In the competitive MA landscape, where there are many buyers and few sellers in comparison, buyers utilizing external financing are able to utilize 100% financed loans as a competitive advantage in their offer. With all else equal, most sellers would rather accept the offer where they get most all of their money upfront and bear little risk other than the portion set aside in escrow for limited attrition protection.
Any seller promissory note has to be subordinated to the lender note regardless of the percentage of the purchase the seller finances. This is extra risk to the seller since they would not be able to collect in a default scenario until the bank is satisfied. The bank can also halt their borrower (the seller’s buyer) from making the seller note payments if cash flow gets tight causing the borrower to struggle to make the monthly bank payments.
For acquisition loans today, the escrow agreement has replaced the seller note being required from the borrower for a retention/clawback period. The escrow structure allows for the amount to be set aside and disbursed according to the time tables and clawback formulas laid out in the agreement. The seller often prefers this since they know the money is in an account waiting for them.
Not all SBA lenders will offer 100% bank financed acquisition deals. The SBA has specific rules around acquisition loans regarding down payment, seller financing, and payment structures. But, just because the SBA rules allow for something, it doesn’t mean all SBA lenders will offer it to their borrowers.
If an advisor approaches their local bank about an SBA acquisition loan they will usually be told that a 10% cash injection (down payment) will be required. If the local bank is familiar and comfortable with acquisition loans they may allow the seller to finance 5% of this requirement reducing the borrower’s cash injection to 5%. But it usually takes a SBA lender that has expertise in wealth management industry lending (and comfortable with the advisory business valuations) that allow an advisor’s practice to be utilized as “assets other than cash.”
Most banks in SBA lending close less than a handful of SBA loans annually. Only about 10% of SBA lenders who approved a SBA 7a loan over the last 5 years (ending ) has approved a loan for the wealth management industry space. Of the 10% of SBA lenders who have approved loans to wealth management advisors, 90% approved less than 10 over the last 5 years combined. For context, AdvisorLoans had 131 SBA loans to advisors during this time period. We have a very high success rate of getting 100% bank financed acquisition loans for the borrowers who want or need this structure.
The Primary Acquisition Scenarios That Are Not 100% Bank Financed:
The broker dealer is lending up to 50% of the acquisition to the buyer and the seller finances the rest in either a fixed note or earn out.
When two advisors that know each other goes old school where a small percentage is paid in cash and the seller finances the rest (or all) with a promissory note.
When the buyer is W-2, novice, or without production, or enough production. For these advisors on a SBA loan, at least 5% cash injection would be required if the seller is willing to seller finance 5% of the purchase price.
Each SBA lender has their own policies and preferences that are in addition to those of the SBA, and different from each other
When the deal doesn’t cash flow strong enough, the LTV is too high, or the lender has other concerns about the deal.