAN ALWAYS GET A BETTER DEAL IF THEY SELL TO A PEER

Really? Full valuation price, 95% paid up front, and no clawback is a pretty strong offer out there. When selling to a qualified internal employee who has strong existing relationships with the clients, the seller would not usually have to finance more than 5% of the purchase price. And the only reason they need to do this is to get the buyer out of 50% of the 10% cash down payment requirement.

SELLERS HAVE TO FINANCE A BIG PORTION OF ANY NEXT-GEN LOAN

If the next-gen advisor is 1099 and owns a book then they could qualify for a complete or partial book acquisition without any seller financing required. If the W2 next-gen internal has 10% cash down payment then the same applies.

THERE IS NO WAY A $50K GDC ADVISOR CAN GET A $1M LOAN WITH NO DOWN PAYMENT OR SELLER FINANCING

Yes there is, maybe, most likely. If the advisor has 5+ years experience, a decent PFS, clean U4, great credit, and has a $50,000 recurring revenue book they own and receive 1099 compensation for, then yes this is possible through an SBA loan.

Next-Gen & W2 Advisor Lending

How does financing work for a W-2 advisor seeking to buy out their book of business and transition fully to a 1099 compensation structure, or possibly a hybrid W-2/1099 role?

What steps must the W-2 advisor take to gain ownership of their book while compensating the practice or senior advisor with an override, platform fee, or overhead fee for the support provided?

There are options.

W2 & Next-gen Advisor Buying Their First Book/Assets

Financing partial and complete books and practices is entirely possible for W2 advisors and depending on your perspective, this model offers its own set of benefits.

Advisors can sell partial books of assets to next-gen advisors as one time events, then more maybe later as a we'll-see-how-it-goes future sale, or sell assets in structured tranches over time.

Unlike selling partial equity, selling partial assets avoids personal or corporate guaranties on the selling side.

The equity injection requirement for W2 advisor buying a book is 10% which can be cash down payment of which 50% can be seller financed on a ten-year standby note. However, the equity injection for an expansion loan is waived. So if the W2 advisor first becomes an established 1099 business then it could be structured as an expansion because it in fact would be. These are looked at on a case by case basis but bottom line is that the SBA makes it viable to get loans at 90% and 100% LTV compared to a 75% typical LTV conventional loan.

W2 Advisor Book Buyout SBA Loans

W2 Advisor Buys A Book

Asset Purchase / Book Buyout

5% Cash Down
Buyer pays a 5% cash injection based on the total project cost. The seller finances 5% on a ten-year standby note. the note can collect interest but no payment can be made until the SBA is paid off.

5% Seller Standby Financing
The seller can eliminate the need for the buyer to come up with half the required cash.

No Seller Guaranty
This is a simple asset/book sale and there is never a seller guaranty in an asset sale, especially a partial book buyout.

W2 /1099 Advisor Buys a Book

Expansion Acquisition

SBA Exception
There is no down payment required by the SBA and it will only be dependent on the bank feeling comfortable with the experience and credit of the advisor in relation to the size loan they are seeking.

Exception Criteria
Business expansion loans involve an existing business starting or acquiring another in the same 6-digit NAICS code, with identical ownership and in the same geographic area, treated as co-borrowers.

No Seller Guaranty
This is a simple asset/book sale and there is never a seller guaranty in an asset sale, especially a partial book buyout. SBA seller guaranties come on the partial equity buy-in side but not partial asset side.

What Sellers to W2 Advisors Should Know

Partial Books to One Advisor


Partial books can now be sold to the W2 Advisor who also owns 1099 business with no buyer cash down, no seller guaranty and no seller financing. You can sell assets to a W2 advisor, pay them 1099 for that business, and charge a platform fee option to provide the home office services you cover as their principal firm or RIA. The W2 buying advisor can transition fully to 1099 replacing or increasing current salary income (after debt service) or they can continue to receive W2 income and 1099 income (for what was acquired).

