Hey guys, how's it going? So, thanks number one to NAPFA for having us and allowing us to speak here today. Really appreciate the partnership and the event that they put on here. I think it's a been a great event thus far and you know we're excited to continue on into tomorrow as well. So, I'm Adam Fairig with Oak Street Funding. We've been around about 20 years. I've been with Oak Street for seven, lending to wealth management firms, insurance businesses, and CPAs. So, all future cash flow revenue stream type businesses for mainly mergers and acquisitions, internal succession planning, any type of change of ownership is kind of our bread-and-butter lending product. So, let's see here. Learning objectives. So, five o'clock session. I want to keep this pretty casual. Feel free to interrupt me with questions and jump in. I've got like six or seven slides. We're going to talk about cash flow a little bit and how we can help you guys with finance stuff, but really the true value in this is you guys having situations that you would want to finance that we can answer and let you know how we can help you. So, really we want to show you how our lenders going to view leverage ratios as it pertains to your business and your cash flow. The importance of lending multiples of cash flow. So, how we look at it as the bank. We're going to look at, you know, what multiple of EBITDA or net profit are we lending and different pricing associated with how high the leverage is. Different acquisition financing structures. So, I put together a couple like right down the middle baseline acquisition structures that we can talk about. Talk about partner buy-ins. Just basically what type of lending products do we have out there that are available to you guys. And then lastly, loans for internal succession. So, what does it look like when you have a partner that wants to buy five, ten percent ownership? What does that mean for the partner that's buying in? What does that mean for the firm that they're selling the shares to that partner? How do they work together to repay the loan to us, make the bank happy, make everybody happy? All right. So, kind of wanted to dive right in with how we evaluate leverage. So, created a couple of different categories of leverage that we look at as the bank. I want to switch sides here. But, really, so when I say EBITDA, does everybody understand what I'm talking about here? Financial planner, so I assume so. All right. So, yeah EBITDA, your cash flow, right? If you're borrowing less than two times your EBITDA, you can probably get that debt from just about any bank, any traditional bank. I mean, that's low leverage, that's commercial and industrial, typical C&I banking, right? But the challenges that you guys face is that the collateral of your business is intangible in nature, right? No real estate attached, no house, no cars, nothing that you can touch that a bank can put a lien on. So, what happens is when the bank doesn't understand that, they want to stay really low with leverage and they'll say, hey, we'll lend you under two times your operating cash flow, but anything above and beyond that, we're not interested, right? So, then you move into the next category, which is the two to three times EBITDA. So, I would say this is medium leverage for us. This is still going to be lower on our pricing scale of how much our interest rate is going to be. And it's a very comfortable lending leverage amount when you're looking at a 10-year deal, right? So, most of the debt that we do is 10-year loans, 10-year amortization schedules, all 10-year, right? So, when you're at two to three times EBITDA, you're going to be able to make the payments, whether you're paying 9% interest or 5% interest, your debt service coverage ratio or how much you're going to cover that debt by, it's probably going to be more than two times on a 10-year amortization schedule. So, if you can double cover the payment, we're pretty comfortable there. We're pretty comfortable to give you guys the best kind of pricing that we can offer. And that would be, I wouldn't call it the sweet spot, okay? It's not the sweet spot. It's still low leverage. We would classify it at Oak Street as a premier client, right? You come in and you're borrowing two and a half times EBITDA, you're a premier client. That's low leverage. A lot of bad things can happen and we're still going to get paid back, right? So, then you would move into what I would call our sweet spot. This is where a lender like Oak Street really comes in, I feel like, and does a great job of understanding the needs that you guys have from an acquisition perspective, succession plan perspective, because we've heard all the different M&A classes of what these things trade for, right? Trading 7, 8, 9 times EBITDA or even more when you get into the aggregator. So, borrowing three, three and a half times, I mean, that's a significant chunk of that. We look at deal structures and say we're going to be lending 30, 40, 50 percent of a deal, you'd fall right into that category with us lending you all the money and you're not putting anything down. So, that's our sweet spot. That's where I think traditional banks are completely out of it. You might get some guys that'll go two, two and a half times, but when you get up over three, traditional banking that's not focused to wealth advisors, they don't want anything to do with it. For Oak Street and the other niche lenders that are in this space, we do a really good job of evaluating you guys's books of business, right? We're gonna, how many households do you have? What's the average size of those households? How