With valuations at an all-time high, more than 100 transactions year-to-date, a fact mentioned several times during multiple sessions at the Schwab Impact conference being held this week in San Diego, now is the time to think about selling, said David DeVoe, head of DeVoe & Co., which consults on M&As.
More than half the transactions made today, he said, were with firms that were $500 million or less in size, DeVoe said. “So this is an interesting part of the market,” DeVoe told a packed audience, and there are key drivers for the move to sell. “This is really a transitional period that break out from the $500 million-plus stage of life cycle.”
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He told the audience that in a survey, 39% of all RIAs stated high valuations were the reason they were seeking a buyer, while that percentage jumped to 62% of firms with $1.5 billion said that high valuations were a reason to sell.
There are key drivers accelerating this trend, DeVoe said. First is succession planning. He noted 17 years ago Schwab did a survey and found that 25% of RIAs had a succession plan. The decisions to make can become “overwhelming” to RIAs, DeVoe said, and “this is probably why we have such a low degree of succession planning” and in fact today is at a “crisis,” as only 38% of advisors have a plan in place.
The second key driver for M&As has “been the aspiration to gain scale,” he said. He provided an example of an advisor who builds a firm up to $100 million in assets and then decides to add another person to the firm. This type of firm has to sell externally, he said, because there isn’t anyone in-house to buy. This is the first step to give up control. Next stage is when an RIA is running a professional organization and hiring specialized experts to run the business better. Now in addition to giving up control of action, the owner is giving up control of decision-making as well, DeVoe noted.
The last stage is when the firm becomes an RIA enterprise that no longer has specialists in organization, but specialized teams. “You not only have a head of technology, but a technology team,” he said. He added that as a firm enters this stage, its profitability is less. Down the road, he said, the firm will be “healthier,” but this is a transition period.
The RIA enterprises represented on the panel included Buckingham, Mercer and High Tower.
Adam Birenbaum, head of Buckingham, noted that back in 2007, they “sold to grow to become the organization we wanted to become,” which is a firm of $50 billion “of collective assets,” he said.
Dave Barton, of Mercer Advisors, who focuses on M&A, noted how they now have a team that specializes in each area. Before mergers, seller advisors typically are wearing five to seven hats. Today, the RIA has $17 billion in assets, has completed 30 acquisitions and is a fee-only firm.
The final RIA enterprise was High Tower and today is run by Bob Oros, who stepped into the job last January. The firm, with $70 billion, just completed a merger with Schultz Collins, a $1 billion RIA.
When he came on board, the firm was going through a change of strategy, he told the audience, they looking for advisors or RIAs that wanted to break away and find independence. “We really pivoted,” he said. “We recognized we’re a national wealth management firm, fiduciary focused, and wanted to be a part of helping them solve problems.”
Why some RIAs succeed in attracting buyers and getting the high multiples: talent, capability and have a track record of success, Bierenbaum said.
Oros said they first looked for good quality management with a determination to grow.
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