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Fidelity Poll Finds Unrealistic Value Expectations Are Sinking RIA Deals

More than half of active buyers are walking away from potential deals for three primary reasons, according to a new Fidelity survey—and they all come down to self-awareness.

About half of potential buyers walked away from RIA deals over the past three years because of misaligned visions around things like growth strategy and client experience, according to a recent poll of active acquirers conducted by Fidelity Investments. At the same time, almost three-quarters of would-be acquirers decided not to move ahead due to incompatible culture, values and mission.

And nearly nine in 10 said they left the negotiation table due to the unrealistic valuation expectations of the seller.

Fidelity surveyed 26 RIAs and four “center of influence firms” in February and March of this year to find out how deal-making is changing. The responses cover mergers and acquisitions activity between January 2020 and March 2023 and build on a 2019 study in which 23 firms participated.

Survey respondents in 2023 were involved in nearly 500 transactions between 2020 and 2023, accounting for close to three-quarters of all RIA deals tracked by Fidelity.

Reported transactions were up by 237% in the latest study—which covers a longer time frame than the 2019 results—from 146 deals over 31 months in the prior study to 492 deals over 39 months in the most recent look. Median deal size also grew, from $250 million in 2019’s study to $400 million.

The new survey found that motivations for both buyers and sellers pursuing deals have remained unchanged, although sellers seem to be placing a greater emphasis on the benefits of scale and liquidity while the percentage citing a lack of a succession plan dropped slightly. On the buyer side, acquiring talent remains the top motivation, rising three percentage points to 90% in 2023. That’s followed by looking to gain entry into new geographical markets, which dropped from 78% to 63%, and adding assets, which fell by two percentage points to exactly half.

Likely owing to the experience active acquirers have gained and the adoption of formalized M&A processes, deals have been closing at a faster clip over the past three years, Fidelity found, going from an average of nine months to a little more than seven.

Even so, more than one-third of respondents said volatile markets have increased the time it takes to close a deal.

“The nature of deals will continue to evolve,” stated Laura Delaney, Fidelity’s vice president of practice management and consulting. “We’re seeing strategic acquirers become increasingly efficient, which is reflected in reported deal completion time; however, opportunity can be left on the table due to misalignment of deal-making fundamentals. There’s an element of emotion behind every transaction.”

The primary reason deals failed over the last three years is a disconnect between what sellers believe their firms to be worth and what buyers are willing to pay. Buyers reported walking away from more than half—52%—of potential deals, and 87% said they did so because valuation expectations were “misaligned.”

Buyers said unrealistic comparison multiples are the top reason sellers tend to overvalue their firms, identified by 87% of respondents. That was followed by not understanding what drives firm value (77%) and being too close to the business to see weaknesses (47%).

About half—49%—of sellers went to a third party to value their firm, while the other half did an in-house calculation, and buyers reported that external valuations were higher in approximately a third of deals that got done.

“I really see the value of people hiring bankers,” Scott Hanson said during last month’s Wealth Management EDGE conference. His firm, Allworth Financial, has completed nearly 30 deals over the past six years.

“We don't always like it because they tend to bid up the price,” he said. “But, on the other side, it's like the seller is ready for a transaction. They've got their act together.”

Revenue multiples did grow over the last three years, from around 2.25x to 3.25x, while median EBITDA multiples increased from about 7x to 9x. Seller expectations regarding EBITDA multiples, however, rose from around 9x to 11x.

High organic growth rates, ambitious next-gen talent and key geographies commanded the highest prices, according to buyers, while rising interest rates, private equity inflows and increasing demand have all affected multiples in recent years.

“Beauty, in my view, is in the eye of the beholder,” FP Transitions Director of Valuations Aaron Wells said at Wealth Management EDGE. “In the middle-market to upper end of the RIA market, these businesses are being sold as growing concerns.”

“At the end of the day, it's typically a multiple of EBITDA,” said SEI’s head of client experience, Gabriel Garcia, speaking on the EDGE panel with Wells. “And the analysis that they're conducting is to understand the consistency of that. Are there consistent profits? Is it lumpy? Are there synergies in the deal?”

Garcia said the three most important things buyers consider are revenue growth, client demographics and differentiated expertise.

"Is there something in your business that the acquirer is saying they have a need for? Those are all analyses that are conducted," he said. "They know what their debt service is, they know what they've done the last five deals at. But do you get a half a turn more or full turn more? Do you get more preferential terms on the deal? All of that comes from some of those factors."

Deal structures have also changed in recent years. Buyers are paying a median 65% in cash and equity upfront, compared with 45% in the 2019 study, and equity comprises more of the overall consideration—32% compared with 26%, respectively. The length of deferred payouts has dropped, albeit marginally, from 2.7 years to 2.5.

The average age of the seller remained the same, at 57 years. Next-gen advisors were involved in at least one transaction completed by 61% of buyers over the last three years, but only 49% of acquired firms had identified G2 leadership.

In 2019, all respondents indicated an intention to increase (74%) or continue their current pace of deal-making. In 2023, 17% expect to decrease the number of deals they’re doing, with some predicting a decrease in available targets, while 3% aren’t sure. Six in 10 expect to increase activity and a fifth said they will continue apace.  

“Despite market headwinds, the wealth management industry continues to be a vibrant space for M&A, with the environment rewarding high-quality firms with strong multiples,” said Fidelity's Delaney. “Although activity has increased substantially vs. the previous study period, it’s important for RIA business owners to align on valuation drivers and understand the dynamics involved in the motivations and expectations of buyers and sellers.”

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