How Financing Gives You an Edge in Acquisitions
Over the past several years, there has been a surge in the number of advisors looking to grow through acquisitions. This has created a market where sellers have multiple buyers to choose from and buyers must compete for the deal. Many factors influence a seller’s decision, including the buyer’s personality, cultural fit, and investment philosophy. Seller’s also look at the numbers. The most attractive option tends to be the one that lets the seller get through the deal quickly and with the most cash in hand.
In the early days of advisor acquisitions, buyers only had two options – self-financing or seller financing. Self-financing required a tremendous amount of capital, which created a barrier to many would be buyers. Seller financing required the seller to serve as financier as they phased out of the practice, thus staying tied to the business longer while receiving a payout over a period of one to five years. As the advisor industry became more established and lenders learned how to value practices and evaluate risk, more financing options emerged. Now, advisors can not only get financing when they find a deal, they can actually build a lending relationship before they even locate a practice to purchase. Having financing in hand and a strong relationship with a lender who understands how to structure acquisition loans makes a buyer more attractive to a seller and increases their chances of landing the deal.
This is because acquisition loans offer the best of both worlds to the buyer and seller. The buyer gets more attractive terms compared to self or seller financing. These terms allow advisors to preserve cash flow post-acquisition and realize the benefits of a larger client base sooner. Sellers receive a larger sum of the purchase price at deal closing, with only a portion reserved in escrow for attrition clauses or other “claw back” items. If a seller is considering multiple buyers, those with financing in place will have an upper hand, especially when all other factors are relatively equal.
If you are considering an acquisition, we recommend downloading our free guide which not only explains financing options and how to secure a loan, but also how to locate a practice to purchase and how to transition the practice. If you have already located a practice to purchase and would like to learn more about financing, you can schedule a call now.