Podcast: A Behind the Scenes Look at the Creation of the RIA Lending Market

Mike Langford:

Hi there. It's Mike Langford. Welcome to the Advisor Financing Forum, a weekly podcast presented by SkyView Partners. This week on the show, we are deep diving on the origins of the RIA lending space with a very special guest. Mike McGinley is the Executive Vice President of Small Business Lending at Live Oak Bank. As Scott Wetzel also on the show today, has often said, and I'm paraphrasing a bit here. "Live Oak Bank is the OG of the RIA lending world." And as you'll hear the teams at SkyView and Live Oak have developed a great relationship.

            Now, before we dive in, make sure you subscribe to the podcast on your favorite podcasting platform and once you've done that, click that little share icon on the podcast episode and share it with a friend or a colleague via text email, or your favorite social platform. If you are finding the show interesting and informative and hopefully a little entertaining, chances are your network will as well. So, help us spread the word. If you have a question or a suggestion for a topic or a guest for this show, let us know by shooting an email to podcast@skyview.com or hit up the SkyView team on LinkedIn, Twitter, Facebook, or Instagram.

            And of course, if you want to explore financing options for your RIA, simply swing by skyview.com and click the Get Started button or call (866) 567-6282 and someone from the team will get right with you. Let's get to it with Mike McGinley and Scott Wetzel. Scott and Mike, welcome to the show. It's really great to have you guys here. Happy, what day are we recording this on? Tuesday morning. Happy Tuesday to you gents.

Scott Wetzel:

And to you. Thanks for having us.

Mike McGinley:

Thank you.

Mike Langford:

So, I was saying at the beginning, as we were getting ready to record this at Scott, off the docs glowingly about you and the Live Oak team, Mike, because-

Scott Wetzel:

What about Live Oak to Mike? Come on right now.

Mike Langford:

So, it is often credited Live Oak with creating this RIA lending space, as we know it today. And so, every time we've had a podcast and we talk a little bit about SkyView and the vision and how it's evolving, Scott makes us a special point of crediting a Live Oak team for really paving the way. So, I thought it'd be fun to start the conversation by diving in to explore how Live Oak came to see RIA as a viable vertical for lending in the first place because it wasn't obvious to other banks that this is a space, this is a business type that was worthy of lending to. So, how did the team at Live Oak first recognize the opportunity for RIA loans?

Mike McGinley:

Yeah, I appreciate the kind words, Scott. And to answer your question, Mike, Live Oak was started in 2007, 2008, and really the idea behind it was to sort of flip the banking model on its head. So, whereas most banks are located in a geographic area, they collect deposits and then lend against those deposits in a geographic region across thousands of industries. The idea was to pick a few industries that we knew really well and lend nationally. It's better from marketing perspective to be in an industry and you also know that industry really well from a credit perspective. So, when we started the bank, the idea was to go after industries that were really underserved from a banking perspective, but have repeatable and sustainable cash flows.

            So, we started off as veterinarian lenders and healthcare and independent pharmacy lenders because they were really underserved. You could do acquisition lending, didn't have a ton of collateral. So, banks tend to shy away from those types of transactions. So, on 2012, someone had brought the idea to live Oak, to work with RIAs because the really predictable cash flows, the cash flow coverage ratio are really strong, but most banks shy away from them because they don't understand how they make money and they don't have hard tangible collateral. The businesses are certainly worth something, but when you look at traditional banking ratios, as it relates to loan to value and collateral coverage banks just going to get on board.

            So, Steve Smith, who really started our group at the time, had the idea and sort of brought that to market and that's how we started.

Mike Langford:

I think it's fascinating to me that financial institutions like banks had a hard time understanding financial institutions like financial advisors. Like you're in a financial business, you understand how money is made from serving assets. And so, whether those are depository assets or they are assets under management, you would think that would be a relatively easy thing for banks to grok.

Mike McGinley:

And most banks actually have a wealth management arm. So, they actually have folks in their office who do that. But when you talk about credit policy and traditional banks, it's tough to turn around a cruise ship and they couldn't get their credit policy on board with intangible assets.

Mike Langford:

Scott, building on this inspiration that you saw in Live Oak, did you see Live Oak first before you decided that you wanted to create SkyView, go after this vertical? Or was it you started getting into it first and then you discovered Live Oak was in the space. How did that come about from your perspective?

