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May 28, 2020 at 04:15 PM
After a record year for mergers and acquisitions in 2019 and a strong start in 2020, the COVID-19 pandemic has created several challenges for advisory firms looking outside their organizations for growth.
For one, lenders and potential deal partners may look askance at advisors who took loans under the Paycheck Protection Program, two executives say.
Three experts on RIA M&As explored some of those challenges on Wednesday, including risks both old and new, that advisory firms should keep in mind as they pursue growth opportunities and succession planning this year and beyond.
Potential PPP Problems
Advisory firms that participated in the PPP may face potential new risks as a result of that decision.
When the pandemic started, several advisory firms likely spoke with their attorneys and accountants and concluded it was “prudent to take the money,” Rick Dennen, CEO and president of specialty lending firm Oak Street Funding, said during the TD Ameritrade Institutional webcast “M&A and Succession in a Pandemic World.”
His firm had a couple of RIA customers who took part in the program and “I’m not going to take it or hold anything against them,” he said. When his firm underwrites a loan, it looks at the firm’s balance sheet and, a year from now or six months from now, if the loans are forgiven, the balance sheets will be enhanced, he noted.
However, the PPP money is probably “not going to enhance the value of the business” and, perhaps more importantly, some will look at a firm taking a PPP loan as a sign that it’s “in distress and we can’t give them credit,” Dennen said.
Like Dennen, David Barton, vice chairman, M&A leader at RIA Mercer Advisors, would not personally “sit in judgment of anybody that’s taken a PPP loan — that’s a business decision,” he said.
However, when firms certify they need that PPP capital to survive, it is “quite a statement that you’re making and you do have to disclose that on your Form ADV” that advisors must submit to the Securities and Exchange Commission, Barton said.
Firms should also keep in mind that, as a result of taking that PPP money, “you’re essentially telling your own clients that ‘we’re in financial distress and we need to take a loan to keep the doors open,’” Barton said. It is “waters under the bridge at this point, but I’d be very careful about the decision to do that and then also … make sure you’re making the appropriate disclosures if you are doing that,” he advised.
Tough Market for M&A Funding
In any case, some firms may find it tougher to get funding right now, Dennen said.
“If you just look overall, it’s probably tougher from a commercial perspective for anybody walking in,” he said.
