Our blog

Finance | M&A Activity | Latest News | Investment

How to Use Debt to Buy an Advice Business (Without Losing Sleep)

Smart Leverage vs. Overextending: Striking the Right Balance

Acquiring an advice firm using debt can be a powerful strategy—if done correctly, it accelerates growth without sacrificing control. However, if you mismanage the process it can become a time consuming and expensive headache. The key is to understand how lenders will assess your business and to structure an acquisition that benefits both you and your future firm.

Three Fundamentals of Responsible Borrowing

If you’re looking to finance an acquisition, lenders will evaluate your business based on three key factors:

1. Serviceability – Can your firm comfortably meet loan repayments? Lenders typically expect company profit to be at least 25% higher than your next year’s repayments. Often called Debt Service Coverage Ratio (DSCR), it ensures there’s a buffer in case things don’t go as planned.
2. Security – What assets back the loan? Traditional lenders often insist on personal guarantees, sometimes secured against your home. However, niche lenders specialising in advice businesses, such as Vertus, may take security over the business itself instead.
3. Surety – Do you have a solid plan to maintain and grow the business? Lenders look for strong leadership, client retention, and a clear roadmap for future growth.

What Makes an IFA Business ‘Bankable’?

Lenders favour stable, predictable businesses. Whilst financial advisers benefit from strong recurring revenue models, that alone doesn’t guarantee funding. Here’s what makes a firm attractive to lenders:

1. High-Quality Recurring Revenue

Not all recurring revenue is equal. Firms with high client retention, strong fee structures, and diversified revenue streams present lower risk.

2. Operational Efficiency

Lenders prefer firms with streamlined processes, scalable technology, and disciplined expense management. Well-documented processes and robust financial controls indicate a well-run business.

3. Regulatory Compliance & Risk Management

A clean compliance record is essential. Any history of complaints or regulatory problems can severely impact a lender’s confidence.

4. A Strong Leadership Team

A business reliant on one person is risky. A clear succession plan and an engaged leadership team reassure lenders that the firm can withstand changes.

Structuring the Right Deal: Debt vs. Equity

Should you fund an acquisition with debt or equity? Whilst equity investment can provide capital, it can also mean giving up control. Debt financing allows you to retain ownership while spreading the acquisition cost over time—but only if structured correctly.

Debt Structures to Consider:

• Term Loans: Fixed repayments over four to eight years.
• Revolving Credit Facilities: Flexible but often more expensive.
• Vendor Financing: Sellers accepting deferred payments can reduce upfront capital requirements.

Avoiding Common Pitfalls

1. Underestimating Integration Costs: Buying the business is just the start—budget for transition costs and plan the steps required.
2. Overleveraging: Taking on too much debt without a clear cash flow plan can put unnecessary strain on the business.
3. Ignoring Cultural Fit: A firm must align with your values, client base, and service proposition for long-term success.

Final Thoughts

Using debt to buy an advice business can be a highly effective strategy—if done right. Understanding what lenders look for, structuring the deal wisely, and ensuring a smooth integration post-acquisition will put you in the best position for success. It’s important you seek help.

At Vertus, we specialise in helping financial advisers secure funding tailored to their needs. As our clients will testify, our focus on lending to advice businesses has given us a wealth of experience over the years and we can support you beyond providing you with the finance you need.

If you’re considering an acquisition, let’s have a conversation about how to make it happen—on your terms.