Anatomy of a Complex Finance Deal | Ep. #03

In this episode, Janine Sim, Finance Partner at KHI Partners, takes us into the world of complex lending and how the right strategies can help build the confidence to grow your business and wealth. From deals not performing as expected to finding solutions to unlock more lending, if you think you have outgrown traditional lending, we explore what complex lending solutions can do for you.

DISCLAIMER:
The discussions in this podcast are for informational purposes only, and should not be considered financial or legal advice, and it does not take into consideration your personal circumstances. Consult a qualified professional first before making any investment decisions.

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Transcript

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If you think about it from the bank's perspective, they're lending money based solely on your balance sheet. There's no tangible property. Without you there, that value is somewhat eroded because you as a business owner are bringing client relationships that you hold deep. And without those client relationships, you can't generate revenues and the banks can't generate an EBITDA or profit or cash flow to actually repay their debt. The moment your business or your portfolio crosses a certain threshold, an entirely different set of financial tools become available. And most people never find out they're qualified. Our guest today, Janine Sim, takes us into a world of complex lending and how the right strategies can help build the confidence to grow. Is there any incentive for you to actually pay back that loan? If you think there's no repercussions for me, people are perhaps less likely to repay their debt in the worst instance. That's why I say that alignment is important. From deals not servicing on paper to finding solutions to unlock more lending. Where you think you have outgrown traditional lending, we explore what complex lending solutions can do for you. Janine Sim, finance partner at KHI Partners, is here to show you how. In a more established business, historical is important, but the future also plays a good part. If you have a good history behind you, I think that's a good case we could put it forward. Before we get into the episode, please be aware that the discussions in this podcast are for informational purposes only and should not be considered financial or legal advice. It does not take into consideration your personal circumstances. Consult a qualified professional first before making any investment decisions. Today we're going to really take a deep dive into some complex lending. And joining us today is the Queen of Complex Lending herself, Janine Sim. You know, so when we talk about, I guess, a complex client, we're talking about a client that might have, you know, quite a number of trading entities with some uh trust structures and things behind them as well, which you know some of our clients would would be in that position. So when you meet a client of that profile for the first time, like how do you approach that meeting? What do you what do you go into that with? I think uh when we first meet them, look the very first thing I ask them is what is their end goal? Um, because then we can work backwards from there. Uh notwithstanding understanding their full corporate structure is very important because typically we'll find that they have multiple trading entities, they've got multiple SPVs, they've got perhaps a range of guarantors at the end. It's not just maybe the husband and wife, but it could be a larger family business that have other family structures involved. So once we get the picture, the bigger picture, then we can work backwards to the like minutia of the corporate structure effectively, and then we come back to how we want to structure it. Um, so yeah, that's important, I think, is understanding the bigger picture and we break it down. Um, the corporate structure is a byproduct of understanding like their whole objective, really. And like you said, the corporate structure, the goal is so important to understand. But I think fundamentally what you're trying to find with these corporate structures is just like any sort of borrowing capacity or lending is where is the income coming from? You know, what are the liabilities, what are the expenses? But it's obviously done in a much more uh complex way. So, you know, how do you actually break that down? What's your process when it comes to meeting a complex client? What's the process that you take to understand exactly how their business is run? Yeah, I think for me, I want to understand what are the training entities, so what's deriving um, you know, income, whether it's from a sale of a widget or they're providing a service. And then I want to carve out what's actual investment um trust structures, and then we know they're either holding residential property, they're holding commercial property. Um, and then outside of that, they may also have structures that um are holding companies effectively that will just be a flow-through entity. Um so it's important to understand how the cash flow is moving through the whole group. Um, and then from a bank, understanding you know which entities they actually want to take recourse over. And that, of course, is the most important for the bank. They want to make sure they have um the correct security structure and have a perfected security position. So understanding that in totality, um we can break it right down and hopefully structure it correctly for the clients and and for the bank as well. All right. So let's talk about some of the different goals uh that someone of this profile might have, right? So they might come to you uh with their and the immediate need might be that they've got a business that's hit a bit of a cash hole because they're growing quite rapidly. Right. So do you want to unpack that a little bit and and how you'll go about solving that problem? Yeah, I think a lot of the clients that we find uh that we partner with, I think a lot of them are in a quite a rapid growth phase. Um they're probably probably in that mid and they're you know about to corporatize. Um so they're going through quite a rapid growth phase where their capital needs probably haven't met up with them, or they're winning contracts where they don't have sufficient capital right now to actually fund that growth. Um, so getting an understanding, that's why that sort of forward-looking plan and what they have for the business, firstly, and then secondly with their personal investments uh is really important to plan. Um so for a lot of sort of trading entities where they typically will have a pipeline of work that's going through, we should get an understanding of that, and we can actually try and put capital in place to allow them to facilitate that growth. So a lot of the time for trading businesses, they need to be able to have a line of um credit or some term debt that needs to be injected, um, whether it's a mix of debt andor equity, in order to fund that. So getting a view on that up front can actually help them to tender with confidence into new contracts or into new jobs where they previously may not have known that they could even have done that. So they may not actually go for a particular job