long have you had a relationship with them? How much are you billing them? We're gonna take all that information and we're gonna put it into an actuarial model that tells us how long is this gonna pay us back for, right? So, that's one of the main reasons that this is our sweet spot instead of the one all the way at the top. So, now we get into my favorite two for a number of reasons, but three and a half to four, this, we would call it high, high leverage. I don't know how high it is, especially if you start getting creative with amortization schedules and different things like that, but it is high leverage. I think that a lot of the acquisitions, if you're talking about doing a full buyout, we're gonna land at that three and a half, four times of the actual acquisition, right? Because that's gonna be, you heard in the FP transitions thing this morning, typical sellers are getting 50% of their cash up front, right? I know a lot of people say, well I want 75, I want 80, I want 100% of my cash up front. Typical sellers on deals in this day and age are getting 50 to 60% of their proceeds in cash up front. The remainder of the deal is some type of subordinated seller note, some type of rolled equity, some type of earn out that's contingent on success of the firm after they join. So, if you guys are advisors that have your own book of business and your own cash flow, and you go buy somebody at seven, eight times EBITDA, you should honestly fall beneath this because you add your cash flow. We're gonna look at the projections together, right? That's another thing that the niche lenders in this space do, is we're gonna be able to go off your projections. We're gonna say, what synergies are you guys gonna realize? What's this gonna look like post-close, right? You're gonna eliminate some stuff from the sellers. There's gonna be some things that you don't need that they paid for, that you might already be paying for in your own business, right? So, I would still call that a sweet spot for us, even though it's a little high. So, then you get up above four times EBITDA. Now, this is, there's some lenders out there doing this in the private credit space. So, Oak Street is a wholly owned subsidiary of a bank, okay? We are owned by First Financial Bank out of Cincinnati, Ohio. They're about 17 billion in assets. So, we are a full-on regulated bank, right? Up over four, you get into some really, just so that cash flow works, you get into some interesting amortization schedules. You look at more of like a venture debt, stuff where they take equity. There is options like this available, but it's typically associated with private equity, which I know folks don't like giving up ownership in their firms what you guys built, right? So, when you think about greater than four times EBITDA, finding your way into a traditional banking relationship like that with Oak Street, it's gonna be pretty difficult and be pretty high leverage. So, that's kind of the the matrix of the space that we play in. All right. So, as I said, senior debt loans are for ten years typically. That's a ten-year term and a ten-year amortization schedule. We can do like some five-year term if you wanted like a five-year fix and we can tie it to the five-year Treasury or we can do some things like that, but most of the stuff that we do, you've got a full maturity date ten years out and you've got an amortization schedule that matches it, right? So, one of the things that I wanted to do today is, I know a hot topic right now is interest rates. Everybody's seen what they've done in the past 18 months, right? Anybody in a variable rate interest, a variable interest rate loan right now, right? So, we have a lot of them. So, one of the things I wanted to talk about today is just what does it mean if you have 7% debt or you have 8% debt or 10% debt? How much is it really that different? Like, I know that optically it's very different. You see 9% on a term sheet. You're like, man, that's that seems really high versus the 5% I had, you know, before. But I ran some numbers, right? So, if you are borrowing a million dollars at 7%, you are paying $11,610 a month. That's at 7% a million bucks. Anybody have an idea how much that increases if you go up a hundred basis points to 8%? Is it up there? I think it is up there, right? 500 bucks a month. So, $6,000 a year. So, for every million that you're borrowing, right? Every hundred basis points that that rate increases, it's about $6,000 a year in additional service. So, a lot of the discussion today and some of the other sessions was, what are these interest rates going to do to multiples and what your business is worth and how much you can sell it for and how much you can acquire for? What we've seen is it hasn't done much, right? Multiples are still at an all-time high. There might have been a little bit of a slowdown and deals getting done, but they're still getting done and it's coming back around and multiples are still as high as I've seen them, right? So, what that means is you typically have deal structures that change a little bit and we'll get into that a little bit later. But, you know, taking debt and then looking at the other side of being maybe a soft note where you're just paying out of cash flow that's left over and not tied to some type of, you know, amortization schedule or something like that with the seller. But, so I wanted to touch on two different scenarios that are on opposite ends of the spectrum from the previous slide, right? So, if we've got a half a million dollars of EBITDA, right? And we're doing two times funded debt to EBITDA. So, that's what? 3.45 