RIA M&A activity and multiples have trended upwards for more than a decade now, culminating in new high watermarks for both activity and multiples set late last year. Deal momentum continued strong into the first quarter, but we sense at least initial signs of slowing as the macroeconomic backdrop has deteriorated.
After a year off, ATO held its annual meeting at the Ritz-Carlton in Amelia Island, Florida to discuss industry trends, practice management, transaction activity, and the current competitive landscape.
In this week’s post, we discuss our main takeaways from the meeting.
Considerations for Every RIA Owner
Selling the business you built from the ground up is a bittersweet experience. Many business owners focus their efforts on growing their business and push planning for their eventual exit aside until it can’t be ignored any longer. While this delay may only prove mildly detrimental to deal proceeds in other industries, in the investment management space, there are very few buyers who will be interested in YOUR business without YOU (at least for a little while).
Long before your eventual exit, you should begin planning for the day you will leave the business you built. There are many considerations for investment managers contemplating a sale, in this post we suggest four ways that you should start.
Valuation gaps are frequently encountered in RIA transactions. Buyers and sellers naturally have different perspectives that lead to different opinions on value. These different perspectives, unsurprisingly, lead to different opinions on value, and the gap can be substantial. Bridging that gap is key to getting a deal done. In this week’s post, we address four ways that buyers and sellers can bridge a valuation gap.
Despite Conventional Wisdom, Some Investors Prefer Minority Positions
The pricing of minority transactions in the RIA space leaves some people scratching their head. Traditional valuation theory holds that investors pay less for minority interests than controlling interests. Reality suggests otherwise.
Even in One of Hottest M&A Markets in Recent History, Most RIA Principals Still Do Not Plan to Sell Their Business in the Next Three Years.
Did you know 67% of RIA principals plan to sell, merge, or conduct a transaction through which they will leave the business in the next 5 years? Yet, only 36% have either a signed ownership agreement or strategy in place? There are some explanations to this disconnect that we discuss in this post. Because succession planning is so important, we conclude by discussing how to ensure a successful succession.
If the Choice Is Buy vs. Build, "Build" Doesn’t Even Come Close
Are RIA transaction multiples getting out of hand? Contrary to the usual laws of supply and demand, each week it seems like we hear about another blockbuster deal rumored to have happened at an astronomical price, and correspondingly, we meet a new capital source we hadn’t known previously who is looking for way to implement an acquisition strategy in the RIA space. Is this FOMO on a grand scale, or just part of a grander moment in market dynamics?
Evaluating a Buyer's Shares From the Seller's Perspective
Stock consideration is rarely discussed in RIA transactions, but it is a common financing feature in other industries. We expect to see more stock for stock deals in RIAs for two reasons. As public investment management firm multiples continue to push higher, buyers will be tempted to take advantage of multiple-arbitrage in certain situations. And if capital gains tax rates rise and sellers can use rollover equity to defer gains, the structure will become more attractive to sellers. How can a seller decide whether or not to accept a suitor’s stock? Jeff Davis has a few thoughts.
There’s been a great deal of interest in RIA acquisitions in recent years from a diverse group of buyers ranging from consolidators, other RIAs, banks and diversified financial services companies, and private equity. These acquirors have been drawn to RIA acquisitions due to the high margins, recurring revenue, low capital needs, and sticky client bases that RIAs often offer. Following these transactions, acquirors are generally required under accounting standards to perform what is known as a purchase price allocation, or PPA. In this post, we describe what a purchase price allocation is and discuss the common intangible assets acquired in the purchase of private asset and wealth management firms – existing customer relationships, tradename, non-competition agreements with executives, and the assembled workforce.
What Is a Fairness Opinion?
Process and value are at the core of a Fairness Opinion. It is backed by a rigorous valuation analysis and review of the process that led to the transaction. In this second of a two-part series, we discuss some of the issues that are considered in a Fairness Opinion.
When Do You Need A Fairness Opinion?
Fair is often the first-four-letter word that most children learn, and it often leads to more arguments than other choice words. Although children eventually learn that life is not always fair, we spend a lot of time ensuring that major economic events are. Transactions are rarely straightforward, and as the pace of M&A activity in the investment management community continues to accelerate, more shareholders are scrutinizing both the pricing and terms of transactions. In this post (and in the next), we explain when you should consider getting a Fairness Opinion and what that involves.
