The RIA deal environment is currently more of a “mixed market” than a buyer’s or seller’s market, according to Daniel Seivert, Echelon Partners CEO and managing partner, and Mark Tibergien, the former CEO of Pershing Advisor Solutions.
The executives gave their takes on the current market during an Echelon Deals & Dealmakers webinar on Tuesday in which they discussed the top issues facing dealmaking and the future of the wealth management industry. The webinar was moderated by FiComm CEO Megan Carpenter.
“There still is a lot of money chasing deals, particularly private equity money in minority positions,” according to Tibergien.
The number of deal announcements has continued in force in recent weeks and, “in virtually every case where there is an advisor firm that’s for sale, there are multiple buyers,” he said. That “favors the seller in terms of price, and it favors the seller in terms of terms.”
Seivert challenged him, saying it can be argued that it’s more of a buyer’s market for four main reasons:
- EBITDA valuation multiples are low in the wealth management industry compared to other industries.
- Deal structures are largely favoring buyers, who can pay over time.
- There are many buyers now.
- There are relatively few sellers.
“We need to be selling about 6% of the industry right now and only 3% of the industry is being sold, or about 200 firms per year,” Seivert said. Because of that, “buyers are able to wield a lot of control in their negotiations over sellers.”
Why It’s a Mixed Market
Seivert, however, went on to classify it as “more of a mixed market” than a true buyer’s market. Valuations are neither truly low nor high, but more “medium” and “quite good, in general, for sellers,” even if they are “not near the levels that they should be.”
Deal structures are similarly a “mixed bag” in which “sellers are getting some really favorable structures that allow them to lean in and get some extra benefits, and the buyers are being creative,” Seivert said.
And, while the number of sellers is in the “medium” range, despite the large number of buyers, “there’s a lot of pretenders and folks that are talking about it, and a very few number of folks that are actually doing most of the transactions,” he said.
Tibergien agreed with the mixed market conclusion, saying that although there were indeed signs we’re in a seller’s market, there is a tendency among some firm owners to “panic and consider fire sales” due to concerns around the pandemic and economic crisis.
Also, “buyers are structuring terms with earn-out and clawback characteristics, [but] that works well for advisory firms who are able to perform,” he said.
The Valuations Debate
In general, valuations of a wealth management business are “not appropriate” for sellers of firms that fall in the over $5 billion, $800 million-$500 billion and $200 million-$800 million categories, Seivert argued.
Valuations become more appropriate for businesses in the under $200 million category, where there are “far fewer buyers” and “a ton of sellers,” and where the “risk of the business model is viewed as quite a bit higher,” Seivert said.
However, Tibergien argued that valuations were appropriate in general for reasons including the “degree of uncertainty” now as a result of the pandemic and economic crisis.
Among other topics, Seivert and Tibergien stressed the importance of advisory firm owners — especially those 60 and older — being both emotionally and financially prepared to exit their businesses before putting them on the market and moving on.
Succession planning is a must, Tibergien advised, noting he was prepared — “and I had been prepared for a while” — to step down from his firm before retiring early this year.
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