This acquisition lending guide shares at a high-level the ways AdvisorLoans assists advisors with acquisition lending needs.

Transcription

1

2 Acquisition Lending Acquisition Types Internal acquisitions Partial book purchases External acquisitions Partner buy-outs With the aging demographics of the advisor population, access to affordable acquisition lending will be reaching critical mass over the coming decade. Historically, acquisition loans have been a daunting endeavor for advisors and most have had to heavily rely on seller financing to structure the acquisition. Most lenders are not fully familiar with advisor cash flow based business models or experienced in navigating the nuances financial sector lending presents. To date advisors have had to deal with limited lending options, time consuming research, lack of lender appetite for non-collateralized loans, the arduous process of securing the capital needed, and lack of advisor specialized lending consulting and advocacy. AdvisorLoans has changed the industry acquisition lending landscape for advisors. The purpose of our existence is to be the advisor s advocate in obtaining the best loan possible with the highest quality customer service experience in the industry. AdvisorLoans implements the same high-touch approach service model to advisors that you deliver to your clients. To this end we have compiled a large inventory of Preferred Lending Partners who are motivated to lend to advisors and have expanded non-collateralized lending options. We don t represent any one single lender or strategy but rather compare multiple lender options, rates, terms and timelines to get the best deal for the advisor. We handle all loan packaging in-house to provide advisors with a turnkey solution that saves you time, money and frustration. This acquisition lending guide shares at a high-level the ways AdvisorLoans assists advisors with acquisition lending needs. We were founded by financial industry and banking insiders, and if you didn t pick up on our name, our sole purpose is to help advisors get loans. We provide you with extraordinary customer service, personalized treatment, and advocate for you to get the largest selection of acquisition loan options, rates, terms, and timelines available.

3 Leadership John Pierce Managing Partner, National Sales John Pierce is our SVP of National Accounts. John develops and maintains national account relationships with broker dealers, insurance firms, associations and national alliances. John brings twenty years of broker dealer management experience with Ameriprise Financial and Merrill Lynch. John has also owned a financial advisor industry consulting firm that helped regionals and boutiques in achieving their growth goals. John is also an author and regular contributor to advisor, centric media articles. MBA, International Finance & Management from the University of London BBA, Marketing & Management from the University of Cincinnati College of Business. Mensa Life Member, six time Ironman FINRA licenses: Series 8, 24, 7, 63, 65 Helena Hauk Managing Partner, Commercial Lending Helena Hauk is our SVP of SBA Financing and manages all aspects of our SBA division. Helena is an expert in 7(a) and 504 SBA lending, SBA packaging and processing. She provides technical training to lenders and continuing education certifications such as CPE. Helena has helped small business owners obtain more than $120 million in SBA funded loans with a 98% loan approval rating. Previously, Helena founded and managed 5th Gear Consulting which employees five SBA processing and packaging professionals. AdvisorLoans acquired 5th Gear to integrate her leadership and team into our SBA dedicated staff. Helena has received numerous local business awards and honors and frequently speaks at SBA related events and conferences. Michael Fritze SVP Consumer Lending Michael Fritze is our SVP of Operations and manages our Lending Partner Program and financing lines. Michael is a thirty-four year banking veteran with retail and commercial banking management experience. His positions included Regional President, Senior Vice President, Vice President, Sales Manager and Bank Branch Manager. He has managed branches, districts, and regions for banks such as Key Bank, Colorado State Bank and Trust, BBVA Compass and US Bank. Over the last fifteen years, Michael has managed a total of seventy bank branches with a combined staff of over five-hundred employees, Michael has received numerous awards and recognition for sales, revenues, and investment production achievements. Former FINRA licensed 6, 63, and 26; Former L&H license, Former NMLS license. Dochtor Kennedy Managing Attorney Dochtor Kennedy is the Managing Attorney of our Tax and Credit Resolution Division. Doc manages the breadth of credit improvement, tax lien solutions, and tax liability resolution services provided to advisors and their referred clients. Doc brings experience settling liabilities for nearly one-thousand businesses and individuals ranging from multi-million dollar debts of publicly traded companies, to debts of a few thousand dollars incurred by individuals. He has effectively negotiated with lien holders to allow hundreds of clients to refinance or sell their homes. Attorney licensed by the Supreme Court State of Colorado to practice law (active registration), Juris Doctorate from University of Denver, Bachelor of Business Administration (B.B.A.) from the University of Minnesota, Master of Business Administration (M.B.A.) with a major Finance, Former FINRA licenses Series 7, 63, and 55. Former L&H license.

