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Republic Deal Demonstrates RIA M&A Continues

Republic Capital Group's Langston says deals are still getting done, but buyers are demanding more protection.

Although RIA M&A may be slowing from its record pace prior to the coronavirus pandemic, it continues apace.

John Langston, founder of Houston investment bank Republic Capital Group, told his firm recently helped $2.8 billion AUM Exencial Wealth Advisors acquire Charlotte, N.C.-based $800 million Willingdon Wealth Management, led by CEO John Burns.

The move brings Exencial’s footprint to four offices, including a presence in Dallas, Oklahoma City and San Antonio. Terms of the deal were not disclosed, but Langston said that his firm has “three or four other deals waiting to be announced.”

“When the pandemic started, everybody’s bandwidth got cramped, as they needed a little extra time to talk over the changes in the equity marketplace with their clients,” said Langston. “But while some folks saw what was happening in the equity markets and made this macro leap that the slowdown would trickle down to the M&A RIA market, that hasn’t happened, and deals will continue to get done.”

John Eubanks, vice president at Park Sutton Advisors, another M&A firm advising RIAs, said his firm is advising on more deals now than it was at the same period last year, and just added a new client last week.

“I so far am not seeing dramatic reductions in what people are willing to pay up front,” added Langston.

“We have had a number of conversations that began before Corona that are moving forward, and there is plenty of activity. There is still plenty of opportunity in M&A for both the sell side and buy side,” said Langston.  

Valuations, which are based on trailing 12-month revenues, have been impacted somewhat over the past two months, but they still haven’t fallen enough that it’s become unappetizing to sell, said Langston.

According to Eubanks, “Valuations are going to have to come down at some point if there is a sustained market decline.”

Meanwhile, for buyers, there has never been a better time to grow larger.

“Firms like HighTower and Creative Planning, RIAs over $4 billion in AUM, can really be a player if they have the right approach,” said Langston. “Ultimately every firm should be preparing for the future; there should be ongoing progress toward whatever the ultimate goal is.”

One thing that is starting to show up in deal structures on transactions that are currently being negotiated is, according to Eubanks, earnouts, where the seller gets anywhere from 50% to as high as 80% of the total payout at closing and then gets paid the remainder of the purchase price each year for the next two or three years tied to the seller’s achievement of revenue targets. Those have dropped from their highs of 80% to 90% of the purchase price at the height of the frothy RIA M&A market last year to 50% of the purchase price as buyers are signaling they want more protection in case the market doesn’t recuperate smoothly.

Eubanks described this as a “reversion to normalcy,” as historically earnouts have hovered around 50%.

Dave DeVoe, founder of San Francisco-based investment bank and research outfit DeVoe & Company, agreed. “17 years ago, when I got into this business, it was common to see deals with earnouts of 35%, but in the last few years that rose to as high as 100%,” he said.

DeVoe said this deal structure is good for buyers and sellers because “for buyers, you don’t need to deploy as much cash up front, and you can mitigate some of the risk should Armageddon occur.”

For sellers, he said, it keeps the deals coming.

Part of what made Willington attractive to Exencial is that the former participates in Fidelity’s WAS referral program, whereby when a client gets too big to be advised by Fidelity, typically over $500,000 in AUM, the company refers the client to an outside firm like Willingdon in exchange for a share of earnings—and this has become “a strong growth engine for these smaller RIAs,” said Langston.

“This deal shows that there is still plenty of opportunity in M&A for both the sell side and buy side,” said Langston.

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