Despite the hiatus in M&A beginning in March of last year with the onset of COVID-19, 2020 was a strong year for RIA mergers and acquisitions and 2021 is expected to be even stronger.
Guest Post by Louis Diamond of Diamond Consultants
For both buyers and sellers, knowing where your firm fits into the RIA M&A landscape is an important first step towards identifying compatible transaction partners. The universe of RIA sellers can be categorized based on firm culture, the motive behind the transaction, management’s expectations for post-transaction roles, liquidity needs, the status of next-generation management, and the like. As RIA transactions have proliferated in recent years, several different buyer profiles have emerged that address the concerns of these different seller types. In this week’s guest post, Louis Diamond of Diamond Consultants identifies four common buyer profiles and the types of sellers that fit well with each.
Deal Activity Rebounds After Brief Lull; Deal Terms and Multiples Remain Robust
After a brief lull during the second quarter of last year, RIA deal activity surged in the fourth quarter, rounding out a record year in terms of reported deal volume. Concerns about the pandemic and market conditions were quickly shrugged off, as deal terms and the pace of deal activity returned to 2019 levels after the brief pause at the peak of the shutdown.
Catching a Falling (Butter) Knife
Last week, Macquarie Group announced its acquisition of Waddell & Reed (WDR) for $1.7 billion. At first glance, the pricetag implies an EBITDA multiple of over 11x and some are asking why Macquarie’s new CEO paid such a premium for a business whose AUM has halved over the last six years. Unfortunately, it’s not that simple. In this post, we dig into the deal economics and explain why paying a premium does not necessarily mean Macquarie over paid.
In last week’s blog post, we covered five considerations for designing earn-outs. While there is no one set of rules for structuring an earn-out, keeping those conceptual issues in mind can help anchor the negotiation. This week, we look at an example RIA transaction to illustrate how the considerations come into play when buyers and sellers are working out deal pricing and structure.
The Role of Earn-Outs in RIA Transactions (Part Two)
Like old sports cars, acquisitions don’t come with warranties, so protecting yourself against buyer’s remorse is critical. Even with escrows and punitive terms, you can’t guarantee that you’ll get what you pay for in an acquisition; but, with a properly structured earn-out, you can at least pay for what you get.
In part one of this series of posts, we explore the basic economics of contingent consideration and the role it plays in negotiating RIA transactions.
Executives Seek Revenue Streams That Aren’t Tied to Interest Rate Movements
COVID-19 adversely affected sector M&A for a couple of months when most of the U.S. was under shelter at home/safer in place orders. However, deal activity is recovering quickly and now could be further accelerated as banks look to replace lost interest income with fee-based revenue. An increasing number of clients on the banking side of our practice are showing interest in the wealth management space, and it’s easy to understand why. Long-term rates hovering at historic lows have significantly impaired net interest margins, so banks are exploring other income sources to fill the void. Wealth management is a natural place to start since so many banks already offer financial advisory services of one form or another.
Earn-outs are commonly used in RIA deals, and we expect contingent payments to make up an even larger percent of deal consideration for the next few months, quarters, or years depending on how long the current economic uncertainty lasts. And while we hope most of our clients would be thrilled by the prospect of $335 million in upfront cash payments, we don’t want you to end up feeling as Ryan Reynolds did last week. In this post, we explain what an earn-out is, why they are commonly used in RIA transactions, and how earn-outs may be used as a saving grace for deal activity in the current economic environment.
RIA M&A Amid COVID-19 (Part II)
The outlook for RIA M&A at the end of the first quarter was murky. As anticipated, previously announced deals in the final stages of negotiations did close despite COVID-19, but new deal activity slowed some in the second quarter. Interestingly, independent RIAs, rather than consolidators, drove much of this deal activity.
In this post, we look back at RIA transactions that occurred in Q1 2020 and venture what M&A will look like over the rest of the year.
Recent Deal Flurry Highlights Investor Appetite for Cost Savings and Recurring Revenue
This week’s post explores the motivations and implications of February’s record month for RIA Dealmaking.
Creative Planning’s Minority Sale is the Most Consequential RIA Deal So Far in 2020
It’s hard to imagine, but the most significant piece of news for the RIA community so far this year happened less than three weeks ago and is already almost forgotten: Peter Mallouk sold a minority stake in his firm, Creative Planning, to private equity firm General Atlantic. The transaction is easily one of the largest, if not the largest, minority transaction in the history of the RIA industry, and potentially provides a blueprint for others to follow.