Explore the landscape of acquisition loans for Canadian wealth advisors. Learn about bank loans, non-bank loans, and best practices to navigate M&A financing.
Introduction
M&A activity in the Canadian independent wealth advisory industry is expected to continue growing over the next ten years. This growth is fueled by a number of aging advisors reaching retirement and a growing and diverse pool of buyers with access to capital.
The Canadian financial advisor industry is facing what many are calling a “succession cliff.” The majority of advisors are over the age of 65, which will lead to a wave of advisors selling and retiring over the next ten years. This creates an opportunity for wealth advisory firms of all sizes to leverage inorganic growth through mergers and acquisitions. In previous years, advisors had to rely on personal capital and seller financing to secure acquisition deals.
But a number of Canadian banks and specialty lenders have entered the space, giving financial advisors access to capital and loan options previously not available.
Types of Acquisition Loans
As lenders have become more aware of the market, they have developed loan solutions to match the needs of financial advisors. Those loan products typically fall into two categories: bank loans and non-bank loans. Each loan type has different terms and conditions that advisors will want to consider before committing.
Bank Loans
For many years, Canadian banks shied away from providing loans to independent financial advisors/firms for their acquisition needs. This was largely due to the fact that the businesses lack tangible assets and very few understood the industry or the value of these firms. However, in recent years, some chartered banks have entered the field and are providing a variety of loan options to advisors. One such bank, CWB Maxium Financial, says they now provide loans in excess of $1 million for a range of events, including purchasing a practice or a book of business.
As a result, some are able to offer loan terms with amortization periods up to 10 years, allowing advisors to preserve cash flow while expanding M&A purchasing power and providing sellers significant up-front liquidity to secure a deal.
Bank loans are underwritten based on the cash flow or EBITDA (earnings before interest, tax, depreciation and amortization) of the advisory practice and generally offered to advisory firms that exceed $1 million in EBITDA or have clear line of sight on that level in the near-term. Deal terms can vary by lender, but loan amounts are generally a function of past and future debt service coverage and the variability of historical revenue performance.
Bank loan terms are usually the most flexible, but will often require personal guarantees and in some instances (particularly where EBITDA is less than $1 million) some asset security from the owners of the firm.
Government-Backed Loans
Government-backed loans, such as those offered by the Business Development Bank of Canada (BDC), are designed to make capital accessible to small businesses which otherwise would not be able to secure a loan or the amount of loan they require from a chartered bank. The BDC has a program specifically targeted at purchasing a business and notes the acquisition of intangible assets such as client lists and goodwill as an eligible use of proceeds.
Despite their intent to make capital more accessible, these loans typically come with limitations and less flexibility, however, the BDC may consider lending to advisory firms that have less than $1 million in EBITDA, making them a great option for smaller or earlier stage advisory firms.
Non-Bank Specialty Lenders
Specialty lenders have continued to evolve their offerings to meet the needs of the wealth advisory market in Canada. The ecosystem remains relatively small in capital terms compared to bank lending, however, specialty lenders will generally consider wealth advisory firms that have more limited track records or are smaller in size. Specialty lenders will often require more restrictive loan conditions and will certainly require higher interest rates, often 30%-100% higher than an equivalent bank loan, and will conduct more thorough due diligence as part of their loan underwriting.
One such lender, Ontario-based Care Lending Group (CLG), provides a lending program designed specifically for advisors, portfolio managers & investment managers. In a recent interview with Wealth Professional, Tyler Wilson, director, advisor finance said “the majority of financing services we provide are either for the purchase of a book of business, or, on a broader spectrum, for assistance with M&A,”.
Specialty lenders are generally more flexible with their loan terms, matching the different and unique needs of wealth advisory firms. The diversity of their investor base allows them to take higher risk than a bank lender, which has seen the emergence of loan structures linked to selling a portion of future revenues, known as Revenue-Based Financing, or through loans that also incorporate minority equity ownership in order preserve cash flow for growth.
Dealer Financing
Many dealers have started offering financing to their advisors. This has created an opportunity for advisors with little personal capital or credit to engage in growth activities. One dealer that has gone on record to announce their internal financing program is Richardson Wealth, who in 2023 launched their program with a $25-million commitment to platform advisors.
However, advisors should know that dealer financing comes with certain covenants that can impact an advisor’s ability to change platforms or make important business decisions.
For example, if the advisor does move, the loan procured through their dealer likely has a stipulation that it be paid in full in the event of a migration to another platform. Additionally, some dealers build in covenants that tie repayment amounts to the firm’s revenue, which can impact cash flow and profitability.
Best Practices for Canadian Wealth Advisors
Contact Lenders Early On
It’s important to reach out to a lender as soon as possible, especially if you are actively looking at a deal or are engaging with a seller or partner. Experienced lenders in the advisory market know what it takes to get a deal approved both within the bank and within the frameworks that govern an advisor’s practice. They can advise you on what will or won’t be approved in terms of deal structure, as well as help you identify risks and protections to safeguard your investment. You can also eliminate any potential lenders who don’t have relevant experience in the advisory market.
Be Forthcoming
Most non-bank specialty lenders take a consultative approach to the lending process. For them to properly advise and guide you in the process, they need to have all the information. The more forthright and complete you are with information, the clearer picture they have of your situation, and the better able they are to direct you toward the right loan products, deal structure, and resources.
Know Your Practice Financials
When it comes time to start talking specifics, having a clear understanding of your practice’s financials is crucial. This includes knowing your revenue streams, expenses, client demographics, and growth projections. Being well-prepared with this information will not only make the lending process smoother but also help you negotiate better terms. We encourage our clients to have a well-considered financial model including up to 3 years of financial projections to support their application.
Common Mistakes and How to Avoid Them
Mistake 1: Not Shopping Around for a Loan
Each bank develops its own lending criteria and offers different terms and conditions. They each also have different levels of understanding about how a financial advisory business operates and is valued. Just like with any purchase, it’s important to shop around. Competition is key to the free-market and commercial lenders will compete for opportunities to lend to the strongest and best candidates. Also, because many advisors who engage in acquisitions tend to do more than one, advisors will want a lender who can be a long-term capital partner.
Mistake 2: Choosing a Lender Without Industry Experience
Most lenders aren’t familiar with the financial advisor industry and don’t know how to evaluate the creditworthiness of a financial advisory practice. Lenders who are inexperienced with financial advisory firms have very low comfort levels in terms of how much debt they will extend. Typically, they are willing to lend far less than your specialty lenders who have a track record of lending to advisors and advisory firms.
Mistake 3: Waiting Too Late to Engage With a Lender
It is never too early to engage a lender when pursuing acquisitions. In fact, talking to a lender before you approach a seller will allow you to learn about your options and know for certain what you can offer to a seller. The standard acquisition can take months, even as many as 12-18 months. The lending process also takes time. Engaging a lender early allows you to better manage timelines and expectations for both you and the seller.
Conclusion
This guide serves as an introduction to the world of acquisition financing and lending for Canadian independent wealth advisors. Not all lenders are created equal, and each loan option comes with its own benefits and drawbacks. It’s important for advisors to thoroughly educate themselves on the types of loans available, the different lenders serving the markets, the rules and regulations governing mergers and acquisitions, as well as any special guidelines administered by their dealer or regulatory organization. This guide is a starting point for advisors looking to engage in acquisitions. We recommend securing an experienced M&A team and lawyer to provide expert guidance specific to your situation.
