M&A activity and other operational transformation goals among independent advisory firms have surged in recent years, creating both opportunities and challenges for advisors looking to evolve their businesses. One of the biggest challenges may be finding access to capital funding to help finance the project.
Historically, advisors have been limited to external means, such as banks, to fund their transactions. Now, there’s a growing trend among independent broker/dealers and other firm partners to provide loans and equity financing to their affiliates.
Here, we examine the growing demand for capital funding and explore some real-life examples to illustrate how you could tap into various financing options to help with your next big endeavor.
Capital in Demand
Take the M&A market. Advisors considering a potential acquisition need to understand that there’s a current supply-demand imbalance. As the number of available buyers outweighs the number of sellers, valuation multiples have increased, creating a call for larger down payments. Distinguishing yourself from the competition could mean raising additional capital to make a compelling offer.
What about potential sellers? The hot market has created an advantage for them, leading some advisors to seek opportunities to remain involved in their business after it’s sold. Or, perhaps you just want to tap 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.
Beyond the growing M&A market, maybe you’re just seeking additional working capital to help expand operations, hire staff, or consolidate debt. Like financing an acquisition, 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.
The best way to see how you may benefit from raising additional capital is to see how other advisors have approached it. Here are some recent examples of Commonwealth affiliates who took advantage of our capital access program to evolve their businesses.
Buying out a partner. A next-gen advisor was looking to buy out his retiring partner. Since he couldn’t afford to purchase the entire book at once, the selling advisor offered to sell tranches of ownership over multiple transactions beginning with 10 percent of his shares.
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.
Increasing 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.
Since the project was short term in nature, she felt she could repay the principal quickly. A bridge loan allowed her to pay off only the interest and then repay the entire amount after 18 months.
Securing 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 on the opportunity.
Preparing 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 could comfortably plan for his eventual exit from the firm.
Jump-Start Your Firm’s Next Chapter
If an acquisition, operational change, or succession is in your future, and you’re looking for capital funding options, you’re likely considering an external lender. But that doesn’t have to be your only option.
Through our Entrepreneurial Capital program, Commonwealth offers a range of loan types, as well as equity financing, to our affiliates to ensure that they have the means to take their firm wherever they want it to go.
This post originally appeared on Insights, a blog authored by subject-matter experts at Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