Scott Wetzel:

I'm trying to think of the cliche and I'll botch it like I do every cliche, but I think it's emulation is a greatest form of flattery, correct? That clearly was cognizant of Live Oak in the marketplace and having a lot of success and felt like there was still a lot of untapped demand in the marketplace for us both to coexist. And we've certainly found that today that Mike and SkyView and Live Oak and all of us have a very good working relationship, but certainly saw the model that they built and was extremely impressed and thought this was something that was my background in distribution, we could add additional distribution expertise and add a little bit different sales culture to the equation.

Mike Langford:

What is the primary use of proceeds for the RIAs that Live Oak lends to, Mike? So, you borrow money for a reason if you're at a business, you don't just borrow it to have it sit in there. Do they come in with a specific mindset of I need to borrow money for this use case? Or is it all over the map? What are you seeing?

Mike McGinley:

So, I can start, we talked to some folks who have an exact reason why they want the money that could be for an acquisition if they have deals sort of already baked, that could be for certain piece of working capital and maybe they're hiring someone to expand the business and they need some working capital to help them do that. And other times we get a call that, they really want to grow their business and they would like to have working capital or maybe even a line of credit to buffer quarterly cash flows or to fill a need if they have one in the future. So, we kind of see both sides of the spectrum, but I'd say the majority of the folks that we talk to on the front end have a specific reason why they need the money. That's what we've experienced.

Mike Langford:

Well, Scott, we've talked a little bit on other podcasts, but I think it's worth revisiting. You're seeing some trends in the use of proceeds at SkyView though, from advisors coming in. At first, you thought it was all going to be straight up acquisition financing or, but you've actually discovered that there are some new common trends in what advisors are looking for and RIA firms are looking for when they come to borrow through the SkyView network.

Scott Wetzel:

I would still classify the transactions as M&A transactions. However, we have certainly seen an increase in the number of partial sales, as opposed to a complete sale where the advisor is selling 100% of the practice and exiting the industry when an X amount of time that we've found a greater interest. In fact, 68% of our transactions are trailing 12 months or actually partial sales. So, the advisor not selling a 100% of their equity and walking away from the practice, but instead selling 25%, 35%, 49% remaining on what the practice, very active with the practice experiencing and appreciating a liquidity event, oftentimes very young 45 to 65, and then continuing on with the practice in the same capacity.

Mike Langford:

To me, that's one of those interesting things that I love when I see an industry get started and then it evolves relatively rapidly. Like you think you haven't nailed down, like this is what it's going to be all about. And all of a sudden you're getting into it. Mike, have you seen things change over time in the years? And you mentioned the bank started in '07 and then relatively shortly thereafter you started exploring verticals like the RIA space. Have you seen things evolve as well in the time that you've been serving the RIA market?

Mike McGinley:

Yeah, absolutely. As time goes on and firms evolve and certainly get larger, right? So, you have consolidation and you have much larger firms than there were five years ago, the needs change. So, you have firms that are larger. You're going to see less full partner buyouts and more individuals who want to buy a certain portion of stock and firms that want to get equity to the next generation. So, similar to Scott, we've seen a lot of partial equity purchases where you have the next generation coming in, looking to be owners. You're looking at firms that are much larger and want to become multi-generational. And so, we've absolutely seen the needs change. We've also seen a much larger deals occur than in the early days with firms getting larger. And you've seen valuations go up over the past five years in a good marketplace and firms adding AUM. So, you see larger structures as well.

Mike Langford:

I'm glad you teed up some of the things you've seen evolving. How do you see the ecosystem evolving in the decade to come? So, not only just on the shape and the size of the advisory firms that you're serving, as they're getting larger, and you're seeing some mergers that are making bigger scale firms, but on the loan program side, are you guys seeing that maybe financing programs and options for RIAs and independent advisors are going to evolve as well? Or is it going to be still the standard programs that are offered in the market today?

Scott Wetzel:

I'll touch on that one quickly, I think as painful as 2020 has been for all of us, for a myriad of very obvious reasons, the one positive for the RIA community has been the performance of our portfolio and Live Oaks portfolio through the pandemic. That it's my humble opinion that RIAs will have a lot more options than just Live Oak and ourselves going forward, because banks are going to start to recognize the performance of this asset through a pandemic. And it was extremely impressive. One of the best performing sectors in the US economy.

