ADVISOR LOANOLOGY
FINANCING CONSIDERATIONS
If the acquisition needs bank financing, then if it can’t get financed, what’s the point of everything else?
Address Financing Before Solidifying Deal Terms
If external financing will be required for the advisor acquisition then the deal must match bank requirements, not the other way around. Acquisition deals can implode in the end when lending due diligence isn’t done in the beginning. If the acquisition deal or structure can’t get financed, what’s the point of everything else?
This scenario plays out regularly in the industry: Buyer and seller have already worked out the acquisition deal structure and terms, hired a lawyer to develop the purchase agreement, paid for a business valuation, and set the closing date. Then, after all that time, money and effort was spent, they look into the financing only to find out that the deal can’t be financed at all, or that it needs to be re-structured in order to comply with the financing option or lender the buying advisor qualifies for and with.
If external financing will be needed for the acquisition deal to close, then external financing becomes one of the most important aspects of the acquisition deal. Buyers getting pre-qualified at the beginning of the process is critical for both buyer and seller.
External financing will heavily influence the acquisition terms and structure. External financing will dictate requirements around loan amount, cash injection requirements, promissory note amount, type and structure, closing timeline, retention provisions, and more.
Financing Touches Everything in Change of Ownership
For an acquisition loan the lender touches about every aspect of the deal. Borrower qualification, loan amount, deal and payment structures, down payments, seller financing and seller note standby and subordination, purchase agreement, collateral, business valuations, insurance, and lien requirements, to just name a few items the bank is involved with in some way.
If an advisor buyer only qualifies for an SBA loan then the deal has to comply with not only SBA requirements but also any additional requirements a willing SBA lender has as well.
Conventional lenders have their own set of requirements that in some cases are more lenient than the SBA and in other cases, are not. SBA has their policies and then each SBA lender adds their bank policies on top of the SBA policies.
Whether you are a buyer or seller, the first step of acquisition deal due diligence should be focused on the financing component. The acquisition deal viability and structure can then be determined and developed in compliance with the financing requirements.
Buyers need to know what purchase amount they are able to finance and if they would be likely an SBA or conventional loan before jumping into bidding or sourcing potential sellers.