times. You're gonna triple cover debt service if you're borrowing two times. Like I said, it's pretty easy leverage, right? For folks like us, that's gonna grade out at like 300 to 350 basis points above the Treasury market, okay? So, you look at the five-year Treasury. I think it's right at five today. Is that right? So, you're looking like eight, eight and a half percent debt, low leverage, two-time funded debt to EBITDA. Go all the way to the other side. We're not even two times coverage, right? If you look at the payments, yeah, if EBITDA is 250,000 and you're borrowing a million bucks. So, you're right at that four times. You're at our ceiling. You know, you're not, you're, it's gonna be a little bit tighter. So, this is gonna be like a Treasury plus five. Treasury plus 550. So, look at, you know, 200, 250, 300 basis points is kind of our rate spread difference in the leverage model. And then everything in between, right? If you're three, it's right in the middle of there. So, those are kind of two scenarios. What debt looks like borrowing a million bucks, you know, at lower leverage, higher leverage with us. All right. So, I put together a couple of different acquisition structures. And I believe these are like, some might say there's a low multiple. You know, this is, should be a right down the middle of the plate deal, right? 100 million of AUM, 900,000 of gross revenue, and the firm's got a 50% margin, right? So, maybe there's $450,000 of EBITDA or cash flow. Or, if this is just like an IAR book, we would call it EBOC, the Earnings Before Owners Comp, right? So, let's say that's what you're buying. So, in these scenarios, if you look at a 50% cash upfront and a 50% subordinated seller note, or seller earn out, and you look at a purchase price, it's two and a half times that gross revenue and five times EBITDA, which is a little bit on the lower side for what firms like this trade. I'd argue that you can maybe get it up, that multiple of EBITDA, you can maybe get that up six, seven, eight times. But, you know, we also got to be careful on how high that gross revenue multiple is getting as well, right? So, 2.25 purchase price, ran some calculations at 8%. So, our note is going to cost $163,000 a year at 8% for 10 years, right? The seller note, I did a five-year 5%. So, we look at all these different types of examples. You can do whatever you want with a seller note, right? So, you can make that seller note 10 years, and it's all, all these deals start with the seller's plans post-close. So, that's what you're figuring out in this acquisition scenario, is what does the seller really want to do? Do they want to sell and stay? Do they want to stay on, collect a little bit of a salary, and just manage relationships with their clients, and not have to deal with operational stuff anymore? So, five-year 5%, it's kind of like right in the middle. I think you get seven, eight years, that's pretty long for a seller note. You get two to three years, it's pretty short. So, right in the middle. It's gonna cost you about a quarter million bucks a year. So, how are we gonna evaluate that? So, we're gonna look at our senior debt service coverage ratio. So, what's, how well is it gonna just pay us back? Forget about the seller note. As a bank, how well are we getting paid back? We're getting paid back almost three times over on our, on the cash flow from the business, right? So, fantastic. Number one. Number two, the only thing I really want as a bank, is I want to make sure that this global debt service coverage ratio is at least over one, okay? If that doesn't cash flow, if it's on like a three-year, and the debt service for that's 350 grand a year, and this is at like 0.7, we're setting you up to fail, right? So, that's where it comes in, where we're gonna evaluate your cash flow. This is just the cash flow from the acquisition itself, but just for a general M&A good practice, I love when deals stand on their own two feet, right? I like when a deal completely pays for itself, and positive cash flows out of the gate. That's what you got here. Is that reality in the market? Maybe not. You might, like I said, you might be paying three times gross. You might be paying seven times EBITDA. So, that might mean this cash flow is gonna go down to 0.7 globally, but that's where I'm gonna take the cash flow from your firm and merge it together to find out does it work after you pay yourself do you have enough cash flow left over to combine with what you're gonna get from this firm to make it work that's how we're gonna evaluate leverage does that make sense yes sir so a question was interest rates generally fixed or floating yes we do both right and honestly the last year is really a toss-up for people's appetite for fixed versus variable if it was five years ago you know I tell you everybody wanted to fix but all we did was variable and you know now that rates have crept up you know now you get people that are kind of getting back interested into that variable right but 18 months ago everybody wanted to fix at six percent I think I see one in the crowd that has one of those with us but it's for us it's like we want to offer you a number of options and you guys really decide hey where do I think the Treasury markets gonna go and hedge my risk based on that I will tell you most of the people right now based on the yield curve are doing a five-year fix on a ten-year term because the five-year I mean it's at five today it's gone up substantially in the last week right but two weeks ago it was at four and a half so a premier deal with us at say three and a half over that's that eight percent