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For advisors pondering retirement and how to get there with a potential windfall via selling their practices, now is a good time to examine a sale because data indicate that not only did transaction volume surge last year, so did the multiples attached to those deals.
A recent study by Advisor Growth Strategies (AGS) confirms there were 239 transactions last year involving registered investment advisors (RIA) or independent broker dealer (IBD) practices. To the delight of advisors, those deals took place at an average multiple of 11x – a record in its own right. Still, prospective sellers need to take the right steps to ensure smooth transitions and maximization of value. Likewise, buyers need to be mindful of exactly what their money is purchasing.
“Sellers must consider their best long-term fit, proceed with conviction, and truly understand whether their chosen partner is poised to succeed,” notes AGS. “Aspiring buyers must consider what motivates them to acquire and define how they compete in an expensive market with season competitors.”
Buyer’s should acquire the first shiny object they see nor should sellers immediately sign on the dotted line, but the consolidation trends are encouraging, particularly at a time when the industry is grappling with an average advisor age in the mid-50s and struggles to lure younger people into the profession.
Yes, Big Can Be Better
There will always be instances when key staffers, even the principals themselves, stay on after a practice is sold, which is to say some deals are reached due to talent. However, the prevailing them in RIA M&A is usually the assets under management at the acquired firm. So it’s not surprising that bigger firms command higher multiples in sales.
“Buyer sentiment highlighted that bigger is better. Valuations peaked with the largest firms, and while all firms performed well, the largest received premium bids that exceeded last year’s case studies,” adds AGS. “The upward trend in valuation from smallest to largest reinforces a long-standing theme in the RIA industry – scarcity. Unlocked demand and scarcity indicate a much more aggressive pack of buyers heading into 2025, spelling premium bids for a narrower set of opportunities. For context, bids on the largest opportunity ($2B AUM) increased by more than 18% from a year ago.”
It’s also clear that buyers prefer the steadiness of recurring fees over hybrid models when perusing the landscape for RIA takeover candidates.
“The mix of recurring versus non-recurring revenues and non-traditional investment management practices highlighted tradeoffs in the mentality that ‘bigger is always better,’” observes AGS. “Buyers reacted less favorably to hybrid opportunities, and the average valuation was 20% less for a $500Mhybrid RIA than one with >95% recurring fees.”
Structure Matters
Another theme that will remain front-and-center in RIA consolidation is how deals are structured, meaning would-be sellers should expect conversations around performance-based incentives, retention and the like. In fact, AGS data indicate sellers, on average, receive just two-thirds of the purchase price at closing with 24% directed to contingencies and 10% to retention.
Translation: it’s on sellers to show buyers that the latter is acquiring a durable, long-term value proposition.
“Firms need to articulate how they execute new client growth, engage and activate a talented team, and present the portability of the client experience (planning, investments, and process.),” concludes AGS. “Potential sellers are likely to find a transaction, but building a premium is key. For example, firms with ‘non-ideal’ attributes in the buyer case study analysis saw a 21% discount from their ideal peers.”
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