3 Biggest Mistakes Advisors Make When Seeking An Acquisition Loan
It takes a great deal of planning and thought to do an acquisition and to do it well. There are many steps and many opportunities to make critical errors that can impact the deal. One area where many advisors make mistakes is in securing financing for their acquisition. Financing options for acquisitions have improved tremendously over the last decade, but many advisors fail to educate themselves properly about acquisition loans. This can lead to major mistakes.
Mistake 1: Not Shopping Around
Not all banks are created equal. Nor do they offer the same loan options. Each bank develops its own lending criteria and offers different terms, conditions, and covenants. They each also have different levels of comfort in terms of how much they will lend against anadvisory business or towards an acquisition purchase price. Just like with any purchase, it’s important to shop around. Competition is key to the free-market and while there are somewhat limited options when compared to a mortgage lender, specialty 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 Financial Advisory Industry Experience
Most lenders aren’t familiar with the financial advisor industry. As such, they often don’t know how to evaluate a financial advisory practice, nor do they understand the market value as it lacks tangible assets/collateral. Even if they do feel comfortable lending for a specific need (such as for working capital), few lenders understand financial advisory practices well enough to offer additional loan options and capital support. Lenders who areinexperienced with financial advisory firmshave 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.As you become an experienced buyer and identify acquisition opportunities, you’ll need a lending partner that has experience and is willing to support your ongoing capital needs.
Mistake 3: Engaging With A Lender Too Late In The Process
Waiting until you have structured a deal with a selleris not the ideal time to engage a lender. Making an offer, agreeing on terms, and signing an LOI without knowing your financing options will burn goodwill with the seller if you end up having to restructure the deal based on a lender’s requirements or inability to finance your deal structure. 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.
Also, not preparing for financing ahead of time can you leave you and the lender rushed to meet a closing date, which will also burn goodwill with a seller. The standard acquisition can take months, even as a 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.
Bottom line, you need to engage with an experienced lender as soon as possible – even before you have a deal on the table. A lender who knows the industry and has a track record of lending to financial advisory firms can advise you on your financing options as well as on items that could impact the structure and timing of the deal. Often, they become a long-term capital partner and a valuable resource, helping you navigate opportunities and empowering you with the knowledge and the financing necessary to make those opportunities manifest into real deals.
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