because they may not have that certainty of capital behind them. So I think if they know that up front, then um we can actually put uh things in place with the banks, um, the commercial banks, um, where they take a view on um perhaps the projected income with a three-way cash flow forecast of where where that job might land and where the revenue that could come in, and then we we've got to mitigate like the risks of that um particular job that they're gonna take on. So it's taking a forward-looking um plan, but really taking steps back to put something in place for them so that they can actually grow with confidence instead of just you know blindly tendering and not sure if they're gonna get uh bank debt to actually support them in that growth. And just to help the uh listeners um, I guess relate to this, have you got like a live example of of this situation? Yeah, we do. Yeah, so um we've got a um decent-sized civil contractor. Um they were tendering for a very large contract that would actually materially change their pipeline of work, I think, since inception actually. So um what typically in that industry you need um retention bonds to actually facilitate that. Um, but in order to tender for that, they need to have some certainty that I can actually provide that bank guarantee up front. Um, there is a defect liability period that they need to address up front and then post the job being done. Um so getting a wind of them tendering the contract before them actually even winning the contract, we actually put forward uh to the bank based on a projected income and profit of what that would actually look like for the business and how that actually folds back into the business's financials. Um and understanding the risks that are involved, because obviously it's a large contract. Like, do they have adequate support in their existing contractors or employees to actually support that growth? Or is it them taking this on actually gonna um sort of erode their current resources and they're not actually able to keep up with the demands of the new contract? So understanding all that up front um is important to actually put it forward to the bank. Um and they actually did end up winning the contract and they had certainty that they had, you know, a retention facility in place in order to win that, which I think is so material because you know it's a really um tight uh competitive situation when you're tendering for these large sort of government contracts and you're up against um quite thin margins, people are sort of discounting margins quite um easily to try and win the tender. Uh so at least they can move forward with a lot of confidence in their bids. And even when they need to make variations, they know that they have capital behind them if they need to make any adjustments. So yeah, I think that was that was a good win for the client. And I think what you said there is very fundamental, is that often we as brokers we receive, say, financials of a self-employed business. But there's more to them than than just those numbers that we look at. Like you said there, you you might see typically we get two years financials of a business and you'll see trends. But if we just purely look at those numbers and not actually go a little bit deeper into how are they deriving that income, do they have you know a key risk with you know maybe one project and that's why their income is so high? And then for you to relay that message back to the bank that you're trying to get funding because their thing is trying to de-risk the situation. So, how important is that to actually go deeper into the numbers, ask your client the right questions to actually understand not what's just happening now or historically, but what's going to happen in the future in getting the funding that you're after? Yeah, it's it's actually fundamental. We're looking at historical position and businesses, and typically those financials are lagging maybe 12 to 18 months. Um, if not, we maybe we get management accounts that haven't quite been reconciled. So the real uh best way to get it is straight from horse's mouth or the directors of the business and actually understand what's happening um with the jobs that they're tendering for. Um, what are the key risks that they're seeing? What's the competitive landscape looking like? Um, and how do they feel they're positioned um, you know, for example, to win this contract? And if them taking that on, what will that mean for their business? So in this instance, it's quite materially growing their business. Um, both their top line, their bottom line, they need to manage their expenses obviously tighter in this current climate, costs are rising. There's a lot of input costs that are materially impacted because of current economic um climate. So understanding that is um a question that I would ask, and I know that the bank would be asking. So trying to anticipate what the banks are gonna ask. Um, so that idea that we can put it forward um to them. And how do you mitigate that risk for a bank? For example, you've got a client that has a big project, but that project's only going to last for say two years. So, what commentary, what things do you say to the bank in order to give them comfort? Yeah. So I think for a contract like that, it is um, I guess, a shorter term in the scheme of their business. Um, but what are they doing? Because every contract has an element of variable and fixed costs. So the ability to actually scale down the costs in line with, say, the job moving off, which may mean that they're perhaps running more subcontractors as opposed to having more employees, so that if the work's actually not there, then they can pull back on those costs. So in a way, they're protecting their margin. Um, and then they're also able to maybe hire machinery as opposed to holding um, you know, yellow goods that they need for the job. So then at least when the job's not there or their uh pipeline of work has somewhat changed, then they can just taper that back. They're not stuck with all these, you know, fixed costs that are there that you know they won't be able to fund with a new pipeline of work. Yep. Now when you're looking into projections and having that discussion about, you know, um we're looking forward now, right? Um quite often being the proprietor, they can be a little bit on the side of optimism, right? So when you're assessing the projections, how do you actually approach that? Is it a and to determine is it accurate or is it yeah. Yeah, that's a good question. And I think um yeah, business artists are I wouldn't say they're bullish. Well, they're me they're a bit optimistic, perhaps. And we all know the banks are conservatives, so we have to meet and present somewhere in between. Um so I like to sense track the numbers. Um we sort of see other clients in similar industries, similar margins that they may be targeting. If we think the margins may be not in line with where we've seen similar sized jobs, we'll ask the question, and they could have a very valid reason, and then we just have to mitigate it really. I think everything is um it is can be explained with uh good mitigation. Uh like every risk, uh, it should be uh outlined and and dealt with. So that's what the banks are gonna see. They're gonna be doing the same thing. Um