debt right so when you have it when you can lock in for five years at that because you don't want to lock in for ten we'll do that we'll lock you in for ten the ten years at five today but it's like how difficult is that for you to say hey I want to lock in at the highest it's been in 16 years right and then you get guys all the way on the other end that say I just want to stay variable and float with the market I think the bottom is gonna fall out of this thing and the one month is gonna be at two and I'm gonna float three over that and be at five we do we do it's a big part of our model right I mean you've got to factor in a number of things that we stress test right so the question was I'm just saying this for the microphone because it's being taped and I know everyone can hear but the question was how do we stress test a variable rate environment and how it affects our ability to get repaid because if the market shoots up it's gonna get a lot more expensive right so that's one of five or six different things we're stress testing I mean we're looking at a 20% fallout in the market as well standard what happens if the market takes a 20% hit tomorrow and that goes directly to the bottom line how well are we going to get paid back and that's why that debt service coverage ratio and those leverage metrics we went over are so important you know a lot of folks at surface level that have not borrowed this type of capital before they compare it to like a home loan or a car loan say you know I can go get 95% loan to value right you go finance a hundred percent of this thing and from a cash flow perspective it's like it might actually work right but we can't evaluate it that way because there's so it's a moving target these businesses are a moving target you know something happens with a house somebody lose their job they can't pay it back bank sells the house recoups their asset moves on right doesn't work like that in these businesses being intangible so stress tests on interest rate volatility stress tests on market volatility stress tests on client attrition okay so one of the metrics that we're going to look at is how many households are in your portfolio what's your average tenure of relationship you know and some folks say well you know I've known for we hopped these different places not even if you've been to a number of different places I want to know how long has that person been your client and when you see an average tenure of client north of 10 years sticky relationship right so I get to score that on my model to not have a ton of risk for clients leaving during a time of market volatility another one how many households do you have with under 250,000 invested with you those are other assets that run when market times get crazy right so if your average household with you is 1.7 million there's a lot less risk that those guys are gonna fly away in the event the market dips 20% so great question number that stuff evaluated from a stress test perspective all right so same same deal but 75% up front and 25% seller note candidly our bank does not love these okay I don't even know if I'm allowed to have it up here but no it's uh we do them right sometimes it makes sense is it where we want to start no do I like well-aligned transactions that are half up front and happiness in a seller no maybe some equity from the buyer yes does this make sense if you've got somebody that's maybe not going to be involved in the business remember I said on the last slide this kind of starts with what the sellers plans are post close can you maybe negotiate a better valuation with more money up front probably right so valuation and deal structure go completely hand-in-hand right so 75% up front you're taking more risk than than the seller is right so you can potentially pay a little bit less for it you know numbers on this we're gonna be on that 10-year am schedule right so 1.7 in debt for us here versus the what 1.1 I think it was before so a little higher I think we're about a quarter million in debt service and then I did a little bit tighter of a seller note on this because sellers get more money up front the surprise situation where they're trying to retire right so maybe call it a three-year note which has some aggressive debt service so there's positives to this too that's what I want you guys to take away here right you can pull on certain levers there's positives here too because now you're only paying them 187 five right the last deal you're paying them what quarter million bucks so you're getting to throw more of the debt that they would be holding in this next structure with 75% up front you're taking that from a five-year amortization schedule on that last one and putting it on your 10-year right so your cash flow is going to get better so this isn't all bad and this makes sense sometimes too especially if you have a very well-established firm and my loan isn't totally contingent on the success of this thing right so very similar cash flow scenario except for how we evaluate and that's what this is called right how do we evaluate leverage right so 2.74 times senior debt service coverage for us on this last one with 50% up front we're gonna lose a whole turn on that just about 1.83 so is this deal as well aligned as the last deal from a collateralization and bank perspective no it's not does it make sense and can you afford to do it and are there scenarios where we do this loan 100% make sense all right so let's segue to internal succession planning and what that lending structure looks like how many folks in here are partial owners in their firm or minority owners in