ADVISOR LOANOLOGY

“An ounce of prevention is worth a pound of cure.”

~ Benjamin Franklin

Selling to Successor:
What to Know

Selling to an internal successor is what most advisors prefer or plan.

It might be to an existing partner, junior or associate advisor, or even a family member. In most cases an internal advisor can qualify for an acquisition loan for the full purchase price.

  • Can I spread out payments over multiple years without seller financing?

    Yes. Part of the purchase can be placed into escrow and then disbursed over multiple years.

  • Can they get a loan for the down payment and then do an earn-out for the rest?

    If they qualify for a conventional loan they can. Any form of an earn-out is not allowed with an SBA loan.

  • Can I help my successor avoid a down payment?

    Other than guarantying the loan, they would need to be 1099 for one year prior to the purchase and own enough assets to value at just over 10% of the purchase price.

  • Can I lend successor money for a down payment?

    You can’t lend it to them.

  • Can they use the phantom stock I gave them as a down payment?

    Conventional: If the buyer is doing a conventional loan, no problem.

    SBA: The equity owned needs to be reported on their last two years tax returns to qualify. If the equity is phantom stock, a verbal agreement, or equity that you gave that has no benefit unless you sell someday, then lenders typically will not view that as eligible equity ownership that could be applied as the down payment.

  • What's this SBA equity injection seller financing all about?

    For advisors with no equity ownership, no 1099 income, and no clients owned, then a 10% down payment would be required. Of this you can choose to seller finance 5% but the note would be on a 10 year standby note.

    This means that while interest can accrue the buyer would not be able to make any P&I payments on that 5% note while the SBA loan is still active. SBA acquisition loans (without property) are 10 years.

    For a lot of internal successors there is a big difference in their ability for coming up with a 5% down payment vs. coming up with 10%. With a little planning you can help your internal successor in this situation either prepare for a down payment or avoid a down payment all together.

  • Should I ever consider guarantying the loan?

    As a general rule, no. However, there are circumstances that could warrant it. If you do guaranty then you will likely only be able to protect yourself in clawing back the equity that was sold.

  • What does it cost to see if my successor qualifies?

    Nothing, AdvisorLoans provides pre-approvals for free.

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.

Can sell partial books of assets 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 or seller financed on a two-year standby note. But the equity injection for an expansion loan is waived. So if the W2 advisor first becomes an established advisory 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.

Equity injections are basically skin in the game from the lender's perspective for an acquisition loan.

The equity injection has nothing to do with an asset or equity structured purchase, it is referencing the equity of either cash, assets, or a seller note injected into the deal.

An equity injection can be provided by the buyer through a cash down payment or waived based on their current book of business value.

A seller can inject equity into the deal by providing a seller promissory note for a portion of the purchase price.

And equity injections can be satisfied through a combination of buyer down payment and a seller note.

Equity Injection

  • Equity Injection for SBA Loans

    When financing a business acquisition through an SBA loan, such as purchasing an international trade company or a franchise, an equity injection demonstrates your commitment, or “skin in the game,” to the deal. This contribution reduces lender risk and ensures financial stability. 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. LoanBox guides you through these requirements, ensuring your loan package meets SBA standards for a seamless process.

    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.

    • Why It Matters: A strong equity injection boosts approval odds, and LoanBox structures your contribution to meet SBA requirements.

  • SBA Equity Injection Rules

    SBA loans for change of ownership (e.g., acquiring a business, assets, or equity with 100% ownership transfer) require a 10% equity injection of total project costs, per SOP 50 10 8, unless exemptions apply.

    • Change of Ownership Loans:

      • Types: Include new business purchases, expansion business purchases, and complete/partial partner buyouts.

      • Requirement: 10% equity injection, sourced from:

        • Cash: Paid by the borrower (e.g., savings, HELOC, gift with gift letter), verified by recent account statements.

        • Full Standby Note: Seller finances 100% of the 10% injection (e.g., $100,000 for a $1M deal), with no principal or interest payments for the first 24 months of the 7(a) loan, allowing zero cash down.

        • Partial Standby Note: Seller finances up to 7.5% (e.g., $75,000), with 2.5% ($25,000) from another source (e.g., borrower cash). Interest-only payments are allowed for 24 months if cash flow (DSCR 1.15+) supports it; no balloon payments permitted.