so I think bringing that up front to the bank as opposed to them maybe discovering it later in the process is is important uh so that they understand um, you know, that the clients have thought about it at least. Uh or if they have proposed perhaps a more bullish, I don't know, it could be a margin, um, that they're saying why and understanding um why. And then they the banks will naturally probably sensitize that anyway. So, but as long as they have a good explanation, then yeah, we can work together with the client and the bank. And often these clients say they're they're they're doing business funding as well as you know, maybe wealth building at the same time property-based. You know, how important in the transactions that you've seen uh with your clients having their own personal property portfolio in helping their business funding? How is that compared to say a client who's trying to get business funding but maybe um doesn't have you know the the property backing and how that changes in terms of being able to do certain things for their business? Yeah. I think I've seen my probably my most I don't know successful clients, we call that. Um, they run very good trading businesses um and they also have a very sizable property portfolio. I I don't I think I see that uh in in all the time. Like I don't really see it, it's not a mutually exclusive thing. They will typically have a business and a decent sized property portfolio. Um and I think for them the trading business is the almost the cash cow of their property portfolio, and in a way they use that property portfolio as something as um you know, something for future generations that their their kids and their grandkids can actually benefit from because the kids may not necessarily want to enter into that business or take over the business. So the property is something that can be um passed through generations. Uh so that's why coming back to that really important point of understanding what is their long-term goal. Because if we understand that, then we can balance um how we actually propose the funding, because we need to, if we're relying on business income to support property acquisitions, then maybe we wouldn't um we take all that into consideration so that we're not perhaps buying as many properties now if they know that they're going to go through a rapid period in their growth. And once they go through that growth, then perhaps they can, you know, um go and use that um profit to actually use for the acquisition of the property. So um I think really understanding what is their end goal uh is really important so we can work backwards again um to actually understand that and structure it today. And we spoke about the um, you know, business being the cash cow to fund th those acquisitions in property. Um have you ever used it the other way around where the property is actually used to get more advantageous terms with the bank to or assist with funding? Yeah, definitely. Um with a lot of the businesses uh if they're trading quite well and there is a level of tangible like goodwill in the company, the banks can actually take a view on um that goodwill as security. So with no tangible property. Um but in addition, look, there's nothing more uh tangible than the actual property asset being tied in. I think um some clients prefer when they their business gets to a certain point they want to keep their property assets separate from their business assets. Um but there's probably a tipping point where they're in that you know sort of rapid growth phase where they may need to actually use that property um to allow them to get more leverage or give the bank a little bit more certainty behind that security position once they've sort of proven up their trading history, and then there may be a point where they may be able to actually release that property back um and then just rely solely on the actual um business value, um, which yeah, many have done. And you mentioned goodwill there. Uh for people who don't understand what goodwill is, can you go a little bit into detail? What is goodwill? Uh, how can the banks lend off the goodwill and you know as much detail as you can? Yeah. So with goodwill, I think if you think about it simply, um every business has a value that's attributed to it. Um it it's not necessarily tangible, like an asset that I can touch. Um, but let's say, for example, if it's um an accounting firm perhaps, um, that's quite a relatable topic for us. We they have a recurring client base that they have. Um clients have pay compliance fees every year. Um so from the bank's point of view, there's sticky revenue that's actually being generated from the bank that they can actually um rely on. So in the event of um worst case that you know they couldn't afford or they go under, the banks can you know step in and um effectively uh use that income. They can continue to trade on that business and that income, assuming they can put a assuming a good proprietor into takeover can still get value out of that of that recurring revenue. So in that instance, that goodwill is generated by the recurring revenues of that business. Uh, and that is the value that is what the bank is lending on. So for example, you have an accounting firm, they got recurring income of 200,000, and just argument's sake, they'll lend three times of that. So that's an example of the goodwill there compared to the other option is property-backed uh funding. But in this case, they're purely going off the business value. Correct. That's correct. Yeah. So there's no real property. They haven't put up their home, they haven't put up a commercial property. That's truly based off the actual. And it's more beneficial for the proprietor in that case, right? And putting their own properties up that they can actually work off the business in that case. Yeah, there will be probably a slightly differential in the interest rate, but I think for many where they may not have um perhaps even the property behind them at that stage, but they have experience running a practice, that's a way for them to actually get into a business that they may not have been able to if they didn't have a property, perhaps. Um so yeah, it does it probably depends on the type of industry they're on and that goodwill and how valuable the bank thinks it's actually worth, um, probably in like a secondary market. Yeah. Yeah, where where property hasn't been offered as security and essentially the lender's taking charge over the business. Is there any recourse to that director? Yeah, so typically there will you find there'll be an individual guarantee. Um, I like to call it an alignment of interests as opposed to an asset grab. Um, and I think that's key because if you think about it from the bank's perspective, they're lending money based solely on your balance sheet. There's no tangible property. But without you there, that value is somewhat eroded because you as a business owner are bringing client relationships that you hold deep. And without those client relationships, you can't generate revenues and the banks can't generate an EBITDA or profit or cash flow, so actually repay their debt. So for me, uh it is um effectively an alignment of interests. Like if the bank is, you know, providing you some capital, it's in your best interest that you know