4

5

6 Tri-party Loan AdvisorLoans has secured over $100 million in capital tranches for non-collateralized conventional lending to advisors of approved broker dealers through Tri-party Tranches via a Tri-Party Agreement. The Tri-party agreement is established between the advisor, the lender and the broker dealer. Tri-party Loans: Conventional No collateral No down payment Competitive rates Fast closing time Fixed and variable rates 3, 5 and 7 year terms Free prequalification Turnkey process Lending for: Full or partial acquisitions Internal or external acquisitions Partner buy-outs Working Capital Debt consolidation Credit line Requirements: 680 credit score 1.3 : 1 debt service ratio Personal guarantee (not secured by personal assets) First lien position Executed Tri-party agreement Account established The essence of a Tri-Party Tranche is that our Lending Partners provide designated conventional commercial loans without requiring collateral if the broker dealer will deduct the loan payment from the advisors compensation each month and deposit the loan payment amount into a dedicated account established with the advisor and our Lending Partner. These loans can be used for internal practice acquisitions within the same broker dealer, partner buyouts, working capital, recruiting, and lines of credit. The broker dealer does not guarantee the loan; it simply deducts and deposits the loan payment into a separate account the advisor establishes with the lender. The Tri-Party Agreement allows broker dealers to support their advisor ranks with a major need without having to get into the advisor lending business themselves. Unlike SBA loans, Tri-party tranche lending can be used for partial acquisitions, and the selling advisor can stay on for more than 12 months (and encouraged to do so). Terms are from 1 to 10 years depending on the loan type. Interest rates typically range from 6% to 8%. Some loans may require a small origination fee (.50% to 1%) from the Lender and there is a loan packaging and processing fee AdvisorLoans charges that ranges from $750 to $2500. Similar to SBA but different from traditional conventional loans, Tri-party tranche loans are fully amortizing. This means advisors will not have to contend with a balloon payment to either pay off a lump sum or refinance into a new loan. If a loan is for seven years, there is seven years to repay it. A minimum credit score of 680 is required (700+ preferred) with a debt service ratio for internal practice acquisitions of a minimum of 1.3:1. In all cases the lender needs to have a first blanket lien position on the business, a life insurance policy assignment for the loan amount, and a personal guarantee. If you have another outstanding lender who already occupies first lien position then we can often roll that loan into the Tri-Party loan and take out your current lender. Internal practice acquisitions often do not require a third party business valuation. Closing costs are minimal when real estate is not involved and often do not exceed $500. AdvisorLoans provides full turnkey services. We prequalify you, package the loan documents needed, facilitate the tri-party agreement execution and lender depository account set up, and work as your liaison throughout the process to funding. Contact us directly or check with your broker dealer/custodian to inquire if you are eligible for tri-party tranche financing.