      • Seller Note Restrictions: Must be subordinated to the SBA loan, with no acceleration clauses.

      • Example: A $1.5M business purchase requires a $150,000 injection, met with a $100,000 full standby note and $50,000 borrower cash.

    • Down Payment Sources:

      • Acceptable: Cash from savings, liquidated investments, HELOC, or gifts (with gift letter).

      • Process: Typically wired to the lender 1–2 weeks before closing, with account statements verifying the source’s legitimacy (no fixed two-month rule).

      • Franchise Fees: Do not count as the equity injection; they’re included in total project costs (e.g., fees, equipment, working capital), but the 10% injection must be separate.

      • Example: A $200,000 franchise purchase with a $50,000 franchise fee requires a $20,000 injection, sourced from cash, not the fee itself.

  • Injections for Partner Buyouts

    Partner buyouts (complete or partial) have unique equity injection rules, reflecting their operational impact.

    • Complete/Partial Buyouts:

      • Requirement:10% cash injection of total project costs, unless:

        1. Borrower has been an active operator with 10%+ ownership for at least 2 years, verified by buyer and seller.

        2. Business maintains a 9:1 debt-to-worth ratio (total debt ÷ total equity, based on recent fiscal year and quarter balance sheets).

      • Restriction:Seller notes (standby or otherwise) cannot count toward the equity injection, unlike other change of ownership loans.

      • Guaranties: Remaining owners with 20%+ equity must provide personal guaranties and meet collateral requirements (e.g., real estate with 25%+ equity for loans >$350,000).

      • Example: A partial buyout of $500,000 requires a $50,000 cash injection unless the borrower has 2 years of 10%+ ownership and a 5:1 debt-to-worth ratio, waiving the injection.

      Calculating the 9:1 Debt-to-Worth Ratio:

      • Formula: Ratio = Total Debt / Total Equity (e.g., $500,000 debt ÷ $100,000 equity = 5:1).

      • Interpretation: A ratio ≤9:1 indicates stability, potentially waiving the injection. Above 9:1 (e.g., $1.2M debt ÷ $100,000 equity = 12:1) requires the 10% injection to reduce risk.

      • Example: A business with $750,000 debt and $150,000 equity (5:1) avoids a $100,000 injection for a $1M buyout, assuming 2-year ownership.

  • Injections for Business Acquisitions

    Business acquisitions (new or expansion purchases) follow standard SBA equity injection rules, with flexible sourcing options.

    • Equity Injection Sources:

      • Cash Payment: Paid by the borrower, wired 1–2 weeks before closing, from savings, investments, HELOC, or gifts (with gift letter). Lenders verify with recent account statements.

      • Full Standby Note: Seller finances 100% of the 10% injection, with no payments for 24 months, enabling zero cash down.

      • Partial Standby Note: Seller finances up to 7.5%, with 2.5% from another source. Interest-only payments require cash flow support (DSCR 1.15+).

      • Example: A $2M acquisition requires a $200,000 injection, met with a $150,000 full standby note and $50,000 cash.

  • 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 export logistics firm acquires another logistics company in the same region with identical ownership, requiring no injection. A different industry acquisition needs a 10% injection.

  • 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.

Equity Buy-in Loans

Comparing SBA & Conventional Equity Injections

An equity injection can be provided by the buyer through a cash down payment or from the seller by providing a seller promissory note (subordinated to lender) or satisfied through a combination of buyer down payment and a seller note. Conventional and SBA loans have completely different rules for equity injections, with conventional being more consistent for all loans but also significantly higher than what SBA loans allow for.

0% or 10% SBA EQUITY INJECTION

The equity injection requirement for partial equity acquisitions is waived if the new owner contributes at least 50% of the equity in the business.

Complete Partner Buyout
For the complete partner buyout there is a 10% cash down payment requirement unless two conditions are met:

1 - The borrower must have been active in the operations of the business and has been a ten percent or more owner over the last two years. This needs to be attested to by both the borrower and seller.

2 - The second requirement is a Maximum Debt-to-Equity of nine-to-one. This is determined based on the business balance sheet over the most recent year and quarter.

Partial Partner Buyout
This loan also requires a ten percent cash injection unless two key requirements are met.