you're gonna do your best to run the business as you've sort of, I guess, presented the business to be. Notwithstanding, um, look, the banks can go after your um assets if if it was to fail. Um, but ideally, I think first and foremost it is that alignment um which is important. And can can we go a little bit into detail for especially this business lending? There's certain charges, like Frank said. You know, there's um, you know, GSAs, general service, you know, general security agreements, uh, individual guarantees, because some business owners might go into lending and if things were to go wrong, there's some things that they may need to be aware of when it comes to getting lending. Can you tell people, for example, if they're getting overdrafts, line of credits, they're getting the funding? What are some things they need to be aware of? Yeah. So I think as a fundamental, if they were going to go into like a goodwill land, the bank's most definitely gonna be taking a fixed and floating charge or a technical, speak like a general security agreement or a GSA over your business. Um so that allows them in the event of default to go in and step in and you know, point at Liquidator if they need to to um run the business. So that's the first thing. Um and secondly, I would say they would um take individual guarantees as well from the main um directors or perhaps majority shareholders of the entity. And that, as I said before, is for that alignment of interest. And um perhaps they will look at the net worth of that individual as well, um, because in that interest that gives them comfort that if the business was to go, that he has adequate assets behind him to support uh to keep trading on in a way. And the proprietor, what does he need to be aware or he or she be aware of when they have a GSA on a certain uh on on their uh business, how does that affect if they want to go for future lending, for example? Yeah. Um so GSAs are recorded on um Equifax, so which is available to us as brokers, we can tell if a client has recorded uh fixed and floating charges over that asset. So they want to know whether that really has um if a bank does a company search, they'll know you have a fixed and floating charge, which would imply that you have some level of liability uh against that business. So I would say a bank has equal access to that and they would be asking the question. So in the first instance, they're gonna be asking what is the nature of that liability, particularly if they're relying on that income for servicing. And um, and secondly, can it be excluded? Like uh because there are ways to if that business trading entity can actually self service its debt, and for some lenders that can be a susceptible where they can actually perhaps exclude that from that. Um, but it's definitely considered. Uh it's registered on uh an open register which any bank or uh financier can actually look up. So So yeah, it's you can't once it's there, you can't say freely go and lend or borrow money from anyone else without sort of f uh initial prior um approval from the first registered. So for example, if a client gets uh a loan from bank A, he then wants to go to bank B and get another loan. In some cases he might be able to, but the bank B is going to ask, What is this? Uh can it be, you know, there's certain rules and regulations around it? And they may say, We don't want to lend to you. So what the proprietor needs to be aware of is that once you go and get lending from this certain bank A, that it might restrict you from future lending. It can, yeah. I think um in those instances they may they'll ask you for like disclosure of the liability, and in the worst case, they'll include the liability if you can still service it's fine. Um, or they may have a policy where you can actually exclude business liabilities, for example. So that may not even apply. Um, but yeah, you would say there is a level of restriction that is applicable that they need to be aware of. Sorry, just one last question, just for the listeners. Individual guarantees. Can you just explain how that affects the proprietor in worst case? Maybe why a proprietor doesn't like having an individual guarantee in terms of lending. Yeah, so I think with an individual guarantee, I think there's a view that if I give a personal guarantee, they're gonna come up to my home. Um, but I think in the first instance they want, as I said, an alignment to make sure that you're actually gonna want to keep trading your business, pay down your debts, which is really in the first instance. And that's really for a worse case. And I'm talking like they would have had to go through um a level of default, engage liquidators, and that is the absolute last resort, then of course they'll be going for any assets they can get at that point in time. But there are a lot of steps before they actually get to that point. Um, but if you just imagine I give you a loan with no guarantee, um, and perhaps there's no like, is there any incentive for you to actually pay back that loan? If you think maybe perhaps there's no repercussions for me, people are perhaps less likely to maybe repay their debt in the worst instance. Um, but it that's why I say again, that alignment is important. It's almost would you say it's fair to say that um it almost gives you the illusion of choice, right? Yes. But yeah. Yeah. No, that's that's a really um good talking point because I think that is a misconception that you know business debt's completely separate from me, doesn't really affect it. But in fact, even in regulated lending, most lenders actually will consider the business debt in your servicing. There's only a couple that would would actually exclude it. Yeah, and what we're talking about here, uh I think to be clear for people that are listening, because my pe some people might think I've got a business, like I can go down this path. But I think can you just maybe give us a high level of the criteria? Because what you're speaking in is more maybe private banking, commercial lending land. Uh, and then obviously in the retail space is your traditional uh, you know, uh banks that would go through. Uh so someone might be thinking, Do I fit this criteria? What's the measures that they need to be aware of? Yeah, look, I probably think examples I've been giving are with a disclaimer that they are well-established businesses, they've been training well over 10 to 15 years and they've got very good trading history behind them. Um but notwithstanding is say that if you want to enter into a new business, um and typically that two-year mark is is probably the most challenging time to get finance because most standard banks want to see at least two years ABN registration. Um, but that doesn't discount, you know, any fast growing businesses in the industry that actually have a very strong trading history to actually prove that. Um it's not uh I wouldn't say it's a year or a tenure that actually limits you, I would say it's your historical trading history. Some businesses can make a lot of money in one year and continue that uh growth trajectory exponentially. Um, so it's not necessarily the years. I think it is um how well you've been performing um and actually how well you've performed out of perhaps a down cycle or you know, tough economic um conditions