Despite a record number of mergers and acquisitions among RIAs, there is a disconnect between the prices that sellers desire and serial buyers are willing to pay, according to a new Fidelity study of mergers and acquisitions among RIA firms.
Its study of 146 deals between 2017 and mid-2019, including deals announced but not yet completed, found that RIA sellers expected EBITDA multiples of around 8 to 10 times while actual deals had a median EBITDA multiple of 7 times, up from 5 times five years ago. Twenty-three firms, accounting for all 146 deals, were surveyed for the Fidelity report. They averaged six deals each, but six of the 23 completed 10 or more deals, or 61% of total deal volume.
“There could be even more deals happening if valuation expectations were better aligned,” said Scott Slater, vice president of practice management & consulting at Fidelity Clearing & Custody Solutions, in a statement. “Seller expectations for valuations are far above what disciplined buyers are willing to pay,” according to the study.
Indeed, Fidelity found that over the past five years 40% of M&A deals among RIAs fell through, even though 227 deals were completed.
Buyers and sellers often apply different approaches to deals. Sellers tend to focus on revenue multiples, including “exceptional, highly publicized transaction multiples, … and their personal needs to ensure a continuation of current cash flow,” according to the Fidelity report.
Buyers concentrate on profitability and stable-to-growing revenue streams, organic growth, leadership talent and advisor and client demographics, according to Fidelity.
Each group comes to the table with different motivations and expectations, according to Fidelity. The top three drivers for sellers are raising cash through a full or partial sale, reducing operating duties in order to focus more on client needs and making up for a lack of a viable succession plan. For buyers, the top three drivers are attracting top talent, entering new geographic markets and growing their share of assets.