Mike Langford:

That's really interesting. Why do you think that is? I mean, I know there's some consistency of revenue there, but why do you think they... Is that it? Is that the reason why they consistently performed really well?

Scott Wetzel:

On a relative basis, it's interesting when we would go in and try to pitch this to banks, and it was incredibly difficult to get this started. I can't imagine as Steve Smith's trying to get this started at Live Oak as the first ever, proposed this to his chief credit officer and actually get it done. And we had the luxury of going in and saying, "Look at Live Oak's portfolio, look at how successful they've been." But overall they asset just performed exceptionally well and I think it's because of diversification, truly of the revenue source because if you look at it, the revenue that is relied upon to service the debt is coming from almost every US industry in form of equity and every US industry in terms of bonds and oftentimes global indices and credit markets as well.

            So, as you did have exposure to hospitality restaurants, you also had exposure to the NASDAQ, therefore revenues for the average RIA or off discernibly, less than many sectors.

Mike McGinley:

Yeah. And just to add on to that, we talked to a lot of our customers throughout the pandemic and well, AUM is down for a certain period of time when the market's down, that's also when they can add new clients, because you've got people who are investing on their own and when there's disruption in the market, they want someone else to bounce ideas off of, and they want some expertise in their investment decisions. So, they actually seek advisors during times of financial stress versus when the market is up and it's pretty easy to make those investment decisions.

Scott Wetzel:

And we certainly saw the same client recapture rates but the other thing that was interesting is there was no service disruption. If you look at the financial advisor service model history, going back to the 80s, mid 90s, oftentimes I rarely met with their clients. So, it was done all over the phone. And then the model evolved the 90s, 200s becoming more holistic, becoming more personal, client meetings, quarterly annually, or semi-annually became more common. But then through the pandemic, the model was just flipped again. And financial advisors were still able to provide these same advice in the middle of a crisis when their clients needed it most. So, there was absolutely no service disruption, therefore, no revenue disruption from the sector.

Mike Langford:

I don't think advisors realized how convenient Zoom can be for a meeting until they had to use it. Whether it's Zoom or something similar, you can speak to someone face to face. You can put the presentation and share your screen. I think you're going to see a drop in expenses for these practices and for these businesses, because they can do a lot more virtually than flying and meeting someone in person.

Mike McGinley:

It's interesting that you said that I recently interviewed the head of business development for a medium size independent broker dealer. And she was really laying into that exact thing. She was saying, many of their advisors, because they've been to work from home are really starting to look hard at their overhead costs about like, "Do I really need to spend four grand a month on that office lease? I'm working from home. It's going, okay. My clients seem to be responding well to it. Maybe I'll start doing this more frequently." It's also starting to, it would be interesting to get your take on this. One of the other things she mentioned was advisors are starting to realize that location isn't necessarily the most important thing for an M&A partner, or it used to be. That you had to be in the same backyard as the advisors that you may be acquiring their clients.

            But if we're going to a world in which we're going to be talking like this, where we have somebody in Carolina, somebody in Minnesota, somebody in Austin, Texas talking live real-time that we see that flowing into the business as well, and open up a lot more opportunities on the M&A perspective as well.

Scott Wetzel:

Well, I'll add to that. And we also saw it on the banking side with many of our banks, they operate on a national basis similar to Live Oak, but there we do have a number of banks that only operate within their specified geographic footprint that often mirrors their depository or branch footprint. And all of a sudden all the branches were closed. So, the banks that have told us in one case we will only fund in the SEC territory, funded an obligation this summer in Anchorage, Alaska.

Mike Langford:

Wow.

Scott Wetzel:

So, it was really interesting to not only see the migration amongst buyer and seller probably willing to discuss a transaction across the country, but now our banks are recognizing that geographic risk is problematic and that banking will also be done on more national basis.

Mike Langford:

That's amazing. Are you seeing the same thing at Live Oak? Are you starting to see less concern with geographic proximity?

Mike McGinley:

Yeah, absolutely. We see folks, especially when you have two trends going on. You've got the ability to meet virtually and it makes the world a little bit smaller. And then the other trend you see are firms getting larger, and if they want to continue to acquire, they can't acquire the person down the street that's already been done. So, they have to go to a more regional basis or maybe another state. And we certainly saw that pre-pandemic as a trend. And this will only force it even more. We see folks buying cross-country, you have a lot of folks, maybe in the Midwest who want to expand down to Florida and maybe spend some more time down South. So, that was a trend again, that was happening 2017, 2018 through this year. And now that meeting virtually will make things even easier. I think you'll see that more.