their firm anybody couple all right how many folks are interested in buying more equity in their firm couple all right perfect so we developed a product that actually started in the CPA space we started working with some of the larger CPA firms that have partners selling and buying very small portions of equity every single year it's a very formulaic thing that's set out that says every year this partner sells like 0.6 percent of one share for this is the formula on the revenue and you can buy in by this date right so there's a lending need for that because before all they did was just hold it no and you paid them directly out of distributions a lot of the sellers of these shares want liquidity events so like why would I sell I can just keep making my distributions and keeping it I'm just paying my own debt down it doesn't make sense so we felt the need to create a product that said how can we get the seller the liquidity event get the buyer of the shares the loan evaluate the cash flow where they can pay us back keep the firm happy keep the seller the shares happy keep us happy what does that product look like so I don't know how well we spelled it out on the slides maybe on a future slide but I'll just actually it might be on the next slide so we we only do these for purchases under 25% and the structure is I'm gonna lend the money to you the borrower you're gonna be the borrower of the debt okay so this debt is not gonna sit on your company's balance sheet that is huge right when you're going to your selling shareholder your founder your CEO and you're saying I'm gonna borrow this debt you guys are gonna provide a corporate guarantee so something goes wrong if we have a separation of employment you guys are basically acknowledging there was debt used to buy these shares right but I'm the borrower of the debt this is not on the company's balance sheet that's huge right because a lot of times these guys feel like they have to either co-sign debt borrow it themselves hold a seller note this is different so we're gonna evaluate this two ways number one what is your global comp look like you make a hundred thousand a year then you're gonna be a 5% owner and you're gonna get another 50 grand so you make a hundred and fifty thousand I'm gonna look at your personal lifestyle how much you got to spend per month on the personal side then I'm gonna look at how much you owe us in debt service and I'm gonna want you to be under a 50% debt to income ratio that makes sense so you got a hundred and fifty grand of income with hundred thousand W to fifty thousand of distributions so that's twelve and a half thousand a month right I want all of your debt including what you're paying us to be under half that on a monthly basis that's one way we look at it the second way is I want the distributions by themselves to be able to cover the debt service so if you attended any of the other M&A sessions most notably the one with FP and Marcus he talked about a cash flow based valuation that you get when you look at buying shares from minority perspective the ideal situation is that you're buying those shares at some level of a discount if you're just handing the seller of the shares a hundred percent of the proceeds one of the things that Marcus touched on was there's very interesting structures to those debt instruments where the seller might say just pay me half of your distributions or pay me 75 percent of your distributions until I'm paid off then they can charge you whatever valuation they want because you're not there's no money changing hands right you're now a partner but are you right because there's no money changing hands and they kind of make the terms of the note and they hold all the cards if you're writing them a check for two hundred thousand dollars for X amount of percentage you've got some say in this right and you're holding the risk of this and you're using your compensation to pay for this so what does that give you leverage to negotiate the right deal which is typically from what I see about a 25% discount of market value so you say a firm's worth eight and a half nine times EBITDA haircut that down to six and a half seven times a ten year note will typically 100% cash flow at seven times and under right maybe with interest rates six and change but so one of the ways that we do this is we take so like I said partner new partner is the borrower of the debt company that partner works for is a corporate guarantor and then you have the distributions that flow through an account that's held at our bank so we will modify our payment schedule to meet how you guys take distributions you get distributions monthly you got a monthly payment with us you get them quarterly so on and so forth so this should be a function that you don't even notice distribution goes directly to control account Oak Street takes its payment remainder goes back to whatever checking account you want it sent to and something that you don't even pay attention to let's see that's right that's right so you have to evaluate that as well because you are taxed on that those new profits right that's an additional tax liability so 100% yes sir number of ways so he asked what happens if the borrower defaults how does that work with the company in the borrower and we've seen that before right so it's usually not a function of cash flow or inability to pay right so you usually have one of the things that we do in that account is we give you reserves we'll lend you reserves it's typically 5% of the loans balance and guys will keep you know so if you're borrowing a couple hundred thousand you get 10 15 20 thousand sitting