uh can actually prove and we can actually make a case to the bank. If it makes commercial sense, like we can put it forward. Um, but if you're probably a business that's just starting out a loss making for like the last two years and only now you're turning a profit, I would say we probably need to wait a little bit more um till we can prove up that profitable trading history um in order to provide something, unless you're maybe in the verge of winning a bigger contract which will change that business. But I will dare say you'll probably get a bit more scrutinized um based on your historical performance. Um, particularly in the startup phase, um, historical is important um and in a more established business historical is important, but the future and where they go also plays a a good part of that um that actual storytelling, if you call it back to the bank. Um so yeah, there's it's a bit of a judgment call to be honest. I can't say like um you're a new business, I can't get you finance. But if you have a good history behind you, I think there's a good case we could put it forward. Yeah. Now speaking of um, you know, mature established businesses, now you look after quite a number of uh family office style clients, right? And and what we're seeing a lot of is this transfer of in in intergenerational wealth, where the you know it's the kids actually taking over the parents' portfolios or their businesses. Now, when that is happening, like how are the kids looked at? What what what are some of the things that should really be put in place leading up to this milestone? Yeah, the family office, uh yeah, we are seeing a growing uh I think in yeah, my client base particularly and with our attachment to the accounting firm. So I think they need to have a good um family office team behind them, firstly. And I think that you know that could consist of an accountant, a legal um a broker or fine or someone that can provide um finance or um structuring in some aspect, and getting a full suite of advisors, as you would on, say, your property investment journey, perhaps you'd have a advice agent, you'd have um a lawyer, but uh the family office becomes more important when you're passing it on. So someone that really specializes in that estate planning, and so you've covered all bases with that. Uh and once they've come up, there's typically like a family office um charter that guides the family office and how they run. Um, and we work with them closely and all the advisors in order to structure uh the finance accordingly. So it's not really me suggesting anything, it is it's derived by the family, and we uh we are structuring according to what they want to do. Um, so and like I said before, it's not just the family office, even smaller um families are in that growing phase. You really need to get a better understanding of their long-term plan. And that applies even more so to a family um office where they have substantial wealth that they need to pass on to the next generation in, you know, the most effective way. Um, so being able to sit with all their advisors um in a room and then we work backwards really how we'll um address that strategy. And while we're on this family office and might get the assistance of Frank here in terms of maybe a typical structure that you would see, as well as you know, this is not just family offices, but complex trading entities. Um, and maybe if you can explain to Frank and Frank and uh maybe draw this structure of what you would see and what makes it complex, what are the banks looking at? Uh, but yeah, this I think would this would help visually for our viewers and you know looking at the same. Well, I can give you a real life example. Um there's multiple entities, but we can break it down. Please talk slowly. Yes. We can break it down. I will do my best. We'll break it down into I guess the three, we can really break down this structure because I think we shouldn't get uh turned off by the volume, but we should really look at fundamentally what are these actual structures doing. Um so this client, for example, has a family office. Um, they have, I would say, I think about 25 trading entities. Um trading entities, you can just show one trading, just one trading entity is is the main one that we're looking at. Yeah. Um so we've got a trading entity which hold which holds its shares via family trust. And that family trust effectively operates as their holding company. And then that family trust has its beneficiaries, which are the two main, you know, um, I guess you could say the wife and the husband. Um and then outside of that, they've got uh, I guess what we call special purpose vehicles, and those special purpose vehicles are actually holding investment assets which range from residential properties, commercial properties. Um yeah, that is typically it. And that SPV is owned by a similar family trust. So they would set up a different Yeah, or some of them are similar, but yeah, you could say there's a family trust, and then again the individual's wife and husband. Um and that structure is replicated, that the SPV structure probably has around I think there's probably now like twelve entities that you can call it that. Um and then within all those different SPVs have a number of uh family trusts that are holding those um ultimate structures and then obviously flows to the beneficiaries. So in this instance, um this is very simplified, but I think that is how simple it actually is, is we shouldn't get overwhelmed by an intense corporate structure because fundamentally it's made up of a training entity, there's gonna be an SPV sort of structure which holds investment assets, and then that's flowing into typically a level of family trust, and then that's flowing into the individuals or guarantors of the whole structure. So I think simplifying it to that is what makes it actually uh palatable. Um, because if I don't understand it, I can't present it back to the bank. Um, so every time I look at it, um, as I mentioned before, I'll break it down for my understanding, what's generating the cash flow, what has investment income, whether it's rental or shares, um, they may be receiving like dividend income um back from the business, the main training entities, uh, and then really trying to simplify that structure back is important. Yeah, now we really do live in a day and age where you can make your life as complex as you want or as simple as you want, right? So are you able to talk to why would people set up such a structure? What is the purpose of uh creating some separation? Yeah, look, I think for maybe a family officer this size, they have a lot of different uh asset classes. Um so I think for them grouping into particular trusts, maybe it's better for their tax up um, which they can probably talk to, but um it also can assist with their lending. If they're mixing residential and commercial assets into the same trust from a finance perspective, can get like a little bit shhh messier because uh commercial in properties are viewed slightly differently to residential properties, um, and keeping things separate can actually help them uh with their growth. And also um they may actually have separate asset classes that are assigned for uh or different SPVs which are perhaps earmarked for a particular child for them to