Mike Langford:

That's fantastic. I am fascinated to see this because as somebody who has worked from home for years and really enjoys the flexibility of it doesn't matter where my clients are. And when my kids are done with school and my wife and I decide we want to move someplace else, it doesn't matter. You just work where you work. I'm fascinated about it. And I'm really excited to see that flow into this industry.

Mike McGinley:

If you think about it, just kind of add on to that. I think of an advisor in New York or Boston as their client portfolio ages, more and more of their clients move to Florida. So, we have some advisors who had 80, 90% of their clients in their location up North, and years later, it's flopped. And you have 70 to 80% of their clients in a Southern state and they've handled it just fine.

Mike Langford:

That's awesome. That's really interesting. So, one thing I skipped over a little earlier that I want to kind of circle back and touch on, because it's really fascinating to me as I'm seeing the two of you on the screen and hearing this is that, there's this collaborativeness, this collegiality between the two of you and the two firms. And again, it's one thing for Scott to compliment Live Oak and say, "Hey, we really appreciate these guys for paving the way." It's another thing for the CEO to be getting on the phone with you or Zoom or in recording a podcast and saying, "Hey, let's hang out together. And let's collaborate." How has this relationship developed? Are you guys collaborating on deals or is it just, "Hey, listen, we're trying to rise in tide, lifts, all boats type of thing."

Mike McGinley:

I think it's a little bit of all the above. I mean, we have a mutual respect for each other and what our firms have done. We have similar views on where the industry is going and there's always opportunities to partner together on transactions. We haven't worked on one transaction and both let money on the same deal yet. That's always something that we could look at in the future and we've discussed that. But in my mind, we want to serve our customers in any way that we can, even when we can't do a transaction, we want to be stewards for the banking industry, but also for our clients. And if we can't do a transaction because it doesn't meet our credit criteria or there's just a piece of that deal that wouldn't work for us, but could work for another lender.

            We want to put them with someone who we trust and having that relationship is really important because it really hurts to say no to someone and decline a transaction because we care for our customers. It makes it a lot easier to say, "Hey, you know what? We've got a partner who we'd like to introduce you to, who might be able to get this transaction done." And the more we know about SkyView and other lending partners, the more we can speak to them intelligently about who they are and how they can help them.

Scott Wetzel:

And Mike, we're just happy to be in the same room with Live Oak. We have so much respect for what they've done. It's been tremendously difficult to get banks come on board and build our network and restating again, to be the first bank, come out and really do this for the industry. I don't think Live Oak gets enough credit. And to my explain one thing when I used to go shopping and go to Nordstrom, one thing I loved about Nordstrom, I go in and say, "I'm looking for this pair of shoes." And they say, "We don't have it, but you need to walk down five stores further. And this is where you can find it." So, I would always start everything with Nordstrom because I knew they'd tell me where to go and make it really efficient at the same sense. If someone comes to us and we can't fund the transaction, I certainly pointing them in Mike's direction to see if it's something that fits for Live Oak.

Mike Langford:

I love business history. There's something really fascinating about hearing the origin story of a company or a product, or in the case of this episode, a whole new industry vertical as Mike and Scott have outlined. It was almost impossible for a financial advisor or a small RIA firm to secure a bank loan only a few short years ago. That's crazy, right? It makes no sense. Why wouldn't banks lend to a business that has a super steady cashflow? Cashflow that is recession resistant and not subject to the whims of fickle consumer preferences. The team at SkyView gets it though. They had the vision to see what other lenders had overlooked for decades. If you own an RIA, whether you are a solo advisor or operating with a team of advisors, reach out to SkyView today to explore your financing options, simply go to skyview.com or call (866) 567-6282 or fire off a quick email to info@skyview.com and say, "Hey, I was listening to the podcast and Mike Langford said, I should reach out." It's that easy? Amazing. Let's get back to it with Mike and Scott.

