There are many accounting firms and financial advisory practices that are owned by Baby Boomers that will transition to new ownership in the next decade. Options include selling to an existing employee, family member, or a third party. Or, a competitor might acquire one of these firms to help expand and grow more quickly while reducing competition.
The sale of accounting practices and financial advisories pose an interesting dilemma for lenders because there is typically little or no “hard” collateral. A buyer is essentially purchasing the cashflow and the “book of business” which includes the goodwill, customer relationships, and intellectual property. Sure, there may be some furniture, fixtures, and equipment – but these are already depreciated to a large degree, and lenders typically discount them even further for collateral valuation purposes. Similarly, accounts receivable might be part of the sale but, once again, they too are discounted. Note that often some or all of the receivables go with the seller so this asset may not even be part of the transaction.
How to finance the acquisition of an existing accounting or advisory business?
There are many options for a buyer to consider. These include using cash, the ROBS program (where an individual can rollover some or all of the IRA or 401k), a home equity line, or the SBA 7a loan program. A buyer could also pursue seller financing for some or all of the purchase price.
Many might wonder why they should not consider a conventional loan program. Realistically, most conventional business lenders will require sufficient collateral to fully secure their conventional loan. For example, if you want to borrow $1,000,000, with a conventional loan, you’ll likely need at least $1,000,000 worth of collateral (real estate, equipment, marketable securities, accounts receivable and inventory).
Because of this, the U.S. Small Business Administration (SBA) 7a loan program provides a great alternative for financing these intangible-heavy transactions. The SBA 7a loan program can provide financing up to $5 million while guaranteeing these loans 75%, sometimes more, which mitigates at least some of the risk, in turn making the bank more comfortable with the deal. This reduction in risk is very important to acquisition financing of an accounting or financial advisory practice, where hard assets and tangible collateral are a typically only a very small part of the purchase price.
An accounting practice, or a financial advisory practice, can be financed with the SBA 7a loan if the business’s trends are stable or positive, if there is adequate cashflow, and if a buyer has good personal credit (typically a FICO over 680), enough liquidity for a down payment, plus some post-closing liquidity or cash reserves. SBA lenders look at all aspects of the loan request during the loan underwriting process to arrive at a decision. If the business is being sold without real estate, the term and amortization of the loan is 10 years. If there is real estate involved in the sale, the term and amortization may go up to as high as 25 years. Notably, SBA 7a loans are fully amortizing with no balloon payments, reset, or call dates.
The SBA 7a guidelines call for a minimum equity injection of 10%, in most cases. You should know that this is 10% of the “total project costs”. Total project costs include the cost of the goodwill, any furniture/fixtures/equipment, receivables plus working capital, closing costs, attorney fees, SBA fees, and business valuation. If there is an existing partner who wants to buyout other partner(s) and (ultimately) own 100%, in some cases that buyer may be eligible for 100% financing if he/she owns 10% or more and the balance sheet meets certain benchmarks. If this is your situation, it is best for you to talk with your SBA lender early in the process for complete details.
With almost all business acquisitions using an SBA loan, a third-party business valuation is required. The bank engages a qualified valuation firm, which reviews the financial statements and cashflow, market conditions, and specifics about that industry. If the business valuation comes in at a value lower than the purchase price, some lenders will require the purchase price to be reduced, perhaps a seller-financed note, and or an increased buyer cash injection to make up the difference between the price and valuation.
Requirements of the Buyer
A buyer could be an individual that forms an entity to acquire the practice, or it could be another accounting or financial advisory practice acquiring to grow their existing business. Ideally the buyer should have a FICO score above 680, 10% cash equity injection plus left over cash reserves, and some related experience. Depending on the state where the practice is and the specifics of the practice, coupled with the requirements for that field, there will be licensing requirements that need to be considered in an ownership transition. Does the buyer have the correct licenses and certifications? Is there an existing employee that could help fulfill these requirements?
A buyer should also consider what consulting, if any, a seller might provide during the transition. How will the buyer connect with the existing client base? Will the seller make introductions? How will relationships be maintained? Is the seller’s philosophy sufficiently compatible with the buyer’s?