actually take over, and it's maybe it's cleaner for them to move that on. Um but they you can have very different reasons, which is we're just really led by them and however they've structured it. Um, and then we can choose to work with whatever they present to us. Sure. Just on that note, now you mentioned you know they might have marked a particular SPV to pass on to a child. Now, as as that transition's actually happening, one of the things I imagine the lender could be concerned about or actually want to know more about is look, all this wealth has been created by the parents, all right, um, and now the child's coming to take over. I mean, how important is that uh child's uh resume, if you want to call it that? Yeah, I think um if it's an SPV that's being transferred, their investment assets typically that are held, so it's like a residential that's generating income or a commercial generating income. Um, I think the key is actually on the family office advisors to get the children in earlier. So it's not so much um, you know, they want to do this now, let's just put the kids on as directors or whatever. It's um they there is a thought-out um plan to actually start integrating the children into their plans, which may be as early as when they turn 14 or 15, which we've seen, um, which they may not really care about at that point in their lives. But eventually um being exposed to it and hopefully transitioning um them, and ideally that they would understand um what it is they're inheriting and that they would hopefully have an interest in it. Um, a lot of the time because they're investment assets, they're probably manage third party by you know leasing agents and whatnot. So there is less reliance on probably um their ability, but um of course they're still gonna want to know um ideally that knowledge has been passed down um from their parents. Uh if it was a training business, then obviously that's a very different story. But the SPV is probably a little bit more uh easier to pass on uh from the bank because yeah, there's hopefully that um third party that's involved that's also managing it. Okay, so to summarise that, I I guess when you know um planning uh for succession, it's very, very important that the children are actually involved in decision's being made, how how those decisions have been made and and what's being considered. Yeah, that's important. And I think when we look at these structures, is there any policies or, you know, in your traditional say retail bank, they look at income, liabilities, does it service, and we have a clear metric, it services or it doesn't service. But in this world, is there a servicing calculator they look at? Is it is it a little bit different in terms of, you know, if they've got an SPV that is supporting itself, they've got a commercial asset in there, do we still need to include it into the servicing, or is there a lot of nuances within this that uh can assist? It's it's nuanced. It is nuanced. Uh can't say we're spinning it into perhaps a traditional servicing calculator. It is a judgment call from the bank's credit team as well. So um some banks in particular, where you're dealing with um high net worth families, uh, their family may not necessarily actually service on paper. But if they hit a minimum net worth threshold in that they may have sold a business and made a large sum of money and they're actually holding cash, but they don't actually have that recurring income anymore to support them. That's actually not a reason to turn them away in certain um lending um we're able to actually still make it work. So it's a judgment call at that at that level of net worth. Uh, we work together with the bank in order to get that actually working for the client. What are some strategies with that? So say you said they don't traditionally service on paper. So what are some strategies that the bank use to de-risk it to still be able to accept the funding at that level? They're going to be looking at your net asset position. That's important, and typically at least minimum 20 million, um, in order to know that they either have the cash or they can liquidate, I don't know, shares in order to repay. So, because what we don't have anymore, for example, in a sale of a business uh uh situation, is we don't have that ongoing income from a business or dividends or anything being pulled, but they do now have a large sum of money sitting over here, which is more than sufficient to actually make the repayments, probably also pay out the debt in full. And that is the greatest mitigant. Yeah, just to just to unpack that a little bit for people listening. Um, so what we probably are talking about here is when they when we say they don't service on paper, like if we look at like standard regulated lending, um we're talking about you know, the banks typically are going to put a 3% buffer uh onto interest rates, or some of the non-banks two or one percent buffer, they might actually shade the rental income anywhere from 75 to uh 90%. So, you know, the more debt that you carry, the harder and harder it becomes to borrow money. So what you're talking about here is that when people can meet a certain threshold, um, they've got a lot more levers to pull, right? Um it so the bank doesn't look at the risk in that sense the same way. Right. So you you mentioned you know the 20 million asset could be one of the thresholds or criteria. What are some others? Is there income thresholds? Uh the income could be challenging because they may not actually have income at that point. If uh if they've sold the business, they wouldn't have um any level of income. They may have a level of um rental income or investment income that's still left from assets that remain. Um, but in terms of a trading asset, that may not be there. But that net asset test um and hopefully that net asset comprises of um perhaps some properties and ideally a large pool of cash from that liquidity event, uh, that is the biggest uh determiner of mitigating. And can you explain that? And I think the term is deleveraging. So how does that actually technically work? Say you've got a client who you know doesn't service on paper. Do they go, okay, well, if you sold asset one to five, you would get this uh in terms of cash? So we're comfortable with that. Do they actually choose the assets or how does that work? Yeah, so the the deleveraging is um it's not necessarily the bank's not forcing them to sell properties, but they're saying in the event that you need it to, which properties could you sell? And working out from a net um selling cost position, is that sufficient to actually cover um the the actual repayment obligations of the loan? Um and they work it to like the granular of you know, less selling costs, um, less any debt that you may have against that. And um going to that and knowing that that is available for you to actually sell. Um, and ideally that there is hopefully a pool of cash, ideally as well, is the most liquid. Property, as we know, is not as liquid as cash, but it is um it is a strategy which they can use. Um and that's what it is, it's a strategy. The bank's not actually implementing it, but they want to know you have the ability to do that. So I guess an example of that, um Janine would be uh so in your example of the client having 