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.
“Client-facing talent is in high demand” among buyers, Slater tells ThinkAdvisor, noting that many buyers want a firm’s talent, including its leadership, to stick around for several years. Also in high demand: a firm’s ability to attract new, younger clients and sometimes a niche market that could provide certain skill sets or higher net worth clients, helping its broader strategy.
Having a large percentage of clients over 70 years old is a negative, seen as a harbinger of declining assets and revenue streams, says Slater.
As the number of M&A deals for RIAs have increased in recent years, their structures have been changing, according to the Fidelity survey.
Over 40% of acquiring firms in the survey reported that on most of their deals they paid up front more than half of the transaction value, compared with just 30% who said they did so five years ago. Also, payout term have shortened, with the share of deals with average payouts of three or more years dropping from 48% five years ago to 30% since 2017.
The deal making is expected to continue at a brisk pace in what Slater calls a “strong seller’s market.”
“Sellers are in a great position, with a lot of suitors, but they can do a better job if they understand what the buyer wants and why,” says Slater. “Buyers know what they want, but do firms understand what buyers are looking for?”
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