Background of the Broker Protocol

In August 2004, three prominent wirehouses—Merrill Lynch, Citigroup Global Markets, and UBS Financial Services—established the Broker Protocol to alleviate the legal disputes that frequently arose during advisor transitions. Prior to this agreement, the typical transition process often involved abrupt resignations followed by frantic efforts to secure clients before the previous firm could intervene. Such scenarios typically necessitated legal action, resulting in the involvement of attorneys who would seek restraining orders or pursue litigation over allegations such as breach of contracts and trade secrets. In a bid to curtail these costly disputes, the Founding Members created a framework designed to streamline transitions and allocate resources more effectively.

Does the Broker Protocol Apply?

Over the years, the Broker Protocol has transitioned and expanded significantly, now encompassing a wide array of broker-dealers and registered investment advisors. Initially entered into by just three firms, membership has grown to over 2,000 signatories as of August 2020. It's crucial to note that firms can join or withdraw from the Broker Protocol at any time; hence, it is vital for advisors to ensure that both their current and prospective firms are members during their transition period. Only in these scenarios can advisors benefit from the protections and advantages offered by the Broker Protocol.

Properly Undergoing a Broker Protocol Transition

At its core, the Broker Protocol is a collective agreement that governs the use of client information when advisors transition between signatory firms, ultimately aiming to safeguard client privacy while allowing freedom of choice. Participating firms must adhere to specific procedures regarding client data transfers to avoid potential litigation. Advisors can only take a limited set of client information—namely names, addresses, phone numbers, email addresses, and account titles—to their new firms, ensuring that both their former and new firms remain compliant with the protocol's stipulations. To formalize their resignation under the Broker Protocol, advisors must provide written notice, detailing the specific client information being transported while maintaining strict adherence to the established criteria. Non-compliance could expose both the advisor and their new employer to legal repercussions.

1. Act in good faith and you’ll be okay:  

We speak with wirehouse advisors who get nervous and concerned about Protocol and others who take it more in stride as part of the business. While following Broker Protocol should be taken extremely seriously by the advisor, if you act in good faith and follow the procedures, you’re going to be okay.

2. Only 5 kinds of client info you can take

To be safe only take this information from clients you personally acquired, developed, and brought to the firm.

• Names

• Addresses

• Phone numbers

• Email addresses

• Account title of the clients that they serviced while at the firm

Don’t take copies of monthly statements, flash drives, client files or any other client documents (paper or electronic files). Don’t take copies of client account numbers or details. Don’t print from the office or email your personal email address client information.

3. Discretion Direction

“Don’t tell anyone” is the discretion direction Protocol brokers should follow. If the “word” gets out it can lead to your manager to take preemptive action against you through termination or a surprising and sudden compliance issue leading to an unsettled disclosure. Telling your friends, peers, assistants, and even family about your move prematurely can have serious consequences.

4. Both firms should be members

Both the departing AND receiving firms must BOTH be members of the Broker Protocol for the departing advisor to receive the protections granted by Protocol. While there are 1598 current members as date of this Blue Paper don’t assume the firm you are joining is a member of Protocol.

5. Resignation letter and list copies

Your resignation letter should be in writing and personally delivered to the branch manager. Don’t pine on about all the good reasons you are resigning. The longer it is the more likely you are to get yourself in trouble. Include two lists with the letter: Copy of list of allowable client information (name, address, phone number, email, and account title) you’re taking. Copy of list of account numbers for the clients you serviced. However, the account number list is only for the manager and this copy you do not take home.

6. When you’re on a team

It’s common for wirehouse advisors to be on teams and if you are on a team there are different aspects to consider. If you’re currently on a soon to be “left behind” team you’ll want to find your team agreement. The agreement should spell out client rules and usually are restrictive to a departing team member. The team agreement should also be given to your legal council advising you on Protocol. If there is not a written team agreement and you have been on the team less than 4 years then Protocol only protects the clients you brought to the team. If you have been a producing advisor on a team for 4 years or more, all team clients are fair game.

7. You need an experienced attorney

Advisorbox strongly advises advisors engage a Protocol experienced attorney to ensure that all requirements are followed. Advisorbox is not a law firm and does not provide legal advice. This overview is provided for general information purposes only. Find Protocol experienced attorneys on the Advisorbox Directory.

COMPLETE ASSET PURCHASE

100% of Assets:

Internal: Acquiring 100% of the assets of an advisor or firm within your broker dealer, firm, RIA or custodial platform.

External: Acquiring 100% of the assets of an advisor or firm from another BD or platform where ACATs will be required.