in that account so if you're distributing less there's some buffer there that's like hey we can work something out until you can make it up right in an actual default the only ones that I've seen doing this for seven years now are ones where there's a disagreement between purchaser of the shares and firm around distributions or around employment some type of separation of employment you know in that scenario borrower is liable for the debt but firm is guaranteeing it and 90% of time in that purchase agreement that person cannot take 4% or those minority shares and go just sell it on the open market there's a buyback provision right so 90% of the time company is buying back those shares paying off our loan redistribute them back into the company typically what happens I don't know that I've seen a scenario where there's been an issue around servicing the debt and there's just been like a default like it's usually if it's somebody that's super young and inexperienced that doesn't have the reserves we're usually sitting down with them and the firm saying can you take out part of this and put it off to the side you know can you pay this down to make that service lighter and typically the firm will step in because a lot of the times when you're doing these these small one two three percent buy-ins these are incentives for these guys right they're trying to retain talent so it's usually pretty amicable it's usually not a scenario where you know it's like well he's got to come up and pay with it I guess it's just something that we don't see a lot of so put an example here candidly I've not looked at this example in a while, unlike the other one. So looks like I stuck with the same firm, right? 900 in revenue, 450,000 of cash flow or EBITDA, right? So owner sells, we use the same valuation, 2.25, right? So no discount. Owner sells 10% to new partner for 225,000. So ran some calculations, 225,000 at 8% for 10 years, is 32,748 a year in debt service. Their distribution, 10% of that 450,000 covers it, right? So you got a 1.4 times debt service coverage ratio, but that difference and maybe a little more is gonna be paid taxes, right? So, and this example was this five times EBITDA, right? So I think when you get up at the eight, nine, 10 times EBITDA, you have a delta where either borrower's gotta put some cash in, maybe seller's gonna hold a note for part of it that doesn't have debt service. Number of different things that you can do there to make it work, but a lot of times what we see is the firm discounting the shares so that a loan like this works as an incentive to provide to the partner that's buying in. That make sense? Great. All right. I guess that was my last slide. So, talked about some examples, talked about some multiples of EBITDA, kinda how we evaluate debt. We lend about 150 million, 200 million a year in this space. We do deals that are a couple hundred thousand. We do 30, 40, 50 million dollar deals as well for large M&A, and we do a lot of peer-to-peer stuff, as we would call it. A lot of stuff of guys buying out folks that they've known for years, that is a couple million dollar transaction, that's probably our bread and butter deal. Being so focused in wealth management for the past seven years that we've been doing it has, we've really gotten to know this space and how the revenue works. So one of the best parts about working with us is us kinda understanding your firm and its cash flow when you come in. I feel like a lot of traditional banks that don't focus in this space, one of the biggest things that they complain about when they come to folks like us, or the other niche lenders that are here, is these guys didn't understand my business, right? And I had to explain myself 10 times on what I do. We take a very consultative lending approach. We can speak to a number of different transactions that we've seen and been a part of, things that have gone good, things that have gone bad, and provide advice on that. So we like to think of ourselves as more than just a lender, but a strategic partner for you guys. So, I'm wondering, in this period, I think firms that are growing really fast, people who are in the growing, they're in the market. Right. In fact, we have firms that are 20% of the market. Okay. They're not gonna be able to get shipped out. They're getting a discount, in fact, if they buy a negative number, it's gonna be really bad, right? So then, doesn't it make debt financing a little bit more difficult, because you can't do that? So, great question, right? So, the question was, how does the growth factor play into valuations, making them such a high multiple that it makes debt difficult, right? So, it depends. On an internal succession plan, like I said, a lot of those very small minority shares are really more to incent the folks as a part of their, the employees as a part of their global comp. So, you'll even see, instead of having to pay them a large W-2 bonus, they would rather pay them distributions, because, to your point, they're worth so much, right? So, it's gonna be a much higher multiple of EBITDA. So, they're not gonna be distributing as much. So, on the partner buy-in side, I wouldn't say it affects it as much. On the general M&A side, it's tough, right? When you get a firm that is selling for 12 or 13 times EBITDA because they're growing 20% a year, sellers are staying on. So, there's just all the reason in the world, and a lot of aggregators out there that will pay those multiples for them to do that. So, how do you deal with that? A couple of different ways. Number one, deal structure. So, we might max out at four times EBITDA, and