A lender will also look at the buyer’s personal financial obligations (mortgage, car payments, credit card debt, etc.) and then consider what, if any income will continue after the business acquisition (spouse’s income, rental income, etc.). The SBA lender then will need to subtract an appropriate salary out of the business cashflow for the buyer.
With an SBA 7a loan, the lender will place a first lien position on all of the business assets. Buyers need to also know that, in most cases, unless the loan is fully collateralized with business assets, a lender may also place a subordinate lien on a buyer’s personal real estate. This means that if there is a first mortgage on the residence, for instance, the SBA lender will put a subordinate, or second position lien on the residence as well. This doesn’t mean that the loan must be fully collateralized or that additional tangible collateral must exist, it just means that the SBA mandates that the lender secure liens against the buyer’s additional collateral, if it exists.
As mentioned above, in many instances, a seller will provide some amount of seller financing, or a seller note. Typically, most seller notes are for 10% to 30% of the purchase price. This can help provide comfort to the buyer and the lender related to performance of the business going forward and minimizing risks. There are different terms for seller notes; some may have P&I payments from day 1, others may be on ‘hold’ or on ‘standby’ for a number of years, or possibly for the term of the SBA loan. Seller notes are always subordinate to the SBA loan.
It is possible, under certain circumstances, that if the cashflow supports it, a buyer can put down as little as 5% cash equity injection if there is a seller note of at least 5% on full standby. Full standby means, in these situations, that while interest accrues, no P&I payments are permitted.
Requirements of the Seller
To begin a review of the seller’s business for a possible SBA 7a loan, the SBA lender will need three years of business tax returns, interim financial statements (profit and loss and balance sheet), and a debt schedule, among other things. Please speak with your SBA lender for a comprehensive list that is specific to your business.
It also helps for the lender to clearly understand what the seller’s roles and responsibilities have been, what employees are staying in place, and what their roles and responsibilities are, what the client base and book of business consists of, the demographics, nature of revenues, recurring revenue details, and the like.
SBA lenders
Each SBA lender has its own unique process so it is important for you to find one that fits well with your needs. For example, some SBA lenders (like Gulf Coast Small Business Lending) are direct, Nationwide SBA Preferred Lenders. This is meaningful to borrowers because SBA Preferred Lenders (often referred to as “PLP” for preferred lenders program) that have earned this status have been granted delegated authority to underwrite, process, and close SBA-guaranteed loans on behalf of the SBA. This means that SBA Preferred Lenders like Gulf Coast Small Business Lending are dedicated to serving small businesses and are recognized as specialists in SBA lending. As a result, our borrowers benefit from a much quicker overall process. Working with Gulf Coast Small Business Lending on your SBA transaction will be (approximately) 3-4 weeks faster than if you worked with a non-PLP lender.
Some SBA lenders are active nationwide, while some have geographic limitations. In addition, some SBA lenders have financed may acquisitions of accounting firms and financial advisory businesses and that experience can be very helpful in the overall process.
In summary, an SBA loan just might be the ideal solution when you are considering the purchase of an accounting or financial advisory firm. If you have questions, I am always happy to talk with prospective borrowers. In addition, you can find considerable information about many of the industries and loan purposes offered by Gulf Coast Small Business Lending by visiting the SBA Loans section of our website.
Jim Frey has over 21 years of financial services experience, including an exclusive focus on SBA lending since 2012. Jim enjoys working with many referral sources across the US and he takes particular satisfaction in helping business owners reach their goals through SBA financing. Over the years, Jim has developed a specific expertise in structuring SBA loans for business acquisitions, franchise lending, expansions and construction. Jim has a Master of Business Administration from the University of Pittsburgh’s Katz Graduate School of Business and a B.S. in Finance from St. Vincent College. When not working on deals, Jim’s hobbies include hiking, volunteering, golfing, and traveling with his wife and two daughters.
Products and services offered by Gulf Coast Small Business Lending, a division of Gulf Coast Bank & Trust Co. Nothing herein shall be construed as a commitment to lend. All loans are subject to credit and collateral approval. Additional terms, restrictions and limitations may apply. Loans are only available to U.S. citizens and residents. Member FDIC – Equal Housing Lender.