Examples include:

- Advisor selling everything, transitioning new owner for 6 months to a year, and leaving

- Advisor selling everything, stays on part time, can generate new split business, leaves when ready

- Purchasing all of the clients/assets of the selling advisor or firm’s business. Both SBA and conventional loans can be used.

SBA Loan:

100% asset acquisitions are the most common type of SBA acquisition loan. A seller guaranty is not required or even allowed with an SBA loan.

If the advisor has equity already or some 1099 income for a year and owns clients that would value at a little more than 10% of the price you’re selling, then we most always can avoid a down payment or seller financing utilizing an SBA 7(a) loan.

Key loan approval qualifiers are credit and meeting DSC cash flow minimums.

Conventional Loan:

The buyer needs to be strong enough to qualify based on their advisor experience, credit, and net worth and the deal needs to both cash flow above the DSC minimum requirements and meet LTV requirements.

If DSC or LTV requirements fall short then the seller would seller finance the proportion of the purchase price needed for the lender to meet their DSC and LTV requirements.

PARTIAL ASSET PURCHASE

100% Ownership of Partial Book Purchased

Internal: Acquiring a partial book of assets from an advisor or firm within your BD or platform.

External: Acquiring a partial book of assets from an advisor or firm outside of your BD or platform where ACATs will be required

Examples include:

Purchasing 10% to 20% of an advisor’s book

Purchasing the assets for the clients your servicing

Purchasing assets in tranches over set time period

Purchasing less than 100% of the clients/assets of the selling advisor or firm’s business. Both SBA and conventional loans can be used.

SBA Loan:

Partial asset acquisitions are the easiest type of SBA acquisition loans to do. If the advisor has equity already or some 1099 income for a year and owns clients that would value at a little more than 10% of the price you’re selling, then we most always can avoid a down payment or seller financing utilizing an SBA 7(a) loan.

If less than 50% of the clients/assets are being purchased then there are a few less requirements for an SBA loan. If the partial asset acquisition is less than 100% but greater than 50% then SBA lenders will apply the same requirements as if it was a 100% asset purchase.

Conventional Loan:

For internal successors, often times a seller guaranty is required. This depends on how financially strong the borrower is. Just over half of these types of loans would require a seller guaranty.

If the revenue flows through the selling advisor and then the selling advisor pays the buyer then some lenders will require a guaranty from the seller. If the buyer advisor gets paid directly from the broker dealer (including a split code percentage) then no seller guaranty would be required.

PARTIAL ASSET ACQUISITION: THE EASIEST ACQUISITION LOAN

A Partial Asset Acquisition (PAA) is when the buyer is acquiring a partial client list, typically less than 50% of the seller’s revenues or assets, rather than acquiring the entire practice.

Advisors will often use PAAs outside of a succession strategy in order to make more room and time for larger more profitable clients. Larger advisors will sometimes utilize a PAA to sell off the “bottom” portion of their book to advisors who are eager to affordably grow their client base. PAAs provide many benefits to both the buyer and seller, and can also provide an ideal path of least resistance for beginning and implementing succession transition strategies.

A Partial Asset Acquisition (PAA) is when the buyer is acquiring a partial client list, typically less than 50% of the seller’s revenues or assets, rather than acquiring the entire practice.

Advisors will often use PAAs outside of a succession strategy in order to make more room and time for larger more profitable clients. Larger advisors will sometimes utilize a PAA to sell off the “bottom” portion of their book to advisors who are eager to affordably grow their client base. PAAs provide many benefits to both the buyer and seller, and can also provide an ideal path of least resistance for beginning and implementing succession transition strategies.

Sellers may choose to parcel out different client tranches to multiple advisor buyers or use as a way for their “anointed successor advisor” to begin a gradual acquisition and client transition process.

Structuring PAAs are flexible and are individually tailored according to the seller’s succession and retirement timeline.

Segment your client list into tranches in order that you would sell. The tranches do not have to be equally segmented. Most advisors will initially carve out their clients with the lowest assets as a tranche and then segment by client asset tiers. PAAs can be structured to sell tranches to multiple advisors, sell a few tranches in the short term and maintain favorite clients for a much longer period of time, or more commonly to sell tranche #1, and then perhaps #2, to a single advisor, and if all goes well, then combine and sell the remaining tranches in a follow up 100% acquisition of the remaining clients.

Ideal Succession Transition Method

Many sellers aren’t ready to completely sell out and retire right now but would like to solidify who their successor advisor will be and start slowing down over the next few years. PAAs allow sellers with longer time windows to work with and the ability to prepare their successor advisor both financially and professionally through partial and incremental transition tranches.