1 - There is also the same nine-to-one maximum debt-to-worth condition.

2 - The second condition is any remaining owners of the business who have twenty percent or more in equity, are subject to the SBA guarantor requirements. This includes the personal guaranty and the property collateral requirements.

9:1 DEBT-TO-EQUITY

Calculating the 9:1 ratio

The 9:1 ratio for equity injection in SBA SOP partner buyout loans is a measure of a business's financial health. This ratio compares the business's debt to its equity, which represents the amount of capital invested in the business by its owners. A lower debt-to-equity ratio indicates that the business has more equity and is less reliant on debt, while a higher debt-to-equity ratio suggests that the business is more heavily indebted.

Calculating the 9:1 Ratio: To calculate the debt-to-equity ratio, divide the business's total debt by its total equity. For example, if a business has $500,000 in debt and $100,000 in equity, its debt-to-equity ratio would be 5:1.

Interpretation of the 9:1 Ratio: The SBA considers a debt-to-equity ratio of 9:1 or higher to be indicative of financial risk. When a business's debt-to-equity ratio exceeds this threshold, it may be required to inject additional equity into the business to demonstrate its financial stability and reduce the risk of default on an SBA loan.

25% CONVENTIONAL EQUITY INJECTION

25% is the typical equity injection for conventional loans.

While a borrower's personal financial situation, experience and competency, and credit scenario impacts if a bank may require an equity injection, all loans will have a primary equity injection policy and for conventional lenders it is based on Loan to value - LTV. Conventional lenders have maximum LTV requirements typically at 75% but one or two will go 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.

Rule of thumb if both practices valued at same multiple, the buyer’s value needs to be at least 33% of the seller’s value to meet a 75% LTV.

W2 Advisor Book Buyout SBA Loans

W2 Advisor Buys A Book

Asset Purchase / Book Buyout

No Down Payment Option
This can be paid 10% cash down but is not required if seller instead does the 10% two-year standby note.

10% Seller Standby Financing
The seller can eliminate the need for the buyer to come up with a 10% cash down payment with a two-year full standby seller note. The 2 conditions is the note can't have a balloon payment and must not have any payments (P&I) paid during the first 24 months. These are typically 7-10 year terms with the first 2 years on standby.

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 Advisor Who Also Has 1099 Business Buys a Book

Expansion Acquisition

No Down Payment
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.

No Seller Financing
Since there is no equity injection requirement then there is not a down payment or seller financing requirement. The only seller financing required is when there are qualifying or cash flow issues.

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.

Next-Gen Succession Equity Buy-ins

Tranches Through SBA Lending

5% now, then 76% to 94% in 2 years, then the last shares whenever final retirement happens

This is not an official SBA program but how we work with the SBA rules to achieve desired outcome of a next-gen advisor going from no equity to 100% ownership over time based on financing timeline benchmarks. This structure outline can work for a senior partner or partners who are ready to slow down but not retire, who want to sell most but not all of their equity to firm employees and next-gen advisors, wants to help position these employees for SBA financing, and does not want to guaranty their loans.

1. Minority 5% Equity

Some small amount level of equity like 5% is transferred to next-gen advisor(s). This can be paid in cash or provided as services rendered or converted from phantom stock or the promise of equity into actual equity.

An SBA loan can be done for this initial piece but a seller guaranty from all 20% partners would be required.

2. Wait 2 Years

The next-gen advisor receives K1s for ownership for two years. At anytime after 2 years the next-gen minority partner(s) can purchase can pursue full financing to buy out another 76% to 94% partial equity purchase.

Other partners with less than 20% do not have to personally guaranty the loan.

3. 76% to 94% Equity Sell

Next-gen advisor(s) purchases a sum equity that can range from 76% equity which leaves seller with 19% to 94% equity which leaves seller with 1%. This is now a partial partner buyout loan. No seller guaranty required.

4. Retire When Ready

Senior advisor maintains minority partner status owning from 1% to 19% of equity. Can sell the rest at once or in tranches to the same advisor or to whomever the partnership agreement allows for.

1.15 DSC: The deal structure needs to cash flow at better than 1.15 DSC.e deal

9:1: The business balance sheets for the most recent completed fiscal year and current quarter must reflect a debt-to-worth ratio of no greater than 9:1 prior to the change in ownership.