Study Finds Good Advisors Are Often Tempting Acquisitions

Banks primarily look for deals that fill gaps in their investment or wealth management services, Palaveev said. They tend to make higher offers than other categories of buyers because they have ample capital, he added.

Registered investment advisors accounted for 30% of the acquiring firms last year and 36% so far this year. They tend to target smaller RIAs looking to pass the company on to a successor. These buyers’ primary focus is to take advantage of the scale, cooperation and efficiency possible through acquiring a business that can complement existing services, Palaveev said.

Consolidators, or holding companies, accounted for 21% of 2005 transactions but only 3%, or a single deal, in 2006. These firms seek RIAs with well-motivated leadership and high growth potential. They tend to buy out firms where the principals seek to cash in their equity in the business but continue to run the firm, Palaveev said.

CPA firms accounted for only one 2005 transaction and none so far this year. When CPAs purchase RIAs, it is generally because they want to offer wealth-management services to their existing clients. Acquiring a firm that is “a good cultural fit” is also important to many CPAs, Palaveev said.

Trust companies accounted for only one transaction last year and none so far in 2006, the study found. Such companies tend to focus on acquiring large firms with a solid reputation that let the buyer establish a presence in a major city. After the sale, trust companies usually leave the RIA to run its business independently, he said.

Buyers have begun to look with increased interest at acquiring RIAs with $300 million or less in assets under management, he reported. That is largely because principals of larger RIAs tend to want to maintain their independence and so are less interested than smaller ones in selling out, he said.

Although average transactions were valued at three times revenue, many acquirers do not pay much attention to revenue multiples, the study found. More important is an earnings record that is considered likely to be transferable to the acquiring firm, Palaveev said.

Moreover, many deals are predicated on post-acquisition performance, he noted. The ultimate value paid to principles of the acquired firm often relies on the firm reaching specified earnings targets, with additional kickers often thrown in for especially strong growth.