On the other side, there are many advisors who have years of experience (rather than decades) who would benefit from acquiring a principal’s practice over time as well. PAAs allow the advisor to more easily afford or qualify for a loan than 100% ownership transfers and provides valuable client transition and retention experience needed for larger acquisitions later.

From a financing perspective, partial asset purchases are better than partial stock (or equity) acquisitions. The SBA does not allow for partial stock acquisitions, only partial asset purchases.

While conventional lenders in our niche love partial equity buy-outs, these loans are typically provided to the junior partners of a firm rather than just junior advisors. AFAs and IARs may have a difficult time qualifying for and obtaining a Conventional loan for a partial equity buy-out or buy-in.

A Mutual Test Drive

A PAA provides both the seller and buyer with an initial acquisition test drive. If the client retention is high, the client relationships are strong, and there is synergy with buyer and client service model and general investment philosophy, then the PAA can be determined a success.

If the PAA isn’t considered a “success” then the PAA served as an insurance policy against both buyer and seller remorse. The PAA gives buyers and sellers a strong indication if both are the ideal match for future client transitions with each other. If not, then the PAA allowed for the buyer, seller, or both, to look at other opportunities.

The PAA provides experience to the inexperienced. Both the buyer and seller are able to judge from the initial PAA experience if future PAAs, or acquiring the rest of the practice, is a prudent continuation of succession transition. If not, then any “remorse” is limited to just the partial client list sold and not the entirety of the practice.

Fewer SBA Requirements

SBA loans are the typical financing option for AFAs and IARs seeking to acquire their principal’s practice. Many of the more restrictive SBA requirements apply to 100% ownership transfers and do not apply to partial client acquisitions.

Down payment equity injection rules, seller financing requirements, seller subordination, twelve-month post-sale seller key role restriction, business valuation(s), and personal property collateral requirements don’t apply to PAAs for example.

The SBA SOP (Standard Operating Procedures) is interpreted differently by lenders and lenders vary in their policies regarding PAAs.

Add Revenue Not Expenses

PAAs typically do not come with additional overhead and operating expenses for the buyer other than the debt service for the PAA. PAAs allow a buyer to acquire revenues without the additional overhead and operating costs that may be required in a 100% acquisition.

Adding revenues without adding additional costs, results in the buyer being able to best cash flow the PAA. One of the most critical qualifying criterion in achieving a loan is the Debt Service Coverage Ratio (DSCR) comparing net income with fixed debt. The higher the DSCR, the easier it is to qualify.

When the only additional expense incurred in a PAA is the loan payment, the acquisition is cash flowing right out of the gate and the acquired revenue cash flow can typically pay for itself in under four years.

Minimal Seller Financial Documentation

For 100% acquisitions, lenders will typically need the seller’s last three years’ tax returns, last calendar year and YTD financials, business valuation and a 4506-T form (allowing the lender to verify tax returns). A PAA doesn’t require any of these items.

The typical required documents for a PAA simply consists of a spreadsheet of the household clients being acquired with each client’s corresponding AUM, revenue, recurring revenue, years as client, age, and any client accounts under the household account.

Most lenders will also require a broker dealer or custodian report showing the total assets managed and revenues generated. This is required to prove that the PAA is not a 100% ownership transfer, or full acquisition.

Provides Experience for the Inexperienced

There is no other way to better prepare for a 100% acquisition then going through the experience of a PAA first. This applies to both buyers and sellers. Like many other aspects of the financial services industry, business in general and in life, there is no better teacher than experience.

PAAs can be utilized as “trial runs” for bigger PAAs down the line or to acquire the rest of the practice. The transition process, client transition meetings and procedures, time allocation, and retention best practices can be learned and lessons addressed to be applied to future acquisitions from both the buyer and seller perspectives.

100% Financing Typical

It’s common for lenders to provide 100% financing for PAAs. That is, the lender will loan the entire amount of the PAA price without the buyer having to make a cash injection or requiring the seller to finance part of the PAA.

Seller Financing Easy for a Lender to Refinance. Some sellers will be more willing to finance some or all of a partial acquisition if it is to their designated successor. For sellers who decide to finance part or all of a PAA, the seller note can be refinanced and rolled into a future loan from the same buyer.

Lenders like refinancing PAA seller notes because it is a legitimate business purpose loan and represents a prior successful acquisition between the buyer, borrower, and seller. Lenders like to lend to buyers who have already acquired a partial client list, have demonstrated a high retention rate, and can show all payments have been made on time.