20 million in in net asset, very, very likely if that was property, it'd be more than 50 properties or so. So if that uh borrower was in trouble, um they've got 50 ways to exit, right? So whereas, you know, on retail lending, the the average borrower is not going to have that ability, not that many ways out. Yeah, so yeah, it's this strategy is really only applicable for definitely a high net worth client. Um yeah, we wouldn't it wouldn't be an option really. Um you've seen many clients on the growth phase, and naturally in the growth phase comes with acquisitions. Now, with acquisition funding and you've done quite a bit, it's a different world out there. And so, you know, for example, let's talk about accounting acquisition. What are the parameters for accounting acquisition at the moment? And in some cases, actually buying a certain business may assist in your servicing, from my understanding. So can you yeah, explain a little bit about that? Yeah, so with the accounting um business, it's sort of no different how you look at any industry acquiring another business. So, what is the fundamental business you run and what is the nature of the business that you're acquiring? So, is it gonna be a natural bolt-on to your business? Will the synergies arise from your culture, from efficiencies of systems integrating, or from perhaps uh consolidating of premises, or there's something that you are consolidating for that is gonna bring perhaps a competitive edge to your overall brand. Um, so for accountants, for example, um, it may be that uh maybe they're an existing three-partner firm and they want to bring on, they want to expand into uh geographically. So maybe an existing Sydney practice wants to buy into Brisbane market. So in those instances, what they're doing is they're um they want to see the fundamentalities and alignment of of culture, that's really important. The numbers can always make sense on paper, but once you actually fold a business in, and if no one gets along, or if then was that truly a successful merger or acquisition, then perhaps not. So understanding the culture and I think the actual person behind it is is important, and the bank wants to know that. They want to know how are you aligned, firstly, or what synergies can you gain from consolidating. So, for example, for that firm being bought in, if um the firm that's buying in is a larger firm, they may have systems in place, they may have HR functions that they never had previously, they may have um a lot more disciplines or a lot a more corporatized structure, which they don't benefit from, then that would actually be why they want to merge. Um and it may in those instances be that they don't actually want to exit. No, none of the partners may want to exit. They may actually still want to stay in, but they're happy to sell down their shares. Um, so an example of perhaps that business folding into an accounting firm, which is already part of a larger multidisciplinary practice, which has other disciplines. They could actually gain from future services in the future. So they're actually diversifying just their current accounting. They are able to offer different services to their clients now just by being part of this larger group. So whilst they may have diluted their shareholding, they're actually increasing perhaps their overall profit share in the long term because they're able to increase their, I guess, share of wallet of the client. So from a lending perspective, the banks are going to look typically at a function either of their revenue or their bottom line. And that's sort of a normalized EBITDA position that they'll look at, depending on the bank, slightly different. But they are looking at those metrics. They want to understand who are the key people that are going to remain in the business and what is the strategy going forward to integrate those businesses together. And if those businesses what are the synergies, and that should actually be explicitly noted up front to see that, you know, the acquiring or target has thought about what that actually looks like in the business. They want to see typically like a three-way cash flow with the new business built in to the existing and look at the actual synergies and what that means to the bottom line. Truly, perhaps they don't need the premises or they're maybe able to use a HR system. They don't need to outsource it now. They can lean on perhaps the parents' HR that they have. So they'll gain naturally economies of scale through that. And that's how they can actually save costs and save on their margin. And that's what the banks want to see is they want to see that level. If it's a profitable business and it fits the metrics, the metrics make sense. But it is that subjectivity of how are these key people aligned? Um, because we've seen very often that sometimes they end up having uh they're they're merge or they fold in, and then unfortunately cultural alignments don't quite make sense, or there's remaining people in the business that uh not necessarily the key stakeholders, but perhaps employees that are not aligned um with the original or the new people that have taken over. And can we uh just draw in a draw an example here so people understand? Sorry, Frank, if you're able to draw top line revenue, say it's a million dollars, right? For argument's sake. This is an accounting firm that we're we're trying to purchase, and then the bottom line is 500,000. Yeah. So say I'm someone who wants to buy this accounting firm. I want to buy 50% of this accounting firm. What is the bank looking at? What are the metrics? You said it works off revenue, it works off bottom line. How do I uh get lending to buy into this practice? Yeah, so we typically, well, I guess we can look at um the bottom line needs to be normalized first. So we want to take out any, you know, one-off costs that are going into the business. So for example, that year they may have had an upgrade to their, I don't know, call it their um IT system, which is no longer a cost next year. We want to understand all those costs. We want to understand what are they paying all their key directors. Um, because typically the banks want to add back like a market salary. Because if they had to sell that book, they're not um typically directors maybe pull a little bit more than market salary because they still need to meet their personal obligations. So we want to normalize that right back with that profit. Um, it can the EBITDA, it it depends on the size of the firm. So and depends on the number of accounting client-facing um accountants, for example. Um, but typically the revenue is either from like one to one and one point one times maybe of top line. Um, and that's typically where the debt will sit. Um, but it can't exceed typically no more than two and a half to three times leverage, which is two to three times of net profit. So there's like a ceiling and a floor, um, which of which the So the lending is the one. Yeah, so that that sort of forms like your debt capacity, um, but it can't also exceed a lower order. Yeah, yeah. Yeah. So uh it is there's a lot of nuances in that, but let's just say high level. We can work it like this. Um and yeah, so if you're buying 50% into the business, um, let's say I was buying 50% into this business, I'm acquiring via