Interest among buyers in acquiring RIAs remains high but sellers could be jeopardizing their chances with unrealistic valuation expectations, according to a recent report.
The median price paid for an RIA has grown from five times EBITDA five years ago to seven times EBITDA for deals since 2017, according to a new report from Fidelity Clearing & Custody Solutions.
Sellers’ expectations are even higher: buyers claim that sellers now expect EBITDA multiples of eight to 10, Fidelity found in a survey of serial acquirers involved in close to 150 transactions over the last two years, which accounts for more than half of all RIA transactions tracked by Fidelity during that time.
The buyers who responded to the survey said 40% of the deals they discussed over the past five years fell through because of unrealistic expectations on the part of the sellers, according to Fidelity.
"We continue to see a rapid pace of M&A, but our study showed that there could be even more deals happening if valuation expectations were better aligned,” Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions, says in a statement.
Sellers are overvaluing their practices in part because of unrealistic comparison multiples in large sales, cited by 91% of respondents as the top factor in overvaluations, but other factors play a role, according to the survey.
Eighty-three percent of respondents cited a lack of understanding of valuation drivers, while 61% pointed to a misalignment between seller cash needs and firm value, 57% attributed overvaluation to sellers being too close to the business to recognize its weaknesses, and 26% of buyers said sellers failed to recognize the synergies sought by the buyers, Fidelity found.
Nonetheless, M&A activity in the RIA space isn’t likely to slow down: 74% of respondents expect to do more deals in the future — and none want to do fewer, according to the survey.
Top 3 Drivers of BUYER Interest in RIA M&As
87% of survey respondents say: To acquire top advisor talent Fidelity's 2019 M&A Deal Valuation and Structure Study
78% of survey respondents say: To enter new geographic markets Fidelity's 2019 M&A Deal Valuation and Structure Study
52% of survey respondents say: To grow share of assets Fidelity's 2019 M&A Deal Valuation and Structure Study
Top 3 Drivers of SELLER Interest in RIA M&As
61% of survey respondents say: To obtain full or partial liquidity for owner or owners Fidelity's 2019 M&A Deal Valuation and Structure Study
57% of survey respondents say: To reduce operating duties and focus on client needs Fidelity's 2019 M&A Deal Valuation and Structure Study
43% of survey respondents say: The absence of a viable succession plan Fidelity's 2019 M&A Deal Valuation and Structure Study