Achieve Foresight from Hindsight

Hindsight has 20/20 vision as the saying goes. Use the perspective and experience from an initial PAA to provide the foresight in how to structure the continuation of the succession or to go in a different direction if the PAA wasn’t considered successful.

PAAs gives the seller the opportunity to examine the results of an initial PAA to determine if the buyer has proven themselves worthy of additional PAAs or a full acquisition. It also provides the buyer with the opportunity to determine if acquiring more of the same would be a dream or a nightmare. The 20/20 hindsight gives buyers and sellers the opportunity to recalibrate structure and improve the transition process moving forward.

PAA Lending Considerations for Servicing Advisors

Advisors who are currently servicing clients owned by another advisor are often interested in acquiring these clients. While having personal production is the most important qualifying factor for a buyer, servicing advisors have a path to gaining personal production from PCAs.

Lenders love lending to an advisor acquiring clients they are already servicing. The risk of attrition is minimized even more when the borrower already has the existing relationship with the clients being acquired.

W-2 advisors should convert to 1099. Business loans are only provided to 1099 advisors not W-2 employees. If acquiring clients is a top priority but you are currently a W-2 advisor, consider discussing with the practice’s principal the option of moving to a 1099 structure. It is much easier to qualify for financing when you have already been servicing the clients under 1099 than transitioning from W-2 to 1099 as part of the PAA process.

The most confusing lender underwriting issue with PAAs, is for the lender to be able to distinguish revenue streams from the serviced clients being serviced.

When a servicing advisor buys 100% of the clients they are servicing it is still a PAA as long as the clients being serviced and acquired are just a partial client list of the selling advisor.

When possible, servicing advisors should have their own rep code applied to the clients being serviced and being developed for a future PAA. Having split rep codes applying to the serviced clients most easily demonstrates to a lender the revenues being acquired.

For example, the owner advisor and servicing advisor may have a split rep code applied to 20 clients where the owner advisor gets 50% of the revenues and the servicing advisor receives 50% to their rep code. In the PAA the servicing advisor is buying the other 50% that will then be applied to their rep code post sale.

Guaranty - For multiple partners buying out one partner’s equity or when there is multiple partners but just one partner is buying out one of the other partners, then a corporate guaranty or stock pledge agreement may be required.

The stock pledge agreement (or equivalent) is where the non-borrower equity owners personally grant the business collateral to the lender. For internal successors that would not qualify for the same dollar amount for an asset purchase, then typically a seller guaranty is required.

Lien - Another consideration is the bank will place a lien on the entire business. So if there are three or more partners but only one is getting a loan to buy out one of the other partners then a lien is going to be placed on the entire business which still encompasses the equity the non-borrowing equity owner has.

Types of partnership buy-in loan scenarios:

Conventional Loans

Merger

When an advisor is merging into another advisor’s business and the new advisor’s business value isn’t equal to the existing advisor’s business valuation so additional funds need to be paid to equate to the percentage of equity the new advisor is going to have. For example an advisor whose business values at $1 million is merging with an advisor whose business values at $2 million and the goal is for both to be 50/50 partners after the sale. The joining advisor would bring merge their assets plus $1 million in cash to buy-in to 50% ownership.

Internal Successor

When the buyer is already at the firm and the principal sells them part of their equity. For example, the principal has one or more service or associate advisors that are the “chose ones” to take over the business someday. The principal sells a small percentage of equity to give them some ownership and a long-term commitment to the business. The principal may sell the remaining equity over time in tranches or all at once at retirement.

Existing Partner(s)

A partner (or multiple partners) that already has equity and is buying more equity but not 100% of the equity of another partner. For example one partner owns 25% and purchasing an additional 25% from the other partner who owns 75%.

Succession Equity Buy-in

The partial partner buyout is when a borrower is purchasing part of the equity owned by a partner. The partner who is selling will remain on as a partner since they are selling just part, and not all, of their equity.

This loan also requires a ten percent cash injection unless two key requirements are met.

A Maximum Debt-to-Worth of nine-to-one (9:1). This is determined based on the business balance sheet over the most recent year and quarter.

Any remaining owners of the business who have twenty percent or more in equity, are subject to the SBA guarantor requirements. This includes the personal guaranty and the property collateral requirements.

Calculate the 9:1 ratio

The 9:1 ratio for equity injection in SBA SOP for partner buyout loans is a measure of a business's financial health. This ratio compares the business's debt to its equity, which represents the amount of capital invested in the business by its owners. A lower debt-to-equity ratio indicates that the business has more equity and is less reliant on debt, while a higher debt-to-equity ratio suggests that the business is more heavily indebted.