            I really love that approach. I mean, I think too often people build up their little silos. It's like it's all for me, right? I can't risk losing a deal or sending your customer someplace else or anything like that. And if my competitor or somebody in my same space is not doing well, it's good for me. But it is like, "Look, you guys are creating something, a space that's new." And you have a market segment that there's relatively low brand awareness or solution awareness, if you will, for lending that is even available because it just hasn't been. So, many RIAs may not even realize that they could borrow money to facilitate an acquisition or to, as Scott we've talked about before, it takes some money off the table to get, have a liquidity event pre retirement or earlier on in the career. So it's really, really interesting. So, I love it, I love it.

Scott Wetzel:

Well, and really at the end of the day, the biggest challenge we face is that educational hurdle of you think about it. If you're 65, 70 years old as an advisor, you've been planning on retiring in X way, which is commonly when build up practice down to very little clients over time and then never experienced the liquidity of that. To David Brown senior's point only 2% of independents are in RIAs actually retire, sell their business and experience a liquidity event. Where it is not about market share between Mike and I. It's about growing the size of that marketplace. If we'd take that two to four to six to 10, the wire house channel is probably close to 100%, appreciate the liquidity event at the time. And we'd like to bring the same thing to the marketplace and in doing so, we don't have to worry about market share at all, bringing this plus the market and that's why we worked together and speak quite frequently about how do we educate more of the advisory community about what we have available?

Mike Langford:

Let's get back to the RAs business and how it might be changing a little bit here. We talked a little bit about how well the business in this class of this vertical has performed during the COVID-19 pandemic. And there's a lot of great stuff to talk about there, but there might be some changes I would assume. Before this, we had this era of free money. There's gentleman, I know here in Austin who runs a large RIA firms says, there's free money happening, the market just went up every year. You could make more money just by sitting still not adding any new clients or any new AUM. It just that things are going to grow. But that era seems to have maybe come to an end or we can at least see it's going to be a pause for a while. I imagine there's some impact on deal structure resulting from that. Are you starting to see the terms of the deals changing a little bit, and not only on your side from a lending perspective, but also in terms of the M&A buyout and so forth?

Mike McGinley:

Yes. So, leading up to the pandemic, you were seeing pretty aggressive loan structures or deal structures where there'd be a pretty large liquidity event for the seller upfront. Whereas early days, 2012, 2013, we were seeing very low upfront payments and then earn outs after that. So, 20% to 30% down an earn out attached to that, paid out over three to five years. And that was sort of the structure as capital started getting introduced, we saw larger down payments, less earn-outs because the risk is shifting from the seller to the buyer. And leading up to the pandemic with aggregators coming in with high cash amounts you were seeing large down payments because if you wanted to be competitive, you had to provide a large down payment. So, on one hand, we really like that because it only increases the need for capital but on the other hand, there's a little bit of added risk there because there's a little bit less seller skin in the game and more of that risk is sort of shifting to the buyer.

            With a little bit of an uncertain market in 2020, we have seen some of that shift a little bit back where buyers have to add a little bit more protection because we don't exactly know where this is going. The market's performed great since we went down in March, but we don't really know what the longterm effects of this are going to be yet. We still have a lot of small businesses that are going to run out of stimulus. If you're a bank and you have exposure to a commercial real estate and shopping centers and things of that nature, you probably have a lot of businesses who haven't been paying rent.

            So, all that to say, there's still a little bit of uncertainty on what's going to happen in the future. And we have seen those structures pull back a little bit, not a lot. You still see large down payments. And because valuations are back to where they were maybe even a little bit higher for some firms, a lot of sellers still expect a large down payment, but as a bank we've said, "Look, we want our buyers to have a little bit more protection than maybe January and February of this year."

Scott Wetzel:

And Mike, from our vantage, we thought our banks would be driving more stringent credit policies, which a few implemented and have all now, I wouldn't say quickly navigated away from, but as they have witnessed the performance of this asset, through the pandemic and have been now more competitive for each individual applicant, we've seen banks, haven't been mandating different deal structures. It's really buyer and seller want more protection because there's more uncertainty. So, we're more commonly seeing the use of escrow proceeds that we think make a lot of sense for 20% to 30% that sell then escrow that can accommodate or offset a purchase price that might be artificially high or artificially low. So, really protects buyers, seller and bank in the event the market goes discernibly higher from here or we test Lowe's again.

