Live Oak Bank
providing financing solutions to Investment Advisors
Investment Advisory Lending
November, 2013
© 2013 Live Oak Banking Company. All rights reserved. Member FDIC
What is Live Oak Bank?
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Live Oak Bank was founded in 2007 with one goal: provide business loans to independent businesspeople in
niche industries
FDIC insured national footprint bank
Privately held Sub Chapter S Corporation – privately funded and employee owned
~120 employees based in Wilmington, NC
Focus on 5 industry verticals: Veterinarians, Pharmacy, Funeral homes, Dentists and Investment Advisory
firms
Top 3 originator of SBA loans in the country. Default rate remains one of the lowest in the nation (<1%).
Preferred and designated by SBA to decision all loans, no outside interaction.
Approximately 1500 loans originated comprising $1.4 billion since inception (2008)
2013 FY Goal of $500M
Participating today… Jason Carroll
Jason Carroll is the Managing Director of the RIA lending vertical at Live Oak. As a former manager of a multi-million
dollar RIA loan portfolio at a major custodian, he is an expert lending to this industry. Mr. Carroll has held several
strategic roles within large banking and financial institutions designing, developing and executing lending programs. He is
series 7, 63 and life and health licensed. (Jason.Carroll@LiveOakBank.com 303-325-4135)
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Investment Advisory Lending Philosophy and Purposes
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Cash Flow lending
 Live Oak methodology - Cash and collateral shortfalls are ok, decisions based on the business financials
 Business should cash flow to support lifestyle. Principals should have proven IA industry experience and
be in good credit and industry standing
Recruiting and Expansion
 Working capital to build out infrastructure before you recruit (i.e. IT, trading platforms, office space, etc)
 Recruiting costs – onboarding the wirehouse advisor
 Forgivable – not a personal loan, we fund the business (wirehouse IA joins as an employee) and we
understand the expensive nature of recruiting in this industry
Merger
 A merger does not typically have a large financial transaction. In our industry a merger typically only
occurs when it makes operational sense or is a good culture fit
 Working capital – approach for financing post merger as you are executing your plan and growing,
recruiting and/or expanding
Other financing purposes
 Corporate real estate
 Re-finance debt
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Acquisition and Succession Trends and Scenarios
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Internal Succession
 100% financing for senior partner buyout – 60% owned by seller and 40% owned by buyer
 75% financing for internal partner buyout – 100% owned by seller. 75% loan and 25% seller note.
 Partial transaction financing for a $14 million dollar transaction. Live Oak $2.4 million, B/D $2
million forgivable. Seller note for balance.
 Stock Redemption - $5 million buyout of 45% owner done as a stock redemption, firm redeemed
back the shares and retired them.
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External (Acquisition)
 Exiting and selling most of Advisors book of business – Seller kept a few clients, we defined what
was being purchased and that was valued and financed.
 Trend – buying a “bunch” of small books that are underperforming books. Didn’t have exit
strategy. Strategy to re-invest client portfolios in better producing products
 100% strategic acquisition – solid performing book that will add positively to bottom line, good
culture and demographic fit. Low client attrition factor. Time has been spent to ensure smooth
transition.
 Acquiring firms in other geographies – there is a financial challenge with these as typically will
need to keep the infrastructure in place at the non-home office. A key employee will remain, the
seller is leaving.
 Most common – same geographic region (“cross town). Nice culture fit with end clients and
consistent demographic, seller was looking to exit and buyer had a good situation present itself.
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Live Oak Loan Features
Below is a snapshot of current loan specifications. Specific features would be
applicable to the actual product chosen for a client
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Transaction Financing: Up to 100% financing
Term: 25 years for real estate and 10 years for business loan purposes (no prepayment
penalty)
Loan Amounts: $5,000,000 maximum in aggregate. Typical minimum loan amounts are
$300,000.
Interest Rates: Our targeted loan rates are based on the Prime rate + 2.00%.
Fast Loan Closings: Most loans can be decisioned in as little as 10 days (assuming complete
files), closings and funding in as little as 30 days.
Valuation and Trends
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Valuation
Live Oak role in valuations – Live Oak relies on 3rd party firms that specialize in valuing IA firms
 Drivers that could increase the value of your business
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 End Clients – client tenure, legacy planning for older group of clients, non-profits and institutions (401k,
pension, etc)
 For the organization - Succession plans, fee based versus transactional, recurring revenue trending up
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Multiples that we see – revenue based, EBOC, EBITDA
 A one time sale of annuities won’t drive up value, we are looking recurring revs
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Common things that we see
Seller notes: performance based incentives
 Multiple disbursements tied to transition performance
 Revenue and/or profit share
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Investment Advisory Lending
APPENDIX
© 2013 Live Oak Banking Company. All rights reserved. Member FDIC
Transition Planning and Execution
Transitions
Merger
Internal Succession
Acquisition
Adding New Advisors
Valuation Drivers
Performance
Profitability
Management Team
Client Satisfaction
Reputation
Growth Trajectory
Size/overhead
Brand
Business Processes
AUM
Valuation Categories
Growth (market and client)
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Risk
Cash Flow
What does RISK mean?
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Investment Advisory firms are defined as risky in the marketplace.
 This is because of a lack of good data and lack of comparables
 Where is the Kelley Blue Book for IA firms?
Publicly traded company
 Audited Financials
 Public Information
So, IA firms are risky in comparison
Discount Rate
 Risk associated with an IA firm transaction
 Start with EBITDA and edit for future year projections
 Roughly 25-35% for IA firms
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Transition Planning and Execution
Valuation Techniques
Book Value
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Discounted Cash Flow
Comparables
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Hard Assets
Inventory
Doesn’t apply for IA
Like for Like?
$100m AUM firm
5 employees versus 6 employees
Top decile or bottom for firm profile?
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EBIT pays back investment
Future projections
Is this a risky industry?
Trading Values and When to Use Them
Revenue
2.3 X
Planning
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Discounted Cash Flow
Cash Flow
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$100m AUM = 4-6 X
$500m AUM = 5-7 X
$1b AUM = 6-9 X
Public firm = 10 X
Candidate Identified
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How long will it take to pay
back the investment
Seller note or financing
Future projections
discounted to present day
Negotiations
Value
Blended formula
from valuation firm
comprised of these
three indicators