Calculating the 9:1 Ratio: To calculate the debt-to-equity ratio, divide the business's total debt by its total equity. For example, if a business has $500,000 in debt and $100,000 in equity, its debt-to-equity ratio would be 5:1.

Interpretation of the 9:1 Ratio: The SBA considers a debt-to-equity ratio of 9:1 or higher to be indicative of financial risk. When a business's debt-to-equity ratio exceeds this threshold, it may be required to inject additional equity into the business to demonstrate its financial stability and reduce the risk of default on an SBA loan.

Example of a Business Below the 9:1 Ratio: Suppose a business has $750,000 in debt and $150,000 in equity. Its debt-to-equity ratio would be 5:1, which falls below the 9:1 threshold. In this scenario, the business would not be required to make an equity injection as it is considered financially stable.

Example of a Business Above the 9:1 Ratio: If a business has $1,200,000 in debt and $100,000 in equity, its debt-to-equity ratio would be 12:1, exceeding the 9:1 threshold. In this case, the business would likely be required to inject additional equity into the business to lower its debt-to-equity ratio and meet the SBA's requirements.

What is Debt Refinancing?

Debt refinancing is the process of replacing existing business debt with new loans with more favorable terms, typically lower interest rates, longer repayment periods, or a combination of both.

This can be a strategic move to:

Reduce overall borrowing costs: Lowering interest rates can significantly decrease your monthly payments and free up cash flow for other business needs.

Consolidate multiple debts: Combining multiple loans into a single one with simpler terms can simplify your financial management.

Extend repayment terms: Stretching out the repayment period can lessen the immediate burden of monthly payments, providing breathing room for your business to grow.

Impact and Benefits:

Successful refinancing can result in significant savings on interest, potentially freeing up tens of thousands of dollars for businesses.

Improved cash flow can lead to increased operational flexibility, investment opportunities, and overall financial stability.

Refinancing can also boost a business's credit score, making them eligible for better loan terms in the future.

The types of debt eligible include:

Any debt structured with a demand note or balloon payment

Debt with an interest rate that exceeds the SBA maximum interest rate based on size or term

Credit Card Debt Used for Business Expenses

Debt that is over-collateralized based on SBA’s collateral requirements

Debt with a maturity that was not appropriate for the purpose of the financing Debt used to finance a change of ownership of a going concern business

Home Equity Line of Credit (HELOC)

Refinancing an SBA 504 loan

Considerations for SBA Debt Refinancing:

Application fees and closing costs: Be aware of potential fees associated with the refinancing process.

Prepayment penalties: Some existing loans may have prepayment penalties, making refinancing more costly.

Credit requirements: You need to meet the SBA's creditworthiness requirements to qualify.

The 10% Improvement Rule:

One crucial aspect of SBA debt refinancing is the 10% improvement rule. This rule states that to be eligible for refinancing, your projected cash flow after refinancing must be at least 10% higher than your current cash flow. This ensures that the refinancing actually improves your financial situation and reduces your debt burden.

Personal debt for business purposes:

Debt in the personal name of the advisor such as personal credit cards or a HELOC (Home Equity Line of Credit) that were used for business purposes can be a challenge for refinancing.

Personal Credit Card expenses that were used for business purposes would be allowed with credit card statements and receipts showing the business purpose expense. We have a hard time getting lenders to deal with small amounts for this since each needs documentation. But, if you used a personal credit card for larger expenses costing thousands, then this could be added along with a debt consolidation loan.

If you tapped into your HELOC to boot string your business or perhaps for a partial client acquisition, this can be refinanced if the interest deduction was reported on your latest tax return or Schedule C.

SBA loans can be used to refinance personal debt if…

- Debt in the personal name of the advisor such as personal credit cards or a HELOC (Home Equity Line of Credit) that were used for business purposes can be refinanced by an SBA loan if:

- If it has been reported on the applicant’s business tax returns (Schedule C for sole proprietorships) showing the interest expense associated with the debt.

- If the debt to be refinanced was used in whole or in part to refinance a prior debt, the debt must be reflected on the applicant business tax returns (Schedule C for sole proprietorships) for the prior two full tax cycles, showing the interest expense associated with the debt, and the borrower must certify that the debt to be refinanced was used exclusively for the applicant business and were not used for any ineligible purpose.

- The applicant must certify that the amount being refinanced was used exclusively for business purposes and provide appropriate documentation. For example, a sole proprietor may demonstrate that the debt was used for business purposes by providing documentation that shows the interest deduction is reported on the Schedule “C” not the Schedule “A” of the proprietor’s tax return. If the interest deduction reported on the Schedule C includes multiple debts, then the applicant must provide a copy of the appropriate IRS Form 1098 related to the debt being refinanced.