Mike Langford:

That's really interesting. Let's talk a little bit about valuation too. Mike, you teed up valuations. You've seen valuations go up for a few years. And some of that has to do with, we have an aging advisor population and some of them were starting to think about leaving. And then there was more competition from the aggregators and so forth to come in and buy those firms so valuation is pushed up, but much of the interest in valuations over the years has been about that MNA process. I'm thinking about planning for succession or are we going to be selling the business or doing a partial sale, whatever. So, I need evaluation, but now we have this new use case for evaluation. It's the lending process. If you're going to secure capital, you need evaluation done. It's not an option, right. It's kind of like if you're going to buy a house, they got to want to have somebody come and do an appraisal of that house.

            If you're going to get a mortgage to support that house, what are the key elements of a firm's valuation that impact an RIA loan? What are you looking at in there? Is it just a number or there's some key elements that you tend to get a little more detailed on?

Mike McGinley:

Yeah. I mean, the major factors in any valuation are going to be cashflow growth and risk. Those are the three factors that you look at when you're either doing a valuation based on multiples or a discounted cashflow analysis. And I think more importantly, over the next few years, you're going to see evaluations affected by how much net new assets that firm is bringing in. So, if the growth figure can't come from AUM growth and it very well may if the market performs well, but in periods where it doesn't, you're really going to be looking at that net asset growth to make sure that that business is growing organically, which by the way, is becoming harder and harder for firms to do. So, we're always looking at that. We're always looking at the risks. So, as advisors age, then typically, so does their client portfolio.

            So, they have a client base that is aging, then that business could decumulate assets more and more over the years. So, they have to combat that those assets leaving with new assets coming in. So, long winded way of saying, "We are looking at valuation, we get a valuation done from a third party every time we do an acquisition." And that, to your point, that trend has definitely gone up over the years based on AUM growth. But I think it will become more important to see net new assets come into that business.

Scott Wetzel:

And Mike, one thing I'd point out is I think advisors make the mistake if they're contemplating selling their practice. That first step is to go out and get evaluation, although Live Oak and all of our banks require a third party valuation to close, it's not necessarily germane to the negotiations that go on between buyer and seller and I wouldn't recommend it as the first step because oftentimes the seller will go out and get that valuation and that, "Okay, forget it I'm not crazy about this. I don't like it if that's the price." Purchase price is determined by buyer and seller and the extent that they want bank financing has to be agreeable to bankers as well. But I think what a lot of sellers don't keep in mind is if they go out and get a valuation that's acts, but we're also have an external acquirer, then we're looking at the enterprise value of new cal post transaction.

            So, when we're running calculations and see the cash flow and loan to value ratio work, oftentimes we're seeing multiples and valuations or purchase prices that far exceed that valuation.

Mike McGinley:

Yeah. Look, we touched on this before, but as sellers require more money up front, a capital source becomes more and more important. And so, we always encourage folks to come to us early one to either be pre-qualified so we can give them a health assessment on their business. So they know what type of business they're going to be able to actually acquire and would qualify for purchasing. So, we'll do that prequalification early, but we can also talk about structure during those initial conversations so that they know if they are talking to a potential seller, they have an idea of what they can qualify for from a bank in perspective and what structure there'll be able to work with. So, we always encourage folks to call us early on, so we can do that prequalification or health assessment and then also talk about structure to your point, Scott.

Scott Wetzel:

And one thing that I think we both struggle with is buyer and seller get together, they go hire a firm, it's expensive, they build the deal structure. Then they show up on our doorstep and we say, "Well, that's great that y'all agreed to this, but we don't have a bank that's going to agree to this. You probably shouldn't include us a little bit earlier on in the process."

Mike Langford:

That's really smart.

Mike McGinley:

And we always encourage the potential buyers if they're starting to work through a transaction to think through the third parties in this deal ecosystem that they need to bring in. If they need to hire an attorney to represent them as a buyer, if they need to bring in a capital source, whether they need an investment bank or someone to pay for those transactions, they need to think through that. And we're always happy to help with that as well.