then the rest of it might be some type of rolled equity, especially if you're factoring in the growth aspect of it, because part of that growth aspect of it is that that's gonna continue, right? So, if that firm's gonna come join, it's more of a merger, they're gonna be a part of a merger, I'm gonna want some rolled equity there, right? So, maybe a third of the deal is cash, that's four times EBITDA. A third of the deal is stock, so we're gonna place a valuation on your firm and a valuation on mine, and we're gonna award you ownership in the greater firm, you have some incentive to keep growing it, and then the last third is some type of seller note. That's one, so rolled equity, if they're sticking around, that's one way. And then number two, it's really evaluating what are the add backs, what are the things that are gonna happen post-close. One of our biggest strengths is the ability to go off of a completely adjusted model, right? Traditional banking's gonna look at it and say, well, last year you made X, we'll lend you this multiple of that, and that's it. We're gonna take adjustments into consideration, right? And there's, for a transaction that's like that, where they're in that type of growth mode, they're probably spending a lot, too, right? So there's a lot of that one-time expense stuff that's gonna be adjusted off that we're gonna have to take into consideration and sell to our credit committee that, hey, this is real, and these are expenses that aren't gonna continue. So that 12-time multiple's really like eight, right? Does that make sense? Yes, sir? I'm just here to remind you that we have a broad U.S. infrastructure, do you fly through my office or do I go to my office? So, we do. The core of what we do is AUM fees, management fees, average of 80, 90 basis points charged, the reoccurring nature of that, yes. But do we bank some alternative investment management folks that have way different fee structures or different folks like that? Yeah, we see stuff like that sometimes. I'd say it's not the majority of what we see. We see commission stuff with trails, right? And a lot of times in an acquisition scenario, those guys are wanting to convert those accounts to managed fee accounts. And so how do you place a value on that? Typically, it's some type of discounted value that's still accounted for. We look at wrap fees, we look at guys that have these financial planning fees where they have kind of a minimum of what they charge. I know I have one client that they bill on net worth. That's it. They just take a look at your net worth and it's like, we're a holistic financial planner. We don't do managed fees. If you're all in cash or whatever, we're gonna take your net worth and we're gonna bill you on a portion of that and you fall into different tiers. So, yeah, we do see it. It can get complex, right? Because the less we understand it, the harder it is for us to convince our group to say, hey, let's lend a lot of money here, right? So 75, 80% of what we see is just traditional managed accounts. Yes, sir. So, confirming, this is all bankable funding for us to get? That's correct. So, all conventional, should've said that up front, sorry. This is all conventional debt. So, Oak Street funding has been around 20 years. We were owned in private equity. We've never sold any of our loans off. We've always held them on our balance sheet. We were owned in private equity for the first 13 years of existence, I believe, and then in 2013, 14, 15-ish, 2015, we were sold to First Financial Bank. We have about a billion dollars in a loan portfolio, just over a billion, and it's all held at Oak Street, at First Financial Oak Street. Do you all take into consideration that collateral earnings are going to be more of a skewed, or is all of these things related to collateral? So, the question is about collateral, how we view collateral. So, yes, take personal guarantees. We have certain situations where we don't take personal guarantees. We have situations where we take limited to ownership or limited to a certain dollar amount, have a number of increasingly creative, I don't know if I'm allowed to use the word creative, but a number of creative structures around personal guarantees where we've looked at springing guarantees, where if you're under three times EBITDA, there's no personal guarantee. If you're over, you now have a personal guarantee, and it's evaluated on a trailing 12-month, and it's a covenant. So, we do some very outside-of-the-box stuff to get folks comfortable, but our coined phrase is no house, no spouse, right? So, no spousal, personal guarantees, which is typical with SBA sometimes. No house as collateral. We don't take any other type of collateral. There are times that I think it makes sense. It's just, it's not our model. You know, our deal's the business. We put a UCC on the business. We are underwriting the business's ability to pay us back. That's our primary focus. The personal guarantee is really more a tool of alignment to say, hey, if something goes completely south, are you sitting at the table working it out with us, or that's really our idea. Yeah. Personal guarantees are coming in. How big is it gonna be? Like, do I have multiple levels with everyone? Right, right, right, right. Yeah, again, personal guarantees are totally up for discussion. Definitely have the ability to exclude certain things, you know, bifurcate certain parts of your personal life, and we've done a number of those things. I would still say 80% of the deals, 85, 90% of the deals that we do have some level of a personal guarantee. But we have stuff sometimes where I'll