Funding Options for Partner Equity Loans: What Accounting Firms Need to Know
The ability to acquire and transition equity within the accounting practice is an ongoing challenge. This is often a result of having to navigate the different financial position and career stage of each partner (and future partners). The more partners in the practice, the more difficult this can become. To mitigate this challenge, a firm needs to ensure it has the right funding structure in place that can facilitate this transition of equity efficiently. As there appears to be a lack of awareness around what funding options are available, we provide the following high-level summary of potential bank funding structures available to the firm and partners. For the purpose of this article, a partner equity loan refers to a loan to purchase shares in the accounting firm. We make the assumption that a partner will own these shares via their family trust, which will be the borrowing entity. Option 1 – Partner equity loan to be secured by property Historically a partner has used the available equity in their owner-occupied property as security for their partner equity loan. Whilst this is still an option, it is becoming significantly harder for younger/new partners, who either don’t own a property, or have not been able to create sufficient equity in their home. Option 2 – Partner equity loan to be secured by a guarantee from the accounting firm Under this option an accounting firm will provide a corporate guarantee as additional security for the partner equity loan. It is effectively the value of the firm’s goodwill that is being relied upon. The partner is still responsible for repayment of their loan and security is taken over their family trust. Typical repayment terms for the partner will be over 10-15 years. Option 3 – Partner equity loan to be supported (without a guarantee) by the accounting firm For the larger firms (4-5+ partners), several banks offer an option where the accounting firm can provide support to the partner equity loan, without having to provide a corporate guarantee. This is typically arranged via a Letter of Comfort or Tripartite Deed between the firm, partner and bank. Typical repayment terms for the partner will be slightly shorter at 5-10 years, given the weaker security position. Other ConsiderationsIn regards to options 2 and 3 we also make the following comments. Shareholders Agreement – when implementing these options, we consider it best practice to document the firms chosen funding policy within the shareholders agreement. An example of this could be setting a timeframe for the repayment of the partner loan. Just because the bank offers 10-15 years doesn’t mean the accounting firm cannot set a shorter repayment profile for the partner. Tax Effective Repayments – under both these scenarios, select banks also offer additional funding options to assist with tax effective repayment strategies. i.e. a funding structure to facilitate the repayment of non-deductible home loan debt first, whilst still transitioning the the partner equity loan away from the firms security/goodwill.
Matt Todman – CAMatt is a Finance & Mortgage Broking specialist with over 15 years in the banking, stockbroking and accounting industries. He helps accountants, businesses and business owners fund their growth aspirations. Matt has access to a large panel of lenders and implements a thorough credit process to increase the likelihood of a successful loan application. If you would like to discuss these funding structures or have general lending questions, please contact him at matt@threestorycapital.com.au or 0413 990 888.
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