Scott Wetzel:

And one anecdotal story that early on and from inception, we had an advisor we were working with, seller, came to us and she was interested in selling her practice and thought the valuation came in about 2.5 million and she wanted to get a 2.6. And that seemed to make sense to us and we decided we'd help her with that. And she was in the process of looking at different M&A consultants. And then she asked the very smart question now that we implement all the time. She said, "Well, how much financing does my practice qualify for alone before we add another balance sheet?" And recognizing the average practice we look at has a E-box of about 48% when she departs the practice, it's not that I'm paying that salary, there's a lot of cashflow there available to pay down that loan. Well, we found her practice alone qualified for about 2.4 therefore she listed for 3 million and guess what? She ended up getting 3 million.

Mike Langford:

Wow.

Scott Wetzel:

So, we always advise sellers to contact Live Oak and ourselves first to do a quick cashflow assessment on what they have in their practice and what they qualify for a loan. And then when they're looking at prospective buyers, they need to look at how strong their balance sheet is or credit worthiness is, if they want bank financing, I recognize it's about culture and fit and purchase price but if you want a purchase price that is attractive and you want to facilitate or fund that with bank financing, let's make sure this person's credit worthy first.

Mike Langford:

I really like that advice. And you've given that advice before in different ways, but one of the things you pointed out to me when we first started working together was this is the first time many individual financial advisors or RIA firms have ever sought out external financing. They've never been involved in bank loans before. Many of them have never conducted an M&A transaction before and most advisors and even RIA firms that have several owners in the group and so forth they grew from individual advisors, kind of more like a sales relationship management role and the business kind of evolved with them. And so, some of these things are new to them. Do you be performing as a business owner who's looking to secure outside funding and conduct a business transaction like this.

            And so, it might not be the first thing that comes to mind is, "Hey, put your team in place." I suppose the two of you have advised, but I think it's really strong advice, if you're going to buy another business or you get to sell your business, make sure you find out who needs to be involved in that process and start talking to those folks before you start whipping around offer sheets and stuff.

Scott Wetzel:

Well, and another thing that we had heard from many bankers that really surprised us in addition to the collateral air ball with no tent, they love silos and tractors, and we'd get advisors to buy silos and tractors. We fund these deals all day long. You can find some way to implement that, but one of the things we heard is that that financial advisors that approach them about financing and many bankers describe them in so many words is unorganized, which I thought was odd because you're giving Gary's Pizza alone, they're giving Dave's Carwash alone. Don't tell me they're running a more sophisticated business than an RIA managing a hundred plus million dollars. And at the end of the day, these are very sophisticated business operators, they're running very sophisticated portfolios, but they're not sophisticated borrowers.

            To no fault of their own, they didn't have access to financing until Live Oak came along. So, until Live Oak started educating the marketplace and they have spent a ton of time and resources educating the market that had very little education other than doing their home mortgage. This is still a very unsophisticated borrower group at the end of the day. And that's part of the reason why SkyView exists, that we help educate not only the RIA on this process and how to go about presenting themselves to the bank in the most favorable manner, but then also educating the bank on what makes a good RIA practice versus what doesn't.

Mike Langford:

Very, very interesting. So, we're getting close to wrapping it up here, and I thought an interesting way to close it out, just given the environment we're currently in. Might be that share your thoughts on some things that that advisor or that RA group may want to come to SkyView, Live Oak to start to examine before they explore the full financing thing. And so, in my mind, as I look at the businesses now for RIAs, there is some new risks that have presented themselves. So, as an example, I had Aaron Hassler on the podcast a decade and half ago. And we talked a little bit about client mix, about the client mix that's in for that advisor or that RIA firm should be looked at a little more carefully during these times, because if you have a bunch of restaurant tours, as an example, as clients that revenue stream might be at more risk than an advisor has the same AUM that has different industry mix and so forth, a different niche that they're focused on.

            What are some things that you would advise advisors in RIAs to come talk to you about now to start exploring and improving as they think about lending in the future?

Mike McGinley:

So, I'd be happy to start. There are a few things that we always recommend to advisors as they're getting ready to either be a buyer or a borrower for capital. First is looking at their entity documents. That's probably something that they haven't done it in a while in a lot of cases because they haven't had to go to a bank for capital. So, making sure that their operating agreements are up to date, that they're structured properly, that the ownership structure in the operating agreement reflects what's actually in the tax returns. So, making sure that all that is up to date is really important. And then, if they're reflecting on their business, looking at repeatable and sustainable cashflow. So, what I mean by that is looking at the P&L, making sure that they have a net profit percentage that would be attractive to a bank, and that would allow for the repayment of a loan.