have a guy that has like a $5 million loan that we're like, sign a $250,000 guarantee. Something that makes it, is it material to the deal? No, right? Does it make sure that you wanna come back and talk to us in the event something's going wrong? Probably, right? So yes, super hot topic, and I will tell you, you know, four or five years ago, everything was personally guaranteed, unlimited, all the time, it's just kind of how it went. As this space has evolved, as we have evolved, we've started looking at a lot bigger deals, deals that have certain levels of private equity associated with them, where, you know, maybe the biggest shareholder that's not the private equity guy is 12%. Like, that guy doesn't wanna put up a personal guarantee, right? Like, I got a private equity that owns 40% of me, and you know, I'm, so I think it's just trying to create alignment, really understanding the business and how much it's gonna play a part of that business, understanding the cap table, understanding the operating agreement, who can do what, that's where we, you know, I think that's one of our strengths, that's where we'll jump in and say, hey, this is what makes sense from a personal guarantee perspective, versus, you know, four or five years ago, just, hey, you're getting a loan, 100% personal guarantee, you're liable, right? What else? Anything else? Did you spread out within, like, three to five, or have you, like, lowered it some, maybe four or four to nine, and then break it to five? Great question. So, questions about our spread, and how that's evolved and changed over the years. So, we switched from a prime-based index to treasury 18 months ago, somewhere in there, and that was around folks that wanted flexibility to fix their rate, right? So, we wanted to hedge that as a bank, by saying, hey, you can fix, or you can have variable, but you're gonna take the risk on the curve associated with where it's at in the treasury market, right? So, just being on prime and trying to do fixed rates just was difficult for us, difficult being owned by a publicly traded bank and doing that, it just kinda wasn't in our wheelhouse. So, before we switched, and I think prime was at four or five when we switched, we were, like, on average prime two and a half guys. I think, what's prime right now, nine? I don't really track it anymore, because we don't use it, but I think it's like nine, right? So, we've lost some spread there, and we'll be the first ones to tell you that. I think, with this interest rate increase, we've all been forced to kinda absorb some of that shock to continue getting market share and keep doing the right deals that are accretive to the bank, right? Lending 11.5% debt's probably not our average right now, right, so I would say our average is probably that treasury 425, treasury, so that's tens. So, we've probably lost 150 basis points in the last two years in what our average spread would look like. Yep, what else? Yes, ma'am. Do you have any thoughts on valuations? I'm interested in where you're seeing these multiples move it up. Why don't we know what they're now, and can we keep doing it? Great question, so the question is my, our insights on valuation multiples, how they're changing and evolving as the deals change and evolve. I said this earlier today, talking to a number of people, I think the deal multiples are staying strong. I think the deal structures are getting more creative and helping keep the multiples there. So, it's really easy to go pay eight, nine times EBITDA when debt was 5% and pay 50, 60% up front and the rest in a five or six year seller note, like that all makes sense, but it's a lot harder to do that at 9%, right? So, one of the things that I've seen a huge increase in is seller notes having some aspect of not a fixed maturity or amortization schedule. So, a soft note is what you'd call it, right? So, take one of those examples that I've done, quarter million dollars of debt service that you got on the deal, there's like 450,000 of cash flow to play with, you might have an agreement with the seller that you pay 75% of that cash flow to pay them down every year, okay? So, what that means for them, especially if it's a longer note, if they're gonna stay in the business longer, is hey, the more you grow this thing up and get better, I'm gonna get paid off quicker, right? I mean, if cash flow goes up and we've had to refinance those deals of guys that have been in that, that they're like, we grew so fast, we don't wanna amortize this down that fast, we wanna refinance it and put it on senior debt. And we're definitely okay to do that. So, I think the soft notes, having agreements like that have been helpful in keeping multiples. That's one of the things that's keeping multiples where they're at. The second thing is just, and I know it's been talked about heavily at this conference the big aggregators that are out there, right? Everybody's willing, those guys that tell you they're gonna write big checks and everything else, that's a lot of competition on the peer-to-peer acquisitions. So, when you have that, it's, I think they said it in the FP1 today too, a lot of guys don't wanna sell to them, but they can't leave that much money on the table. So, where's the bridge? Where's the bridge, right? So, I think deal multiples are staying strong, which is good for all of us. Any other questions? All right, thank you guys so much. Sorry for keeping you from the cocktails at six. Thank you.

Adam Fairig

Oak Street Funding

cash flow lending

finance industry

leverage ratios

acquisition financing structures

interest rates

internal succession planning