Thursday, June 20, 2024

Financing Options for the Next Phase of Your Financial Advisory Business -Dlight News

Have you considered what the future of your practice may look like? To evolve your business, through an acquisition, expanded operations, or a planned succession, you’ll need an additional source of capital. In the past, you likely would have had to rely on external means—such as a bank—for financing options. But more and more advisors are looking for money to fund their projects, and those projects have become bigger and more complex. As a result, many firm partners have expanded the scope of what they offer in this area, adding different types of loans as well as equity financing.

The Evolution of Capital Needs

The M&A market is heating up, so if you’re thinking about an acquisition, consider that 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. So, you’ll need to find a way to distinguish yourself, and that could 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 the flip side, this hot market has created a seller’s advantage and led some advisors to seek opportunities to remain involved in their business after it’s sold. These new deal structures have grown more prevalent and could allow you to relinquish ownership without completely stepping away.

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.

What Funding Solution Is Right for You?

The best way to see how you may benefit from raising additional capital is to see how other advisors in similar situations have approached it. Here are some recent examples of advisors who have leveraged capital access to evolve or improve their business.

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.

goals financial advisors can achieve through new financing options

Working with a Partner Aligned with Your Goals

If you’re looking at financing options for the next phase of your advisory business, your first instinct may be to seek out an external lender. But the right firm partner could save you time and money and eliminate an extra step if they provide access to additional capital as part of their service offering.

At Commonwealth, we offer several types of loans as well as equity financing. Learn more about our Entrepreneurial Capital program to see how our affiliated advisors can get access to the funding they need to take their firm wherever they want it to go.

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