Success in Succession Planning
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Don't Put Off Getting a Valuation for Your RIA

A practice should always be prepared for a sale.

Quick, what’s your RIA worth?

If you don’t know the answer straight off, you’re in good company, and not just among RIA owners. No less than 98% of U.S. business owners don’t know their company’s value, according to industry tracker IBISWorld. And the same source tells us 78% of business owners plan to fund 80% to 100% of their retirements by selling their companies.

Meanwhile Cerulli Associates says 37% of the roughly 310,000 financial advisors in the US plan to retire in the next 10 years, with advisor headcount expected to have declined by 5.8% in the five years through 2022 compared to a 1.6% increase between 2012 and 2017. Given this demographic pressure and a fairly flush economy, it's not too surprising that mergers and acquisitions involving RIAs have gone from strength to strength through most of the last six years.

Quite resilient

Only recently—with most firm owners focused on helping clients navigate the financial impacts of the coronavirus pandemic while equipping their firms to withstand ongoing restrictions on business activity — has the pace of M&A activity around RIAs slowed somewhat. M&A involving RIAs managing at least $100 million dipped from 32 transactions in Q2 2019 to 29 transactions in Q2 2020, according to M&A researcher DeVoe & Company.

But when you put this year’s first-half M&A total beside last year’s, the number is 64 for both six-month periods. And there were sharper consecutive-quarter slides in 2013, 2014, 2016, 2017, and 2018 than has been seen so far this year.

So the big point isn’t that M&A activity involving RIAs has slowed slightly in the face of the pandemic. It’s that, so far, it continues at a healthy clip despite economic headwinds blown up by covid-19. But like so much these days, the future of RIA M&A is uncertain. Will it continue apace, with the demographic weight of aging owners outweighing fears of selling into a downturn of uncertain severity and duration? Or will it slow significantly for a while as sellers decide there will be more upside once the coronavirus is, by hook or crook, under control?

It’s tough to say.

Be prepared

What can be said, and said with confidence, is that an RIA should always be prepared for a sale. This preparation starts with the owner or owners having a solid understanding of the value of their enterprise.

For many M&A experts, a valuation is a critical aspect of good governance, and an organizational review of importance to:

  • Near-term M&A
  • Long-term succession and continuity planning
  • Equity or profit sharing
  • Debt or equity financing
  • Effective insurance coverage

In addition to these tangible benefits, undergoing a periodic valuation is comparable to going for an annual checkup at the doctor’s office. It’s an easy way to consult with an expert to understand the RIA’s financial health. Additionally, it provides valuable insights on an RIA’s deal readiness, regardless of size or ownership structure.

Death and gambling

In addition to being an element of sound governance, having an accurate and up-to-date valuation of your RIA is in keeping with the sound advice you give your clients every day. After all, you would probably work to dissuade a client who wants you to try and time the markets on their behalf. That’s because you know market timing is a losing game rooted in gambler's logic.

So why would you try to time the market for RIA practices by delaying the valuation you know you need to get the most of any deal, whether as buyer or seller?

On the contrary, you understand that it’s better to take an always-ready stance with regard to your most valuable asset: your business. After all, fortune favors those who are best prepared. Having an accurate valuation on hand is like having your personal will and living trust prepared, notarized and on file. You don’t have those documents prepared because you know when you’ll need them. You have them at the ready because you know it’ll be too late to act if and when the need for them suddenly arises.


Harris Baltch is Head of M&A and Capital Strategies for Dynasty Financial Partners. Andrew Sclater-Booth is a Senior Vice President of M&A and Capital Strategies for Dynasty Financial Partners.

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