family trust, which means that there's gonna be either partners exiting or partners actually uh diluting their current shareholding. Um what that means from a servicing perspective is um when they run a servicing on the person acquiring in, they're gonna have access to now 50% of this profit uh of the 500. Um and um they're still able to borrow up to the firm capacity. So the firm capacity they're allowed to borrow up to, but we only need funding really for the 50% buy-in. But that depends on how the purchase price has been set also. So the purchase price could have been set as a function of um I know we've seen both, a function of revenue or a function of EBITDA. So in all intents, maybe say like this buyout was gonna be 1.5 million, which means if I'm buying 50%, I need $750,000 to fund the buy-out. So $750 means that I need to raise $750, and you can actually structure the debt within to actually lean against the business. So which means there's gonna be a fixed and floating charge over this entity, and that $750,000 is gonna sit in the family trust. It's not gonna sit in the actual business entity. But what that means is the fixed and floating charge needs to be signed off by the actual existing directors or guarantors of this um entity. It's being quiet. Because you're lending against a book that you're about to buy. Correct, yeah. Um, and then that'll also set off like whitewashing provisions under the Corps Act. So uh we need to make sure that uh yeah, that is all addressed. So the person acquiring can structure this way, but they need to make sure they're having very robust discussions with the people they're buying into. Um, because if you think about it from the people, they need to they're not they're not providing a guarantee for their loan being bought in, but they are providing uh permission for that uh fixed and flowing charge to be used for that debt. Uh so that's important, but it's a great way for someone to buy in at 50%, still maintain the current key stakeholders of the business and ensure that it keeps running uh successfully going forward, and then able to fold in all the other services, for example, in that example that we were talking about. Now you like these are all the numbers, and and provided people don't go into these uh acquisitions if the numbers don't work, right? But I I quite often hear uh something that commonly gets overlooked is actually assessing the culture of the business that you're buying. Um so in the in the acquisitions you've seen done well, what what are the what are these uh buyers actually doing well in terms of assessing the culture of the business they're buying? Yeah, I think I've seen a range of people acquiring sole practitioners, so they're just buying um perhaps someone that's nearing retirement, so they actually want to exit the business. And then they typically don't have uh they may have a few senior accountants left, but not so much the main proprietor. And in those instances, it was probably the main proprietor that held the key relationships with a lot of the clients. So in those instances, it's it's kind of risky. Like we see the clients sort of drop off a little bit when we sort of review the position maybe a year later and see how the acquisition went, or even sometimes um throughout the year. Um, so that model is a riskier model to take over a sole practitioner. I think uh what I've seen work well is where they're taking over multiple um practitioners, so at least two to three, and that obviously spreads like the key person risk. If one person wants to leave, they still got two other primary uh key directors level that can actually talk to clients and strategize with clients because that really is where they make all their money, not so much from compliance. Um, so the compliance piece is always there, but the compliance is easy to move. It is the perhaps the advisory work where um actually keeps clients really sticky um if they're getting good advice effectively um on structuring and whatnot. So um yeah, I think that staying away from the sole practitioner um is probably it becomes there's a lot more challenges that you need to address unless you can transition the clients successfully. I can't say I've done it, seen it done overly well. Um, but where there are two or three, that seems to be the sweet spot, at least. Um and any more than that is is of course good as well. But um two or three is is sort of sufficient. And typically these acquisition loans, are we looking at loan terms five to seven years? Are they paying principal interest? Are the interest rates high? And you know, how are they typically when you've seen them been paid? Is it been paid from the the dividends or the distributions from the the accounting firm that they're buying it from or they're paying it from their own funds? How is that taken into consideration? Yeah, it could be a mix. Um the structuring comes down to the specific bank. They have different metrics of how they apply PI and IO repayments, which typically is either a function of leverage or sort of that first stage. Um, but let's say they put it on PI. Uh, typically the loan term is can be structured over probably a five-year loan term, but it's probably being amortized over 10 to 15 years, depending on lender. Um, that's typically what we'll see. If it's interest only, um, the term is still five years, but and then it'll be up for renewal um closer to um the expiry of that facility. So that is subject to lender um and perhaps how the client wants to structure it as well. It's typically paid from their share of the business profit. So they're 50% owner, they ideally are getting a 50% business profit distribution, whether it's monthly or quarterly, or and that's what they're using to actually pay the debt because that debt is actually sitting in the family trust, not sitting as a business liability, but it is leaning onto the business for um servicing. Yeah. So, but in terms of their physical repayment, it should actually come out of the borrower, which is that family trust or the person that has acquired. Yeah. Yeah. So I I yeah, I think that's something to consider when you know someone's doing acquisitions. Exactly what Frank said. It's those numbers, you know, in some cases they can be funded 100% nearly. Uh, with a client or someone that's looking to buy into a firm, they don't actually need any more funds. But I think there's more than that. There's the culture, there's the soft side of things that they need to consider, which you said. There's some cases it hasn't been done right, you know, and now you've got perhaps a loan in a business that you know you're more in debt and you've got another business to look after. And so it's more than just do the numbers work. Uh so I think today you've given us uh quite an in-depth discussion of complex funding. Uh, and I think it it helps us understand that there's more than just uh your typical retail funding world, and so maybe clients that have been listening today that are moving into that space, that they're aware there's uh your your world can open up when it comes to complex lending uh and being in that space. So, Janine, being my sister and being the second love child, we really appreciate you coming in, and we hope to see you again soon. Thank you. Thanks, Janine. Thanks, guys.