Partial Books to Multiple Advisors


An advisor can sell $250K GGC/revenue to one advisor or multiple books to 4 advisors all in this same structure. A $1.5M revenue advisor ready to slow down can sell $1M in 4 different asset tranches to 4 different advisors and sell the last $500K when ready to retire. The advisor buyers do not guaranty each other loans in this example as they are assets purchased separately. In partial equity buy-ins any remaining partner with 20% is required to be a personal guarantor.

W2 Advisor Converts to Expansion Loan Eligibility...

Expansion Through Acquisition: When an established business starts or acquires a business that is in the same 6 digit NAICS code with identical ownership and in the same geographic area as the acquiring entity and they are co-borrowers, SBA considers this to be a business expansion, and SBA will not require a minimum equity injection.

If W2 Advisor Becomes a 1099 Advisory Business

1. Entity

Can technically do as a sole proprietor but let's start off right with s single member LLC.

2. Start Book

Don't need much but $25,000 to $50,000 in GDC/revenue depending on the acquisition amount objective. Seller transfers these clients and their ownership to successor new rep code.

3. Agreement

Seller and successor advisor have entered into a service agreement which shows the clients owned, that they are owned, and the payout which will be received. W2 income can continue but acquired assets must be paid 1099.

4. Expansion Ready

The next-gen advisor still has the W2 income they have been relying and living on but now also owns a fledging 1099 advisory business and is ready to expand. SBA doesn't have time periods which have to be met prior. You're ready to acquire as an expansion loan.

Equity Injections FAQ

Equity injections are basically skin in the game from the lender's perspective for an acquisition, expansion, or partner buyout loan.

Most advisors who are acquiring other advisors books or practices qualify for the exception the SBA has for expansion loans. There is no equity injection requirement for expansion acquisition loans allowing for 100% bank financed acquisitions.

  • Equity Injection for SBA Loans

    The SBA requires a minimum 10% equity injection for loans facilitating a change of ownership, calculated based on total project costs, not the loan amount. This contribution must originate from sources outside the business’s existing balance sheet, such as personal cash, gifts, or seller financing under strict conditions.

    Per the SBA SOP 50 10 8 (effective June 1, 2025), equity injection rules apply to change of ownership loans, with specific requirements for partner buyouts, business acquisitions, and exceptions for expansion loans.

    What Is an Equity Injection?

    An equity injection is the borrower’s or seller’s contribution of cash or assets to a change of ownership loan, showing dedication to the transaction. It’s not tied to purchasing equity but to injecting resources to fund the deal.

    • Purpose: Covers 10% of total project costs (all costs to complete the transaction, e.g., purchase price, fees, working capital), not the loan amount, unless exemptions apply.

    • Sources: Borrower cash (e.g., savings, HELOC, gift), seller standby notes, or a combination, sourced outside the business’s existing balance sheet.

    • Example: For a $1M acquisition (total project costs), a $100,000 equity injection is required, via $50,000 cash and a $50,000 seller standby note.

  • Business Purchase:
    Buying a book or practice.

    Expansion Acquisition:
    An existing business purchasing another, advisor-to-advisor acquisitions.

    Complete Partner Buyout: Buying out a partner’s full equity share, transferring 100% ownership to you.

    Partial Partner Buyout: Purchasing part of a partner’s equity, with the seller retaining some ownership.

  • Injections for Business Acquisitions

    Business acquisitions (new or expansion purchases) follow standard SBA equity injection rules.

    Requirement:

    A 10% equity injection of total project costs (e.g., purchase price, fees, working capital), sourced from:

    • Cash: Paid by the borrower (e.g., savings, Home Equity Line of Credit, gifts with a gift letter), verified by recent account statements.

    • Seller Note: Seller financing on full standby (no principal or interest payments for the entire 7(a) loan term) can cover up to 50% of the injection (e.g., $50,000 for a $1M deal with a $100,000 injection).

  • Exception for Expansion Loans

    Expansion loans through acquisition may be exempt from equity injection, easing financing for growth.

