Ep 395: The Rise Of Bank Financing To Fund Independent Advisor Acquisitions And Succession Plans With Dustin Mangone
Jul 23, 2024
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Dustin Mangone discusses the rise of bank financing for advisor transactions, focusing on key metrics like buyer's capitalization and seller's recurring revenue. He explains the differences between conventional bank loans and SBA loans, emphasizing the continued robust financing opportunities for advisory firm transactions.
Bank financing addresses challenges for financial advisors lacking tangible assets as collateral.
Internal succession planning can improve borrowing capacity for next-gen advisors through phased acquisitions.
Lenders offer various loan structures like fully amortizing or balloon payments with rates based on risk assessments.
Tranche-based financing aids in building buyer capacity gradually from smaller to larger acquisitions.
Deep dives
Loan Facilitation for Financial Advisors
Conventional bank loans for financial advisors often face challenges due to lack of tangible assets for collateral. Dustin Mangone's firm provides solutions by facilitating loans for RIA and independent broker dealer transactions. The firm works with partner banks to offer loans, sometimes up to 100% of the acquired firm's purchase price, based on key metrics like capitalization, recurring revenue, and profits.
Internal Succession Planning and Loan Structuring
Structuring internal succession plans involves considerations like phased acquisitions to improve borrowing capacity for next-gen advisors. Evaluating debt service coverage ratios is crucial to ensure cash flow aligns with debt payments for a sustainable transition. By spreading financing over tranches, it grows the inside buyer's capacity to acquire larger pieces of the firm.
Terms and Lending Flexibility
Financial institutions offer flexibility in terms like 10-year fully amortizing loans or 7-year balloon payments for large transactions. Rates vary based on risk assessments of buyers and sellers. Lenders consider debt service coverage ratios to ensure buyers' ability to repay loans efficiently, especially in internal succession scenarios.
Risk assessments, Collateralization, and Capacity Building
Lenders perform risk assessments to ensure buyers can handle debt payments relative to their profits. Collateralization of business shares is a common practice to secure financing for internal successors. Tranche-based financing helps build buyer capacity by starting with smaller acquisitions before moving to larger pieces.
Loan Programs for Growth and Succession
Loan programs for acquisitions, mergers, and internal succession plans aid in facilitating the transfer of ownership within financial advisor firms. Next-gen loan programs focus on enabling internal equity purchases, buy-ins, and buyouts, fostering sustainable growth and transitions within the industry.
Financial Position and Growth Through Tranche Purchases
Making consistent note payments on investments can lead to revenue positivity, facilitating further purchases. By gradually acquiring additional stakes over several years, individuals can boost their financial positions, resulting in increased personal liquidity, retirement savings, and equity ownership interests. This approach enables borrowers to qualify for larger acquisitions and establish wealth.
Loan Types and Considerations for Financing Advisor Transactions
SBA loans, providing capital for various markets, differ from traditional financing options due to strict stipulations like full sale exits and personal real estate liens. While SBA loans offer longer terms, conventional loans ensure more flexibility and support for ongoing needs. Understanding the differences in loan terms, costs, and collateral requirements is crucial for successful financing strategies in the independent advisor marketplace.
Dustin Mangone is the Director of Investment Advisor Services of PPL Loan, a firm based out of Texas that facilitates conventional bank loans to financial advisors. Dustin's firm uniquely enables financial advisors to access bank lending—a traditionally difficult source of debt capital in the advisory industry—for financing various transactions, including RIA and independent broker-dealer acquisitions, internal succession plans, and other growth initiatives. This approach provides vital support for advisors looking to expand or transition their businesses.
Listen in as Dustin shares how his firm partners with banks to provide loans to financial advisors purchasing advisory firms, enabling sellers to receive the purchase price upfront and increasing loan amounts as advisor repayment success grows. He discusses the key financial metrics used to determine loan amounts for mergers and acquisitions, such as the buyer’s capitalization and the selling firm’s recurring revenue, and explains how these loans support both full purchases and partial buy-ins during internal firm successions. Dustin also touches on current trends in advisory firm valuations, the differences between conventional bank loans and Small Business Administration loans, and the continued robust financing opportunities for advisory firm transactions, underscoring the inherent stability of these businesses due to their long-term client relationships.
