Risks and Protections to Financing Partner Buy-Ins and Phased Successions

The financial advisor industry is rapidly growing. In tandem with that growth is a largely aging advisor force who must now look to next generation leaders to help carry the practice into the future. For many, an internal succession plan must rely on third-party financing so that junior advisors can bring the necessary capital to the table.

The financial advisor industry is unique. Because so much of the value of an advisory business is based on goodwill, the value and equity lieprimarily in the client relationships and lacks the tangible assets most banks require as collateral. Therefore, this requires an in-depth understanding of the advisor industry and unique loan structure so these can be funded without the personal guarantees of the selling partner(s) or those not taking part in the purchase or sale.

NextGen Loan Structure

The typical structure for a NextGen loan is as follows:


The borrower is the individual acquiring equity in the practice. They are required to make a personal guarantee for the loan.


This is the RIA or BD entity(not the actual broker dealer). A corporate guarantee is required since we don’t offer unsecured personal loans. However, no personal guarantees are required from the selling partner or any other partners who are not in need of financing.They are only required to sign on behalf of the entity in which they hold an ownership interest to acknowledge it will serve as a corporate guarantor.


The lender will hold blanket first lien security interest over all business assets of both the Borrower & Guarantor.

Risks and Protections

The most common question raised from the remaining partners of the firm who will not need financing is, “Aren’t I inadvertently responsible as a ____% owner of the entity serving as a corporate guarantor?” The basic answer is yes; they would be inadvertently responsible.However, it’s important for those partners to understand the potential risk, or lack thereof, and how they can protect themselves using the buy/sell agreement.  Here are a few standard ways firms have addressed these issues:

  1. In terms of protection, most firms will add a default clause to the buy/sell agreement that outlines what happens to a partner’s equity in the event of death, disability, and default.  In the event of death or disability, the equity or shares would be sold at market value.  In the event of default, a discount could be applied where the remaining partners could force the partner defaulting on their loan to sell at a discount to market value (i.e. 10%, 20%, 30%, or any amount agreed upon) 
  2. Language could be added to the buy/sell agreement allowing the firm to withhold income and/or distributions from the partner in default which would protect the other partners income/distributions from being impacted by the partner in default. 

If this situation ever became a reality, PPCLOAN’s goal is to always work with our clients to find a solution that is favorable for all parties.  In most cases, it would not be difficult for PPCLOAN to help the firm or another partner purchase the shares from the partner in default.  That is why these financing needs are looked at very favorably and considered to be much less risky when compared to a firm owned by one person with no potential partners or successors.

If you have a NextGen leader who is interested in buying in to the practice, contact us today to learn more about our NextGen loans program and download our NextGen loan overview.

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