- If the debt is in the form of an outstanding balance on a credit card issued to an individual personally, the lender must confirm which of the credit card obligations were used for business purposes. Documentation required for refinancing personal credit card debt includes a copy of the credit card statements and individual receipts for any business expenses in excess of $250. In all cases, the applicant must certify that the amount that will be refinanced was used exclusively for business expenses.

How The Importance of First Lien Position to Lenders Impacts Refinancing

Lenders prioritize security when extending loans; they want assurance that they will be the first to be reimbursed should a business default on the loan. This assurance is provided by being in the "first lien position" on business assets.

The Existing Lender's Lien:

If a business already has a loan, the lender likely holds a lien on the business's assets, putting them in the first lien position.

A Scenario for Debt Refinancing:

When a business approaches a new lender for a loan, the new lender will almost always demand to be in the first lien position. This improves their security and mitigates their risk.

Two Options For Addressing the Existing Lien:

1. Subordination: Under this arrangement, the existing lender agrees to move their lien position below that of the new lender. While this secures the new loan, it is less favorable for the existing lender as it reduces the likelihood of being fully repaid in case of a default.

2. Refinance and Consolidation: More commonly, the new lender refinances the existing loan, effectively paying it off and absorbing it into the new loan. This action replaces the existing lien with the new lender's first lien position on the business assets, ensuring their priority in repayment.

ADVISOR RECRUITING & TRANSITION FINANCING

Loan Usage:

• Ideal for covering recruitment and transition expenses (e.g. transitioning from wirehouse to independence).

• Working capital offers financial support during an advisor's move to a new platform.

Transaction Specifics:

Funding available for recruitment and acquisition in a single transaction.

Recruiting Transition Loan

Advisors focused on acquisitions are often simultaneously in recruitment mode. Many Registered Investment Advisors (RIAs), Office of Supervisory Jurisdictions (OSJs), and independent broker dealer principals aim to expand their businesses by recruiting advisors to join their teams. They receive a payout from the broker dealer or custodian, then offer a reduced payout to the advisors they bring on board, retaining the difference for the services they provide.

Most advisor business owners are unable or unwilling to match the 10% to 20% (or higher) transition deals that breakaway brokers negotiate when affiliating directly with a broker dealer. To address this challenge, we provide recruitment transition loans. These loans empower recruiting advisors and firms to offer more competitive incentives to attract top talent and provide financial support to new recruits during their initial months of transitioning clients.

Recruiting Note Payoff Loan

We offer assistance not only to breakaway brokers seeking to settle their recruiting debts but also to independent advisors looking to transition smoothly without financial burdens. Whether moving from independent broker dealers or firms, we provide solutions to pay off existing recruiting notes. Advisors who initially received a recruiting note while operating as 1099 can benefit from refinancing options with both SBA and conventional lenders. For those who weren't aware of financing options and covered costs themselves, we offer working capital loans to cover transition expenses and revenue losses. Our aim is to support advisors in their moves by providing tailored financial solutions.

Breakaway Broker Recruiting Loan

Breakaway brokers, a term used in the industry to describe advisors from wirehouses like Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo, are professionals who transition from the employee model of wirehouses to become independent business owners of their financial practices.

Over the past decade, there has been a consistent trend of advisors shifting from employee status to independence. It is anticipated that in the coming years, the number of independent advisors in the industry will surpass that of employees.

When employee advisors opt for independence with an independent broker dealer, they usually receive a modest transition package and payouts ranging from the high 80s to low 90s, officially taking ownership of their practices. On the other hand, those establishing a Registered Investment Advisor (RIA) with a custodian forego the transition package but enjoy full 100% payouts.

Wirehouse advisors manage some of the most substantial and top-quality practices in the industry. They are the custodians of client relationships, with clients valuing their advisor more than the name of the broker dealer on the business card.

We provide financing for breakaway brokers to address various financial needs when transitioning to independence. This includes covering expenses such as settling existing recruiting note balances with wirehouses, funding new office setup and renovations, purchasing furniture, computers, systems, and technology, as well as covering marketing, promotional costs, and working capital to manage income loss and client transition expenses during the initial months.

The traditional firm (W-2) model recruiting notes are perceived as personal loans by the Small Business Administration (SBA) and commercial banks because they were granted to employees, not business owners. Our loan transforms these personal notes into tax-deductible business notes, facilitating easy refinancing as a business loan once the advisor has broken away and transferred their clients.

What is a CRE Loan?