7 Conventional Loan Since conventional loans are not guaranteed by the federal government like SBA loans are, our Lending Partners require higher FICO scores, a strong debt service coverage ratio, and significant collateral. While conventional commercial loans are popular for many other industries, the emphasis on collateral has deterred some advisors who are heavy in cash flow but light on business assets. Conventional loans require a larger down payment, shorter terms, and higher rates than SBA loans. In addition, all SBA loans are fully amortized. There are key reasons why a conventional loan (including the Tri-party loan) may be more suitable than an SBA loan: Partial acquisition Needing to keep the seller as an employee, whether W-2 or 1099 or longer than 12 months Retaining seller as a consultant beyond a 12 month transition. Any type of seller earn out agreement Collateral type is a very significant factor in a lenders decision. The collateral required can come in the form and in combination of real property such as owner occupied home or/and office, rental properties, land, cash savings, CDs, financial accounts, stocks and bonds, insurance policies with cash value, and vehicles. With the recent increase in home values it is becoming easier to utilize a home mortgage. Our Lending Partners offer both fixed andto floating rate options and unlike SBA loans, conventional loans can be used for investment real estate. A minimum credit score of 680 is required but most of our lenders need The debt service ratio for internal practice acquisitions areof a minimum of 1.5:1. Terms are typically 3, 5, 7, and 10 years depending on the loan type and if real estate is involved. Interest rates typically range from 6% to 9%. Some loans may require a small origination fee (.50%bps to 1%) and there is a loan packaging and processing fee that ranges from $750 to $2500. There is no prepayment penalty after the first 12 months. See Tri-party Loans for conventional commercial lending without significant collateral.

8 Business Credit Line For smaller capital needs including smaller acquisitions, partial book and working capital where the funding needed is less than $150K then utilizing a business credit line or bridge financing may be the best alternative. Business credit lines are not only a good idea for working capital reserves but also for smaller acquisitions as well. You only pay interest on a revolving line of credit on the amount that is actually being used. AdvisorLoans has a large inventory of commercial lenders seeking to provide credit lines to independent advisors, especially to advisors intending to utilize the line. Included in AdvisorLoans inventory of lenders are SBA Express lenders. The SBA Express loan is commonly used for small lines of credit for working for capital needs. The lender recieves a 50% government guarantee as opposed to the most common 75% guarantee. The lender can close the loan faster because they can process with reduced forms and their own internal forms. The maximum SBA Express loan amount is $350,000. Typically lines of credit will be established as an annual revolving loan for up to three years. In some cases they can renew beyond three years. Often times the line of credit needs to be paid down at lease once over a twelve month period. A line can renew with a balance if the financials support the repayment. Additionally, some scenarios require a line of credit to be termed out, meaning the loan is converted into a term loan to repay principal and interest payments within a certain amount of time 3-7 years. Lines of credit can be very handy just like that credit card in your back pocket, but it is always important to consider what you are financing first over how quickly you can get the funds. To avoid making a costly or painful mistake in selecting the financing that meets a short term need, understand what you are financing and your cash flow associated with that item(s) as well as your short and long term lending goals. Many times our clients obtain a credit line in addition to funding for full or partial acquisitions for an additional liquidity source in the short term. Contact AdvisorLoans to consult you through your decision. Bridge Financing Bridge financing is utilized when you have some but not all of the money and need a little extra to get the deal done. Bridge financing can be the solution to fill a short term gap. The gap can be many different things including the difference between the down payment available and the maximum loan amount that a lender can legally lend. Bridge financing is mostly found in the commercial real estate arena for owner-occupied building loans. Often times a lender has a maximum to lend of 65-80% of the appraised value against real estate. In the world of SBA, for example, a 504 loan can be available for up to 90% of appraised value, where the advisor qualifies for 10% down payment. In order for the advisor to not have to come to the table with the difference in cash, a bridge loan can be used. Bridge financing is also available to meet short-term capital needs, an acquisition or other business growth needs where timing is extremely sensitive and traditional financing method simply cannot be closed in the timeframe available. The upfront closing and origination costs are higher and the interest rates track higher as well, typically between 7% and 12%. The term is typically 1 to 2 years. Often a bridge loan can be refinanced into a lower rate, longer term credit facility. However, AdvisorLoans would caution you to make the right loan decision up front to save you time, money, and frustration along the way. Every loan product has its need, it is important to understand and know when to use the correct tool for the job, as the saying goes.