    • Expansion Acquisition Exemption:

      • No Injection Required if:

        1. Target business is in the same 6-digit NAICS code as the existing business.

        2. Located in the same geographic area (e.g., same metropolitan region).

        3. Has identical ownership structure (same owners, percentages).

      • Otherwise: Standard 10% equity injection applies.

      • Example: An advisor who is 100% owner of a single member LCC acquires another advisor’s book or practice with the same ownership.

  • Equity Injections for Partner Buyouts

    Partner buyouts involve purchasing a partner’s equity, either fully or partially, with specific equity injection rules.

    Partner Buyouts:

    • Complete: Purchasing 100% of a partner’s equity, transferring their full ownership to you.

    • Partial: Purchasing part of a partner’s equity, with the seller retaining some ownership.

    • Equity Injection: The lesser of:

      • 10% of the purchase price.

      • An amount ensuring a debt-to-worth ratio of 9:1 or lower on the pro forma balance sheet (based on the most recent fiscal year and quarter).

    • Exemption: No injection is required if:

      • The buyer has been an active operator and owned 10% or more of the business for at least 24 months, verified by both buyer and seller.

      • The business maintains a debt-to-worth ratio of 9:1 or lower (total debt ÷ total equity).

    • Sources: Must be paid in cash, seller notes for partner buyouts for the purposes of the equity injection are ineligible.

    • Guarantors: Post-sale, owners with 20%+ equity (including the seller, if retaining equity) must provide a personal guaranty. Sellers retaining less than 20% must guarantee the loan for 2 years post-disbursement.

  • Equity Injection Sources and Verification:

    • Acceptable Sources:

      • Savings: Personal or business savings (outside the acquired business’s balance sheet), verified by bank statements.

        • Liquidated Investments: Proceeds from sold stocks, bonds, or other assets, documented by investment account records.

        • Gifts: Funds from a third party (e.g., family), requiring a gift letter confirming no repayment obligation.

        • HELOC: Funds from a Home Equity Line of Credit, verified by loan statements.

      • Unacceptable Sources: Funds from the acquired business’s existing balance sheet or borrowed funds (except HELOC or seller standby notes). Franchise fees do not count as the equity injection, even for startups; they’re included in total project costs (e.g., fees, equipment, working capital), but the 10% injection must be separate.

    • Project Costs Context:

      • The equity injection covers 10% of total project costs (purchase price, fees, working capital, etc.), not just a “down payment” toward the purchase price (Paragraph D.2.a).

    • Verification: Lenders require recent account statements (e.g., bank, investment, HELOC) to confirm the source’s legitimacy and availability. If funds come from multiple sources, each must be documented (e.g., separate statements for savings and HELOC). No fixed timeframe (e.g., two months) is mandated by SBA, but lenders typically request statements covering recent activity.

    • Process of Providing the Equity Injection:

      • Payment Method: Funds are typically wired to the lender or an escrow account 1–2 weeks before loan closing, ensuring availability for the transaction.

      • Documentation: Lenders require account statements, gift letters (for gifts, verifying no repayment), or HELOC records to confirm funds. Multiple sources require documentation for each (e.g., savings and investment statements).

      • Example: For a $1M acquisition requiring a $100,000 injection, you wire $60,000 from savings and $40,000 from a HELOC, providing statements for both accounts to verify the funds.

  • What is the SBA equity injection seller standby note?

    If your buyer is utilizing an SBA loan to finance the purchase of your book or practice then the buyer’s down payment requirement depends on if it’s considered an expansion acquisition. In most all cases when an established independent advisor or firm is acquiring your business with an SBA loan they will not be required to make a down payment and you will not be required by the lender to seller finance a portion of the sale.

    However for book and practice acquisitions where the buyer is currently 100% W2 or has issues for whatever reasons with coming up with the full 10% cash for the required equity injection, there is an option for you as the seller to step in and help in a big way, all with minimal exposure to you. Seller notes allow the seller to finance part of the equity injection, reducing the buyer’s upfront cash need.

    Full Standby Note: Can cover up to 50% of the 10% injection (e.g., $50,000 for a $1 million project, with the remaining $50,000 from buyer/borrower sources like cash).

