The industry
Independent advisors looking to buy another practice face tough
I focus on helping commercial buyers with financing, especially when acquiring professional service firms. I've noticed that smaller buyers — including independent RIAs — are often ready to go on a deal, having researched valuations, client keep rates and asset management mixes. However, they can stumble at the end of the process because they didn't think much about financing upfront.
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The loan arranger
This gap can cause deals to fall through and sometimes stops growth-minded firm owners from expanding their businesses properly. Small RIA owners are experts in managing clients' money. But if they want to acquire, for instance, a colleague's client base or another practice in a nearby area, they may not be experts on standard financing choices available to them.
One of the most common questions I encounter from prospective buyers is whether an SBA 7(a) loan or a conventional commercial loan is the right way to go. These are the two standard financing tools for RIA acquisitions, usually covering 80% to 90% of the purchase price.
Both are term loans used to finance the purchase of a business and use recurring revenue from the advisory firm as security. But they work differently under the hood. Here's an overview of the two instruments and the potential pros and cons advisors should weigh before deciding which one to choose.
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SBA 7(a) loans: Less risk, more paperwork
SBA 7(a) loans are partially guaranteed by the U.S. Small Business Administration, which reduces the lender's risk and allows for longer repayment terms on the borrower's part — typically up to 10 years for a practice acquisition. They also allow for lower down payments, often in the 10% to 15% range.
For advisors just starting out or working with a thinner capital base, that structure can make the difference between a deal that works and one that doesn't. But government backing comes with rules. More documentation is required, and there's a longer approval process. The prospective buyer must also qualify as a small business under SBA size standards.
Consider this hypothetical: An RIA owner with $75 million in assets under management wishes to acquire a retiring advisor's $30 million book of business in a nearby town. Since the seller was comfortable with a slightly longer process to achieve a clean, stable transition, the buyer used an SBA 7(a) loan to finance 90% of the $2.1 million purchase price.
Pros: Because the SBA loan only required a 10% down payment, the seller kept most of their firm's cash reserves intact — money they used instead to fund a smooth transition, including retaining the departing advisor for 90 days to help move client relationships over personally.
Cons: The SBA process required more documentation than the buyer expected, including verifying the recurring revenue base, providing several years of firm financials and completing additional underwriting steps. This stretched the closing timeline to about 60 days instead of the 30 to 45 days a conventional loan might have taken.
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Commercial loans: Flexible deal structure, larger down payment
In contrast to SBA loans, conventional commercial loans are funded entirely by the bank's capital. That gives the lender more flexibility to set terms but usually means a larger down payment (often 20% to 30%), shorter repayment terms (commonly five to seven years) and underwriting based purely on the bank's risk appetite rather than on standardized federal standards.
As a result, conventional loans tend to move faster and can accommodate more complex deal structures, including earnouts, partial seller "carrybacks" and multipractice transactions. Without a federal guarantee to satisfy, the bank can approve custom terms on a deal-by-deal basis rather than fitting the transaction into a standardized structure.
Consider an independent RIA owner looking to acquire two smaller practices at once — a $20 million book from one retiring advisor and a $15 million book from another — structuring them into a single $2.5 million acquisition with a partial seller carryback on one deal.
The buyer chose a conventional commercial loan since the multipractice structure and seller carryback arrangement didn't fit neatly into the SBA program's rules.
Pros: The bank approved the deal in about three weeks and was able to structure the loan around both acquisitions and the carryback arrangement in one package — something an SBA loan likely wouldn't have accommodated without restructuring the deal into two separate transactions.
Cons: The loan required a 20% down payment instead of the 10% to 15% an SBA loan would have asked for. The shorter repayment term came with higher monthly payments, which meant that the buyer tied up more of their firm's cash upfront. But the speed and flexibility that was gained allowed the buyer to lock up both practices before either seller could be approached by a competing buyer.
Whichever path an acquiring RIA takes, the key is to make an informed choice. Understand both options and let the deal shape the structure rather than the other way around.
A final note: Loans should be preapproved before negotiations begin. Having your loan details sorted can make all the difference in landing the deal versus watching it go to someone else.
