Financing as an option when buying a book of business

Selling or buying an advisory business takes plenty of prep work. To get an edge on the process, advisors should understand trends influencing sales and purchases.

One trend, as discussed by CWB Maxium Financial at the Independent Financial Brokers of Canada annual fall summit last week in Toronto, is the availability and strategic use of financing to fund an acquisition.

Rising rates are helping drive the availability of funds to buy a business. “People are out there buying because they know they can get financing,” said Tom de Larzac, director, financial advisory, with Richmond Hill, Ont.–based CWB. “We’re definitely seeing lots of [capital] availability in the market today.”

Reflecting availability even last year, 58% of 2021 deals on FindBob, an online platform for continuity and succession planning (IFB partners with the platform as part of its offering to members), were bank or third-party financed, while 42% were seller financed.

These stats also reflect the availability of longer amortizations with external financing, said Pierre Sauvé, director of originations with CWB. Buyers are “trying to see if they can maintain a positive cash flow post-acquisition,” Sauvé said.

Financing can also be part of a longer-term strategy of acquiring several businesses, motivated by a need to maintain profitability amid squeezed margins and increased compliance costs, de Larzac noted.

Externally financed deals on FindBob had higher multiples than seller-financed ones, and more cash was brought to closing, with down payments making up 80% of these deals.

Sauvé described financing as cash-flow lending, as opposed to personal lending. “We’re looking at recurring, predictable cash flow,” he said. “That’s different than your traditional lending model … The options [in lenders] are limited but they’re growing.”

As part of the credit application process, CWB assesses the predictability of the combined cash flow of the buyer’s business and the seller’s business, net of operating expenses, and how well that cash flow can service debt.

With the focus on recurring revenue, ensuring a smooth client transition is one of the most important parts of a sale. From a credit perspective, client transition is the biggest risk, de Larzac said.

FindBob stats showed that 70% of buyers had acquisition experience, so they likely had the ability to obtain financing and understood how to conduct a successful transition, Sauvé said.

The data also suggested more than 10% of deals on the platform in 2021 had multiples of recurring revenue greater than 4x.

While that figure indicates some buyers were willing to pay higher values for deals and had access to financing, they also wanted to hedge against a poor client transition by including clawback provisions in the deal, Sauvé said.

Advisor’s Edge and sister publication Investment Executive were media sponsors of the 2022 IFB Toronto Fall Summit.