Schwab executives predicted a decline mergers & acquisitions between RIAs in 2009, as potential sellers hold out for a stronger market and a better deal. With asset levels way off, valuations have plunged.
Indeed, even a very informal poll of 15 RIA principals gathered for a Schwab Institutional Mergers & Acquisitions event in New York showed there are more buyers than sellers in this market. Roughly a third raised their hands when asked which of them were looking to grow through an acquisition. Just three individuals said they were looking to sell. “In general, there are more buyers out there than there are sellers,” says Dave Devoe, managing director of M&A at Schwab.
Typically, a firm generating $100 million in revenue could get six times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or more. Now, it’s more like four times EBIDTA. “Some advisors are saying, ‘Hey, my RIA buddy got eight times EBITDA last year. I want the same multiple.’ But last year was a different story,” Devoe says.
While 2008 was another record year for M&A deals in the RIA industry, the growth was not as astounding as years prior. There were 82 transactions in 2008, just two more than in 2007. Total assets acquired in 2008 jumped 34 percent to $134 billion. But that’s peanuts when you consider the growth in m&a the previous year: Total assets acquired in 2007 were up 87 percent versus 2006. Devoe speculates that 20 to 30 percent more deals would have gotten done in 2008 if it weren’t for the market meltdown.
Even RIA holding companies, the biggest acquirers of RIAs in terms of assets of late, are cooling their heels. In 2007, holding companies like Focus Financial, WealthTrust, United Capital and others, were responsible for 45 percent of assets acquired in RIA deals worth more than $100 million. Last year that number dropped to 30 percent.
Devoe says there are typically about 200 firms available for sale each year. But most are just not selling right now—at least, they aren’t selling to buyers looking to pay bargain basement prices. His advice, “Don’t try to time the market when it comes to buying or selling. What matters is that it makes sense for your firm,” he adds.