Options for Structuring Advisor Acquisitions During the Coronavirus Market Dip
Fluctuating markets spurred by Covid fears have left many advisor acquisitions and internal successions in limbo. Challenging times call for ingenuity and a balanced approach to structuring deals that take into account the impact of the market on both the buyer’s and seller’s position. Although deals may look a little different right now, advisors still have options when it comes to structuring advisor acquisitions and successions during the Coronavirus market dip.
The key to getting deals done right now is flexibility. We have to look at deals differently and consider both the short term and long-term implications. Over the last several years, advisors have enjoyed greater access to capital. As a result, bank financed deals have quickly surpassed the number of buyer and seller financed acquisitions. The pandemic will likelycause a constriction of capital for advisor acquisitions from traditional and SBA centered lenders who don’t have the ability to creatively structure deals. Alternative lenders will continue to fill in the gaps, using their knowledge of the industry and their ability to distribute risk among the lender, buyer, and seller to achieve deal terms that work now and as the market continues to shift.
There are a few approaches we are taking with deals during the pandemic market. One approach we are taking is to work with both parties to shift some of the risk to the seller beyond a typical client retention claw back. A retention clause is important for maintaining the value of the practice during and immediately after the acquisition, but other terms need to be included to account for the temporary change in the value of client assets and the fluctuations that may happen over the coming months. Those terms need to be designed so that they are fair to both the buyer and seller. A permanent adjustment to the purchase price may not be the answer either, as it penalizes the seller for what may very well be a temporary downturn.
Above all, any deal structure must allow the buyer to absorb market fluctuations and still maintain debt service, no matter how much of the purchase price is financed. There is a lot of uncertainty in the market right now, and that uncertainty needs to be built into the deal terms. There really isn’t a silver bullet deal structure that works for all acquisitions, even in a good market, so it’s important to shop lenders and to take the time to really understand the terms and how those will impact the practice in both the short term and long term.