Many RIAs are spending time taking care of their clients and employees while assessing the financial impacts of COVID-19. As the industry gets used to working remotely and adjusting to market volatility, new questions about macro RIA trends have surfaced.
What will happen to RIA M&A?
There were 139 M&A transactions in 2019 compared to 97 in 2018, according to Fidelity Investments. At the beginning of 2020, the RIA industry appeared poised for another banner year in M&A, as Fidelity reported 13 transactions in January. Everything seems to have changed in a matter of weeks.
No industry participant has a crystal ball, so the best approach is establishing verifiable truths about the RIA M&A market and building a reasonable case on how to best position for the months ahead.
- The capital options are more diverse than ever before.
- There are more acquisition brands competing for opportunities.
- The succession problem isn’t going away.
The M&A market has never been more diverse and accessible, so historical downturns provide little guidance. Instead, these truths point to some practical implications that all RIAs should consider for the next generation of RIA M&A.
A Chance to Prioritize
Deal volume is likely to slow considerably in the coming months. Buyers will evaluate deal structures, and sellers will consider the timing of the transaction.
Late-stage transactions may proceed as planned, but deals in the early stages will likely pause. The length of this volatility is a key concern, and the impact on deal flow may be felt for the next one to two quarters.
Suppressed deal flow presents a good opportunity for potential buyers and sellers. Why approach the M&A market at all? Is the juice worth the squeeze?
RIAs should take the opportunity to consider how M&A efforts perpetuate the broader objectives of an advisory firm. The firms that are playing long-ball will continue evaluating M&A for access to talent, capabilities, and geographic expansion. The coming months provide an opportunity to get educated and position for the future.
Adjusting Deal Structures
Our inaugural release of The RIA Deal Room research showed that deal structures were emphasizing down payments with over 60% of cash consideration paid at closing.
Our upcoming 2020 release will show that deals in 2019 followed a similar trend. This market is likely going to tilt structures away from cash guarantees and put emphasis on shared risk/reward.
Creating more balance in transaction structures is not surprising at the end of a bull market and there are opportunities for participants to evaluate a potential strategic relationship based on its long-term merits.