Fund Your Evolution: Financing Options for What’s Next

From various loans to equity options, more partners are offering the help you need to fund your evolution.

By Tim Helman, CFP®, ChFC®, CLU®, business solutions consultant, Commonwealth Financial Network

Now that you’ve set a vision for your firm, and have either reached your goals or come close to doing so, what’s next? Have you created a plan for what your practice will become? No matter how you choose to grow in the future, you’ll need capital.

Historically, this meant external financing, through a bank or something similar. But as increasing numbers of advisors seek funding for projects that continually get bigger, firm partners have answered the call. From various loans to equity options, more partners are offering the help you need to fund your evolution.

How Capital Needs Have Changed

If you’re considering an acquisition as a method of growth, you’ll need to find a way to distinguish yourself in this hot market. The number of potential buyers heavily outweighs sellers right now. This supply-demand imbalance has led to an increase in valuation multiples and created a call for larger down payments. This may mean raising additional capital to make a compelling offer. Finding a larger and more flexible loan could enable you to jump on an opportunity quickly and confidently.

On a positive note, the market has created a seller’s advantage, leading some advisors to seek opportunities to remain involved in their business after it’s sold. These new deal structures have grown more widespread and could allow you to relinquish ownership without stepping away completely.

Or maybe your vision involves tapping into the increased value of your firm without giving up autonomy. In either case, selling a preferred minority equity stake in your business at a highly competitive valuation while still maintaining control could be an option.

If an acquisition isn’t your objective, you may be seeking additional working capital to help expand operations, hire staff, or consolidate debt. Like acquisition financing, these initiatives may call for more flexibility in terms of the loan amount and duration. Or, in the case of bigger or more complex projects, equity financing may be the ideal solution.

Financing for What’s Next

You aren’t alone in wanting what you want to accomplish. In fact, you can learn from those who preceded you. The best way to see how you may benefit from raising additional capital is to see how advisors in similar situations have done it. Here are some recent examples of advisors who have leveraged capital access to evolve or improve their business.

1. Use a traditional loan to buy out a partner. A next-gen advisor was looking to buy out his retiring partner. He couldn’t afford to purchase the entire book at once, so he accepted the selling advisor’s offer to sell portions of ownership over multiple transactions beginning with 10

With annual revenue estimated at $1.5 million, his book was valued at $4 million. By using a traditional loan, the purchasing advisor was able to execute the $400,000 payment.

2. Get a bridge loan to increase office space. An advisor wanted to overhaul her office and expand her physical footprint to make room for another advisor. She needed to cover the modest up-front costs of renovating and redecorating the space.

The project was short term in nature, so she felt she’d be able to repay the principal quickly. Using a bridge loan allowed her to pay off only the interest and then repay the entire amount after 18 months.

3. Use a jumbo loan to secure an acquisition. Targeting a large acquisition, an advisor was positioned to purchase a practice that would nearly double his AUM and expand his regional footprint. With an attractive practice, the selling advisor could command a sizable price in the deal. He had several interested parties and was seeking a down payment that showed commitment and goodwill.

Using a jumbo loan, designed for more extensive, long-term projects, the buyer was able to stand out among the other parties and seize the opportunity.

4. Leverage equity to prepare for retirement. About five years from his planned retirement, an advisor wanted to invest capital in his business and de-risk his portfolio. With a significant portion of his net worth tied up in the business, he wanted to monetize a portion of the firm’s value without relinquishing control or being told how to operate.

Through an equity financing option, he received a capital investment in exchange for a percentage of revenue. This enabled him to fund a local acquisition while retaining enough capital to bolster his firm’s infrastructure to manage the increased workload. And, by de-risking his portfolio, he ensured he could comfortably plan for his eventual exit from the firm.

Funding Your Goals

Whether you want to grow physically or invest in cutting-edge technology for your firm, new financing options can help you meet goals such as:

  • Kicking off a strategic growth project
  • Expanding your firm’s physical footprint
  • Hiring additional staff
  • Streamlining your operations
  • Pursuing a merger or acquisition
  • Implementing a succession plan
  • Consolidating your debt

Meet Your Goals Through the Power of Partnership

You may save time and money, and be able to secure the financing you need to move forward, by aligning with a partner who shares your vision. And though you may lean toward an external lending option, you should know that a firm partner that offers additional capital as part of its service offering could eliminate this extra step for you.

Enter Commonwealth. We offer various types of loans, as well as equity financing, through our Entrepreneurial Capital program. Are you ready to experience true collaboration? Contact us today and see how we’ll meet you where you are and help you get where you want to go.

This post originally appeared on The Independent Advisor, a blog authored by subject-matter experts at Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

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