CRE loans are specifically designed to help businesses finance the acquisition or refinancing of income-generating properties like offices, retail spaces, warehouses, and industrial facilities. These loans are secured by the property itself. These loans offer the leverage to unlock new opportunities, expand your business footprint, and generate consistent income for years to come.

What can you use a 7(a) loan for?

This loan opens doors to a plethora of exciting opportunities:

Purchase your dream commercial real estate: Whether it's a sleek office building, a bustling retail space, or a warehouse that hums with productivity, the 7(a) empowers you to own the space that fuels your operations.

Construct your ideal facilities: Don't settle for cookie-cutter spaces. Design and build the perfect environment to reflect your brand and optimize your workflow, from a cutting-edge restaurant to a state-of-the-art manufacturing plant.

Modernize and expand your existing space: Give your business a fresh lease on life with renovations, expansions, or upgrades that boost efficiency and enhance your brand's presence.

Refinance existing real estate debt: Simplify your financial landscape by consolidating debt at potentially lower interest rates, freeing up valuable resources for reinvestment.

Fuel your working capital: The 7(a) goes beyond bricks and mortar. It can also inject valuable resources into your day-to-day operations, covering payroll, marketing, and essential business expenses.

Invest in inventory and equipment: Acquire the tools and materials your business needs to thrive, from top-of-the-line equipment to essential inventory, ensuring you're always ready to seize opportunities.

7(a) vs. 504: SBA Loans for Real Estate Purchase

When it comes to financing your office location, the SBA offers two loan programs specifically designed for commercial real estate: the 7(a) and the 504. While both provide valuable options, there are situations where the 7(a) program shines particularly bright for advisors.

Here are a few of the advantages to consider:

Down Payment Advantage: For many borrowers, the biggest hurdle of the 504 program is the mandatory 10% down payment. With the 7(a), established franchise owners can potentially secure financing for your commercial property without any down payment, depending on your creditworthiness and the lender's policies. This frees up valuable capital for equipment, inventory, or working capital, setting you up for a smoother launch and growth.

Extended Terms and Flexibility: If you're not just acquiring real estate but also expanding your business through an acquisition or investing in equipment, the 7(a) offers a powerful advantage: combining loan purposes. This means you can wrap real estate financing with other business needs into a single loan with an extended term, potentially stretching as far as 25 years if the real estate portion represents at least 51% of the loan amount. This translates to lower monthly payments and more breathing room for your growing franchise.

Speed and Simplicity: Time is money, especially when starting a new venture. The 7(a) program typically involves a streamlined process with faster approval times compared to the 504 program, which involves a three-party process with a Community Development Company (CDC). This quicker turnaround can get you the funds you need sooner, accelerating your progress toward opening your doors.

Beyond Interest Rates: Remember, cost isn't everything. While the 504 program might offer slightly lower interest rates, consider the trade-off: the 10% down payment, potentially higher fees, and longer processing times. Weighing all these factors, the 7(a) can often be a more cost-effective solution, especially for franchisees looking to maximize their available capital and expedite their expansion plans.

Choosing the Right Path: Ultimately, the best loan program depends on your unique circumstances and needs.

SBA 504 Loan Program: An Overview

The SBA 504 Loan Program, also known as the CDC/504 Program, provides long-term, fixed-rate financing for small businesses to purchase major fixed assets, such as land, buildings, equipment, and machinery. It's administered by the Small Business Administration (SBA) in partnership with Certified Development Companies (CDCs), nonprofit organizations that promote economic development within their communities.

Here's how the program works:

Borrower contacts a CDC: You start by reaching out to a CDC in your area. They will discuss your needs, eligibility, and loan options.

Loan package assembled: The CDC works with you to develop a loan package, which includes a financial analysis, business plan, and project proposal.

Funding sources: The 504 loan utilizes three funding sources:

Borrower contribution: You are required to contribute at least 10% of the project cost in equity.

CDC debenture: The CDC sells a government-backed debenture to raise 40% of the project cost.

Third-party lender: A participating bank or other financial institution provides the remaining 50% of the loan.

Loan approval: The CDC submits the loan package for approval by the SBA and the third-party lender.

Closing and funding: If approved, the loan closes and the funds are disbursed for your project.

504 advantages:

Lower interest rates compared to traditional commercial loans. You get to keep more of your hard-earned profits for other needs.

Longer repayment terms, stretching up to 25 years. Breathe easier knowing you have ample time to manage your loan payments.

Competitive down payment requirements, with a minimum of just 10%. Access your dream space with less upfront capital, thanks to the SBA's guarantee.

ADVISOR ACQUISITION ALTERNATES

Brand Portfolios

Succession, familiar peers, wholesaler referrals, field leadership connections, and M&A marketplaces are how advisors find acquisition targets.