9 SBA 7a Loan SBA lending is a committed, active and important player in advisor cash-flow based acquisition loans and commercial real estate mortgages. If you are considering an SBA loan in the near future, it is smart to begin speaking with an SBA lender now. Understanding the process, your options, and what you would qualify for is information that can be valuable when formulating your strategy. 7 reasons the SBA may not be the way for an acquisition loan For partner buy-outs many SBA lenders consider the buying advisor to have equity in the company already and may not require any amount down from the buyer. 1. Partial practice acquisition The SBA does not For practice acquisitions under $500,000 the down payment requirements are up to the lender. It will vary from one lender to the next and the overall credit package as to whether or not they will require an equity contribution from the buyer in the form of cash. Most lenders do consider the need for working capital to be retained and consider this in the overall structure of the loan. does not allow you to hire the seller advisor as an employee and they can t be a consultant longer than 12 months. Terms are typically 7 to 10 years depending on the lender and cash flow. Interest rates typically range from 5%-6%. There is a loan packaging and processing fee that ranges from $1500 to $2500. There is no pre-payment penalty on SBA loans shorter than 15 years. The lender may not charge an origination fee, however, SBA charges a Guarantee Fee which will range from 3%-3.75% depending on the loan amount. The overall cost of funds with an SBA loan is not the least expensive path. With loans in excess of $150,000 there is an SBA Guarantee Fee that ranges from 3%-3.75% depending on the loan amount. SBA does require a third party business valuation adding time and costs to the transaction. Valuations range from $800-$2500 depending on the size, elements and third party provider. Often SBA lenders require an attorney to review and prepare loan closing documents, adding cost and time to the transaction. These costs are passed along to the buyer in the loan closing fees. SBA does require a minimum of 25% equity injection or down payment from the advisor/borrower when the loan proceeds exceed $500,000 in goodwill. The required equity can come in the form of advisor (borrower) cash and seller financing. A lot of SBA lenders require the buyer to come in with a minimum of 5% cash for acquisitions (where the buyer and seller are unrelated). This means the seller can provide financing for the remaining 20%. However, there is a caveat, the seller must take a 2 year hold at a minimum in order to be counted as equity. That means, the seller may not take a payment in the first 2 years the SBA loan is in place. Additionally, as you read earlier, a seller may not be retained as an employee at all and may not be retained as a consultant beyond 12 months. A seller earn out is also not an option under SBA. See our SBA Lending Guide for more details... allow for partial acquisitions. 2. Keeping the selling advisor on board The SBA 3. Don t want to use your home as collateral The SBA requires that any available personal and business collateral is pledged to the full loan amount. 4. Partner personal guarantees required The SBA requires that any principal who owns 20% or more of your business has to also sign a personal guarantee. This can be viewed as problematic for some partnerships. 5. Your credit score is below 625 The SBA requires a minimum 625 FICO score which is low compared to conventional lenders. If your score is below 625 consider calling our internal Credit & Tax Resolution team. 6. Intend to get a conventional loan in the near future Conventional lenders, including our Tri-party lenders, require that they have a first position blanket lien on the business they are lending to. If the SBA has first lien position then the SBA loan will typically need to be refinanced and combined with the new conventional loan. 7. Prefer not to put a down payment on an acquisition The SBA wants to see a down payment of 10% to 25% and conventional lenders will require 10% to 20%. Our Tri-party loans do not require a down payment.

