Partial Book Buyouts & Partial Asset Acquisitions
When an advisor is selling less than 100% of their client assets through an asset purchase.
Partial Book Buyout
Acquiring less than 100% of the client book an advisor manages.
Asset Tranches
Acquiring multiple client books over time.
Partial Asset Acquisition
Acquiring less than 100% of the assets of a practice which may include assets other than a list.
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.
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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.
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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.
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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).
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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:
Target business is in the same 6-digit NAICS code as the existing business.
Located in the same geographic area (e.g., same metropolitan region).
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.
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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.
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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.
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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).
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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%).
Partial Asset Acquisitions or Partial Book Buyouts
A Partial Asset Acquisition (PAA) is when the buyer is acquiring a partial client list, typically less than 50% of the seller’s assets, rather than acquiring the entire book or practice.
Advisors will often use PAAs outside of a succession strategy in order to make more room and time for larger more profitable clients. Larger advisors will sometimes utilize a PAA to sell off the “bottom” portion of their book to advisors who are eager to affordably grow their client base. PAAs provide many benefits to both the buyer and seller, and can also provide an ideal path of least resistance for beginning and implementing succession transition strategies.
Sellers may choose to parcel out different client tranches to multiple advisor buyers or use as a way for their “anointed successor advisor” to begin a gradual acquisition and client transition process.
Structuring PAAs are flexible and are individually tailored according to the seller’s succession and retirement timeline.
Client lists can be segmented into tranches and the tranches do not have to be equally segmented. Most advisors will initially carve out their clients with the lowest assets as a tranche and then segment by client asset tiers. PAAs can be structured to sell tranches to multiple advisors, sell a few tranches in the short term and maintain favorite clients for a much longer period of time, or more commonly to sell tranche #1, and then perhaps #2, to a single advisor, and if all goes well, then combine and sell the remaining tranches in a follow up 100% acquisition of the remaining clients.
Ideal Succession Transition Method
Many sellers aren’t ready to completely sell out and retire right now but would like to solidify who their successor advisor will be and start slowing down over the next few years. PAAs allow sellers with longer time windows to work with and the ability to prepare their successor advisor both financially and professionally through partial and incremental transition tranches.
On the other side, there are many advisors who have years of experience (rather than decades) who would benefit from acquiring a principal’s practice over time as well. PAAs allow the advisor to more easily afford or qualify for a loan than 100% ownership transfers and provides valuable client transition and retention experience needed for larger acquisitions later.
A Mutual Test Drive
A PAA provides both the seller and buyer with an initial acquisition test drive. If the client retention is high, the client relationships are strong, and there is synergy with buyer and client service model and general investment philosophy, then the PAA can be determined a success.
If the PAA isn’t considered a “success” then the PAA served as an insurance policy against both buyer and seller remorse. The PAA gives buyers and sellers a strong indication if both are the ideal match for future client transitions with each other. If not, then the PAA allowed for the buyer, seller, or both, to look at other opportunities.
The PAA provides experience to the inexperienced. Both the buyer and seller are able to judge from the initial PAA experience if future PAAs, or acquiring the rest of the practice, is a prudent continuation of succession transition. If not, then any “remorse” is limited to just the partial client list sold and not the entirety of the practice.
Add Revenue Not Expenses
PAAs typically do not come with additional overhead and operating expenses for the buyer other than the debt service for the PAA. PAAs 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 PAA. One of the most critical qualifying criterion 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 PAA is the loan payment, the acquisition is cash flowing right out of the gate and the acquired revenue cash flow can typically pay for itself in about five years.
Minimal Seller Financial Documentation
For 100% acquisitions, lenders will typically need the seller’s last three years’ tax returns, last calendar year and YTD financials, business valuation and a 4506-T form (allowing the lender to verify tax returns). A PAA doesn’t require any of these items.
The typical required documents for a PAA 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 PAA is not a 100% ownership transfer, or full acquisition.
Provides Experience for the Inexperienced
There is no other way to better prepare for a 100% acquisition then going through the experience of a PAA first. This applies to both buyers and sellers. Like many other aspects of the financial services industry, business in general and in life, there is no better teacher than experience.
PAAs can be utilized as “trial runs” for bigger PAAs down the line or to acquire the rest of the practice. The transition process, client transition meetings and procedures, time allocation, and retention best practices can be learned and lessons addressed to be applied to future acquisitions from both the buyer and seller perspectives.
Achieve Foresight from Hindsight
Hindsight has 20/20 vision as the saying goes. Use the perspective and experience from an initial PAA to provide the foresight in how to structure the continuation of the succession or to go in a different direction if the PAA wasn’t considered successful.
PAAs gives the seller the opportunity to examine the results of an initial PAA to determine if the buyer has proven themselves worthy of additional PAAs or a full acquisition. It also provides the buyer with the opportunity to determine if acquiring more of the same would be a dream or a nightmare. The 20/20 hindsight gives buyers and sellers the opportunity to recalibrate structure and improve the transition process moving forward.