    Terms: No principal or interest payments for the entire term of the 7(a) loan, which is a ten-year term. The note must be subordinated to the SBA loan with no acceleration clauses.

    Here’s how it works:

    An SBA acquisition loan allows for attrition offsets, hold-backs and clawbacks, and any additional seller financing are eligible elements in an acquisition payment structure. This example doesn’t account for additional deal components.

    Upfront Cash: You could receive 95% of the purchase price (up to the SBA-approved valuation) in cash at closing, funded by the SBA loan and the buyer’s cash contribution.

    Standby Note: The remaining 5% is a 10-year standby note from you to the buyer, with no principal or interest payments during the SBA loan term (typically 10 years). At maturity, the buyer pays the principal plus accrued interest (e.g., 6-9%, negotiable) in a lump sum.

    Subordinated Lien: You hold a subordinated lien on the practice’s assets, behind the lender’s first lien, securing your claim if the buyer defaults (though secondary to the lender) or sells.

    Example: You sell your practice for $1 million (SBA-approved valuation). The buyer needs a $100,000 equity injection (10% of project costs, including price, fees, and working capital). You provide a $50,000 standby note at 9% simple interest. At closing, you receive $950,000 in cash. In 10 years, you collect $95,000 ($50,000 principal + $45,000 interest).

  • Equity Injection With Conventional Loans

    An equity injection demonstrates your commitment, or “skin in the game,” to the deal. This contribution reduces lender risk which is paramount for the loans not partially guaranteed by the SBA.

    While a borrower’s personal financial situation and credit profile have significant influence, the primary equity injection criteria from conventional lenders is the Loan-to-Value (LTV) ratio. Typically, conventional lenders cap LTV at 75%, although some may extend to 85%.

    For acquisitions, LTV is calculated by combining the value of the buyer's and seller's practices, resulting in most conventional acquisition deals meeting the LTV requirement. If a $1M value practice acquires a $1M value practice then $1M loan/$2M value = 50% LTV.

    When a $333,000 value practice acquires $1M value practice then $1M/$1,333,000 = 75% LTV. In this case an equity injection (down payment and/or seller financing) is not required based on LTV but the lender may have other reasons they may want to see "some level" of injection (5%-10%).

Minimizing Cash Down Requirements with Strategic Financing

Buying a Book or Practice

How to Avoid an Equity Injection (0% Down):

If you’re transitioning to 1099 status and generating 1099 income, you may be able to eliminate the need for an SBA equity injection. For W2 advisors, this scenario often arises when the clients you bring in start contributing to your 1099 income alongside your W2 salary. By positioning yourself for an expansion acquisition when the time comes, you can bypass the usual equity injection requirement.

Reducing Equity Injection to 5%:

If you’re purchasing assets and don’t qualify for an expansion loan, the standard SBA requirement is a 10% equity injection. However, this can be reduced to 5% with a seller promissory note. The SBA allows sellers to issue a standby seller note, with no principal or interest payments required during the full term of the loan (typically 10 years). Interest may accrue, but payment is deferred until the loan matures. To take advantage of this, discuss the standby note with the seller early in the process and secure their agreement, reducing your cash requirement significantly.

Buying Equity in a Practice

How to Avoid an Equity Injection (0% Down):

You can eliminate the need for an SBA equity injection in two scenarios:

  1. Established Ownership: If you’ve been an active operator with at least 10% ownership in the business for over 24 months, SBA equity injection requirements do not apply. Verification is required, typically through tax returns, but processes may vary by lender.

  2. Strong Financial Ratios: If the practice you’re buying into has a debt-to-worth ratio of 9:1 or better (e.g., $900,000 in liabilities to $100,000 in equity), no equity injection is needed. This could be as simple as the business having little to no debt. Confirm the debt-to-worth ratio in advance to ensure eligibility.

By leveraging these strategies, you can minimize upfront costs and position yourself for successful acquisitions while maximizing your financial flexibility.