            So, reflecting on their expense structure, looking at benchmarking that different third-parties will put out to make sure that they're sort of in line with what they should be paying folks, what their marketing costs are to make sure that's in line with industry standards. And then, when we talk about sustainability of cash flows, to your point earlier, Mike, and what Aaron was saying is making sure that those cash flows will be there in the future. So, if you look at the revenue stream is it up and down every year? Do you see growth? And then, if you do see growth, is that going to be a reflection of what's going to happen in the future? So, do you have a client mix that is diverse? Do you have an average age of the portfolio that's too high? And if so, do you have a strategy for bringing in new assets organically, maybe with a younger average age help with that sustainability of cashflow?

            And that's all that we talk about in that initial discussion. And when we sort of reflect on that business and collect the financials and have that discussion with the borrower, those are the areas that we focus on, but having those things in line and reflecting on that as a business is really important.

Scott Wetzel:

And, Mike, I'll address the other side of the equation with sellers. And I think it's extremely important for sellers out there to know that there's a lot of flexibility in the manner in which they go about retiring today, that we are completely agnostic to if they want to retire over the next 20 years and sell 10% a year each five years. And sell it to whoever they like, who is credit worthy at whatever pace they like to leave whatever legacy they like. We are completely agnostic to that. It's a completely flexible structure that we are by no means interested in them, entering in any transaction that they feel forced out of the business that they built over the last 30, 40 years. It's giving me hard to pry my dead hands away from this business someday, but it's probably going to unfortunately happen.

            I have to find a hobby, which is not good. And at the end of the day, what we really admire about Live Oak is it's really about empowering the small business owner. And if I did say who a competitor is, and who's an agitator to me, it's the aggregators because they have a narrative of, "Hey, your value practice is only going lower. You need to sell today and you need to sell a 100% to us. No one else has the capital provide you with this liquidity. Your price is all you get worse." Well, Mike and I are here to tell you that there is other options from our borrowers to liquidate advisors at whatever glide path they like.

Mike Langford:

Very, very interesting. I love it. I think that's a great way to take us out because you have options. If you are an RIA firm, if you're an independent individual advisor, you have options to choose your glide path. I really love that term, I've really fallen in love with that term. You're like, "Did you choose how you exit the business?" And it may be immediately and just cut it off or you may just decide I'm going to glide on out of here over the next 10, 15 years. But I want to make sure that my clients are taken care of and the business lives as long as I do and beyond. So, that's a really, really interesting it's great. Well, gentlemen, this has been a fantastic conversation. I love it. Mike, I really appreciate you carving out the time to spend it with Scott and I, we love having guests on this show and as you can see, we have a lot of fun doing it.

Mike McGinley:

I appreciate you having me on, I had a great time and we'll do it again in the future.

Scott Wetzel:

Yeah. Mike, we're honored that you're willing to come on today and talk about this lot of things that you and I talk about quite frequently. So, I appreciate both of your time.

Mike Langford:

Wonderful. All right. Thanks gents. Thank you very much for listening to this episode of the Advisor Financing Forum podcast. It's always an honor to have you with us. So, again, thank you. And of course, huge thanks to Mike McGinley of Live Oak Bank for joining us. It's so incredibly cool to have him on the show and hear him and Scott share their visions for the future of RIA lending. Speaking of the future, next week on the show, we are kicking off a new series of episodes that will feature our RIAs and individual advisors who have completed mergers acquisitions and or a partial sale. Our first guest is Scott Danner, CEO of Freedom Street Partners.

            Scott has acquired several advisory businesses over the years and he and his team have leaned on SkyView Partners, not only for the financing to make those deals possible, but as Scott will tell you, SkyView actually helped in many other ways as well. It's a fantastic episode with Aaron Hassler joining us again from his bunker. So, make sure you subscribe to the podcast so it shows up in your feed next week. You don't want to miss it. As we close out, make sure you reach out to SkyView. If you are looking to explore a loan for your RIA.

            Simply head on over to skyview.com or call (866) 567-6282. As you heard again today, it's always good to get the ball rolling early. Well, that's it for today. Please do stay safe and healthy by making sure you wear your mask and keep your distance when you're out and about. And of course be nice to each other, it helps, I promise. We will see you next time on the Advisor Financing Forum Podcast. See you. Bye.