Financing Operational Cashflow for Advisory Practices-PowerPoint presentation

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The document titled "Financing Operational Cashflow for Advisory Practices (Acquisition/Succession)" by Adam Farag from Oak Street Funding covers essential aspects of acquiring and succeeding in financial advisory practices, focusing on leverage ratios, lending multiples of cash flow, acquisition financing structures, and internal succession plan loans.<br /><br />### Key Points Discussed:<br /><br />1. **Leverage Ratios:**<br />   - **Low Leverage (< 2X EBITDA):** Typically associated with traditional banks and local community banks.<br />   - **Medium Leverage (2-3X EBITDA & 3-3.5X EBITDA):** Found in niche lender spaces, which provide senior debt for acquisitions. This ensures sufficient capital while maintaining a cushion for debt service.<br />   - **High Leverage (> 3.5X EBITDA):** Falls into the venture debt/private credit space, potentially involving equity conversions over time.<br /><br />2. **Lending Multiples of Cashflow:**<br />   - Senior debt loans generally extend for ten years. For example, borrowing $1,000,000 at 8% interest results in annual payments of approximately $145,584.<br />   - Debt service coverage ratios vary based on EBITDA levels, with higher EBITDA resulting in more favorable ratios.<br /><br />3. **Debt Stack:**<br />   - **Senior debt:** Typically carries an 8% interest rate over ten years.<br />   - **Subordinate Seller Notes:** Carry a lower interest rate (5%) for shorter terms (e.g., five years).<br /><br />4. **Acquisition Financing Structures:**<br />   - Conventionally, deal structures split financing into cash and seller notes. For instance, a firm with $900k Gross Revenue and $450k EBITDA may have a purchase price of $2,250,000, split into various debt components, ensuring proper service coverage ratios.<br /><br />5. **Internal Succession Plan Lending Structures:**<br />   - These involve new partners buying equity and payments flowing through controlled accounts. Example: A firm worth $900k Gross Revenue and $450k EBITDA involves a partner purchasing 10% equity with structured debt service payments aligned to their distributions.<br /><br />This comprehensive guide by Adam Farag is designed to equip advisory practices with knowledge on securing and managing financing effectively while ensuring smooth transitions in ownership and operational cash flow management.

Keywords

Leverage Ratios

Lending Multiples

Acquisition Financing

Succession Plan Loans

Debt Service Coverage

Senior Debt

Subordinate Seller Notes

EBITDA

Equity Conversions

Operational Cashflow