10 10 Advisor Acquisition Lending Myths 1. Extensive lender research is necessary and time consuming to get the best deal on a loan Thanks to AdvisorLoans, this is a myth. Now, advisors can let AdvisorLoans do the research and heavy lifting, saving you time, money and headaches. 2. SBA offers 100% financing for acquisition loans The SBA does not offer 100% loan guarantees to lenders. In order to receive 100% financing, it is up to the bank and the borrower s overall credit package and request. If the borrower brings equity to the table, can make a case for cash preservation for working capital, and the lender s lending policy allows for this type of structure, it may be possible. Additionally, some lenders will use multiple loan products to ultimately provide 100% financing by including working capital in a loan. 3. I have to put my house and first-born child up as collateral Our Tri-party tranche loans do not require collateral in most cases. The SBA does seek 100% collateral on the guaranteed portion of the loan (typically 75%) and will attach your home to the loan. However, you can t be disqualified by the SBA (but can by the lender) if you do not have adequate collateral. It is common for some lenders to waive full collateralization with a SBA guaranty (assuming the collateral is not available to give) if the loan cash flows well. 4. It will take forever to get funded Advisors know how to plan ahead; it s a big part of what you do as an advisor. Our Tri-party tranche lending can be funded in a week. Business credit lines take even less time. For SBA loans we can get a decision letter to you in days and acquisition loans typically take 30 to 45 days to be funded. Call AdvisorLoans to get prequalified and prepared in advance so when you do need funding we can hit the ground running at full speed. 5. I will be required to get a valuation on the business being acquired For Tri-party tranche loans a valuation is not required for internal practice acquisitions within the same broker dealer. The SBA requires a third party valuation of the purchased practice if the loan is over $250,000. Most third party advisor valuations, which qualify for lenders, cost from $800 to $2500 on average. 6. All SBA lenders charge the same rates Not true. While the SBA puts a ceiling on the interest charged over the prime rate (or selected index) there are SBA lenders who are much more competitive than others. This is why AdvisorLoans compares rates with multiple lenders for every loan packaged by us, to get the best deal for our client advisors. 7. I can keep the seller on as an employee after the sale This is a partial myth depending on the loan. For Tri-party tranche lending our Lending Partners prefer the seller stay on as long as possible. For SBA loans the seller cannot be hired as an employee and can only be a consultant for up to 12 months. 8. I have to have perfect credit to get an acquisition loan Credit is an important factor to qualify for a loan but not the only one. SBA requires a 625 score and our conventional commercial lenders require a 680 minimum score. AdvisorLoans is different from other lending solutions in that we have an in-house credit and tax lien resolution division to help advisors overcome the credit consequences of unfortunate circumstances. With SBA it is not always the score so much as the content of the report, meaning a delinquent mortgage or medical with no reasonable explanation will probably have a difficult time getting approved. 9. It s impossible to find a lender that really understands my advisory business While it is true that most lenders do not know the difference between GDC and CRD, AdvisorLoans bridges the gap. We exclusively serve advisors and have partnered with many lenders who are eager to lend to advisors with our support. 10. I ll just get whatever funds I need from my broker dealer While many broker dealers deserve praise for the financing assistance they provide advisors, this isn t always the case. Many broker dealers do not want to lend money for internal practice acquisitions within the same BD because it is a zero sum game. More BD s are motivated to lend for external practice acquisitions but often have funding limits that do not always cover your full capital needs. AdvisorLoans works in conjunction with broker dealers to supplement or replace the financing provided.

11 Credit score and tax lien issues Tax and Credit Resolution division provides active credit improvement, and solutions for both tax liens and tax liabilities. Our full-service representation is the fulcrum necessary to navigate resolution strategy, credit score improvement, tax lien and tax liability. AdvisorLoans is uniquely positioned to provide credit counseling and repair as an integral component to the lending arm of our business. In most instances, if an individual s credit score indicates a higher risk factor than that with which our lender is comfortable, the lender may choose to finance the loan at a higher than usual interest rate or simply deny the application.

12 Resources AdvisorLoans posts multiple blogs every week about advisor lending topics. Check out advisorloans.com/blog for blogs and articles like: The SBA may be out of money but AdvisorLoans isn t. AdvisorLoans secures $75 million to lend to advisors. What is a Tri-party loan? It s almost guaranteed a lender will want a personal guarantee. 10 Advisor acquisition lending myths. 10 step process for SBA loans. Raise your credit score by lowering your credit utilization. The 3 primary SBA lender options for advisors. 4 ways to resolve a tax lien. We also have guides available: Acquisition Lending Guide SBA Lending Guide Mortgage Guide Credit Improvement and Repair Guide Tax Lien and Liability Guide Find other resources: Advisorloans.com/resources