For the lifestyle practice advisor who isn’t in a succession scenario, whose peer prospects are still years out from slowing down, who may not be big enough or proactive enough to get the field leader and wholesaler introductions, and has yet to make it to even final stages in any marketplace deal…what do you do if you’re ready to jump to the next plateau?

Advisors can grow their book or practice organically or inorganically, or both. Most inorganic growth minded advisors mind their time waiting for their acquisition opportunity focusing on their organic growth. This is natural and wise, and takes time and patience.

But having patience is harder sometimes the more necessary it is to have, when the prospective seller inventory and access to it becomes dimmer not brighter, when the 50-1 buyer seller ratio you’ve been operating under is now 80-1. When the multiple of 2.5 you thought you could acquire at is going to be 3 to 3.5 to win the deal.

There is a lot of acquisition restlessness in our industry and building buyer side frustration at the lack of access and opportunities for aspiring acquirers and aggregators to even get in front of, more-or-less win. Acquisition minded advisors are clearly seeing that it’s only getting more competitive, and it won’t be too long before they’re saying it’s a 100-1 buyer-seller ratio.

All of these advisors with millions each in bank financing ability, ready to buy a business, who have nothing available to buy, even when paying the premium prices being asked today. Don’t worry, you want to ramp up to $5 million in acquisition debt? Advisorbox has your back.

Alternate Acquisition Plan: Multi-Brand Portfolio

Frustrated by the competitive acquisition landscape?

Finding suitable advisor practices is tougher than ever, with skyrocketing prices and limited opportunities. But that doesn't mean you have to put your growth plans on hold.

Introducing Advisorbox's Franchise Acquisition Model.

We empower advisors like you to leverage debt and Build Investment Portfolios of Franchise Businesses while you wait for your ideal advisor acquisition.

Unlock the benefits:

Wider Selection: Choose from hundreds of approved franchise brands across diverse sub-sectors.

Easier Financing: Secure SBA loans up to $5 million limit on non-owner managed franchise acquisition or startup.

Diversification: Spread your risks and income streams across multiple high-potential businesses.

Equity Building: Create valuable assets with long-term appreciation potential.

Passive Income: Gain additional income from franchise operations, while building business portfolio value.

Build a portfolio of strategic franchise acquisitions, diversifying your debt, risk and subsector exposure, revenue streams, and building valuable equity, all while remaining positioned and poised for that perfect advisor practice acquisition.

Don't wait for opportunity, create it.

Contact Advisorbox today and explore how our Franchise Acquisition Model can accelerate your business portfolio.

Acquire While Waiting to Acquire

There is a lot of acquisition restlessness in our industry and building buyer side frustration at the lack of access and opportunities for aspiring acquirers and aggregators to even get in front of, more-or-less win. Acquisition minded advisors are clearly seeing that it’s only getting more competitive, and it won’t be too long before they’re saying it’s a 100-1 buyer-seller ratio.

There are all of these advisor wanna-be-buyers, each with millions in bank financing ability, ready to buy a practice, who have nothing available to buy, even when willing to pay the premiums being asked today.

When the landscape was a 50-1 and 2.5x multiple neighborhoods it was a seller sourcing challenge and a critical imbalance for buyers. The importance of implementing strategies and best practices then (way, way, back to a year or so ago) is magnified all the more with current ratios hitting over 80 buyers to every seller and a multiple that appears to be zipping quickly up the 3.1 to 3.3 to you know where it’s going next already. When acquisition prospects are this dire for an advisor who doesn’t have the biggest network in the world but has a good practice, action is needed. Advisorbox has taken action.

Advisorbox introduces an alternative franchise acquisition model for advisors to acquire franchise branded businesses. Our model plans out borrowing power and monitors ongoing cash flow metrics to be able to harness SBA backed loans with the top SBA lenders you’re familiar with like Live Oak Bank and Byline Bank as well as others to acquire franchise branded businesses and build investment franchise brand portfolios while your waiting those years for your turn at a real shot at a book or practice acquisition.

Stay diligent on advisory long-play strategy (and poised to pounce on opportunities) but you don’t have to sit on your hands if your ready to be an aggregator or build a portfolio of business. Sidestep the frenzy, be in control of what and when and where you expand, and if you want offer equity and succession plans to the managers and operators of your various franchise branded businesses (you already have a full-time job being an advisor).

We developed this plan specifically for advisors to be able to leverage debt for acquisitions (that the IRS ends up paying for with interest and amortization write-offs as well, just “paid” over time) and build investment business portfolios.