Key Takeaways
External transactions often occur at higher valuations. In today’s RIA M&A market, external buyers, particularly scaled, private equity-backed platforms, frequently pay higher headline EBITDA multiples than internal purchasers can match. Their ability to extract synergies, accelerate growth, and leverage a lower cost of capital often supports those premium valuations.
Both internal and external transactions can make sense depending on the situation. The decision is rarely purely about maximizing price. Culture, succession objectives, governance preferences, client continuity, and long-term strategic goals all factor into the analysis. External transactions may offer pricing advantages, while internal transactions may better align with legacy, independence, and control considerations.
Internal transactions can enhance long-term value, even if they don’t maximize today’s price. Internal ownership broadens equity participation, reduces key person risk, strengthens succession planning, and can improve negotiating leverage with future external buyers. In many cases, internal transitions are not an alternative to external sales but a strategic step that increases the firm’s ultimate value and optionality.
One of the most consequential decisions facing RIA owners is whether to sell internally or pursue an external transaction. While this choice is often framed as cultural or strategic, valuation inevitably sits at the center of the discussion.
Internal transactions do not occur in a vacuum. Sellers are keenly aware of the valuations being paid in the broader M&A market and naturally compare what internal buyers can offer against external alternatives. Over the past decade, external transactions (particularly those involving large consolidators and private equity-backed wealth platforms) have driven RIA multiples higher. Internal buyers have often struggled to keep pace.
The result is that when internal transactions occur, they frequently do so at valuations that appear meaningfully discounted relative to external deals.
Why is that?
Headline Multiples vs. Real Economics
At first glance, the gap between internal and external valuations can seem substantial. External deals are often reported at headline multiples that imply premium pricing—sometimes well into the mid-teens or higher on EBITDA.
However, headline valuation and realized value are not always the same thing.
External transactions typically include components such as retention based earnouts, growth based earnouts, or consideration in the form of buyer equity.
When these elements are stripped out or risk-adjusted, and when transactions are evaluated on a true cash-at-close basis, the gap between internal and external valuations may narrow. Internal deals are often structured more simply, frequently involving notes, staged redemptions, or minority recapitalizations, without contingent consideration tied to future performance.
On a comparable basis, the delta may be smaller than the headline numbers suggest.
But that does not explain all of it.
What Ultimately Drives Valuation?
At its core, valuation comes down to three variables: cash flow, risk, and growth. External acquirers may perceive advantages on all three fronts.
Cash Flow Enhancement
An external buyer, particularly a scaled wealth management platform, may be able to extract higher cash flow from a target firm than the current ownership. This can come in the form of vendor pricing leverage, technology consolidation, reduced occupancy costs, or centralized compliance and back-office functions.
These margin enhancement opportunities can justify paying a higher multiple than internal buyers, who are typically underwriting the firm’s economics largely as-is.
Growth Acceleration
Many serial acquirers in the RIA space are not merely aggregators; they are focused on driving organic growth within their partner firms. Dedicated growth teams, marketing resources, recruiting infrastructure, and cross-selling opportunities can alter the growth trajectory of a target firm.
If an acquirer believes it can accelerate organic growth, it can rationally justify paying more today.
Cost of Capital
Perhaps the most significant factor underlying the valuation gap is cost of capital.
The large wealth platforms driving much of the deal activity in the RIA industry often transact at valuation multiples north of 20x EBITDA. A sponsor-backed platform trading at those levels has a comparatively low cost of capital. This enables them to acquire RIAs at, say, mid teens EBITDA multiples while still creating value for their own shareholders.
Put differently, a dollar of EBITDA purchased at $15 may contribute north of $20 in enterprise value to the acquirer. That dynamic simply does not exist for internal buyers.
Internal purchasers, typically employees or next-generation partners, face a meaningfully higher cost of capital. They often rely on personal guarantees, bank financing, seller notes, or distributions from the business itself to fund purchases. Their ability to pay is constrained not only by valuation theory, but by practical financing realities.
Why Consider an Internal Transaction?
Given the valuation premium often available in external sales, why should RIA owners consider internal transactions at all?
Internal and external paths are not mutually exclusive. Even if an external transaction is the ultimate end goal, an internal transaction can serve as a valuable intermediate step. Broadening ownership among key employees reduces key person risk and institutionalizes the business. A firm with diversified ownership and aligned next-generation leadership is often more attractive—and more valuable—to an eventual external buyer.
In other words, internal ownership can increase the ultimate external valuation.
Internal ownership also creates powerful incentives and alignment. Equity ownership remains one of the most effective tools for retaining and motivating key talent. Firms that fail to create meaningful ownership opportunities may find their most capable professionals recruited away by competitors offering exactly that.
Maintaining internal optionality can also improve negotiating leverage. The credible ability to transition internally—even if it is never exercised—changes the dynamic in conversations with external buyers. Sellers who are not compelled to transact are in a stronger negotiating position than those for whom an external sale is the only option.
Internal sales further allow founders to maintain greater control. Staged transactions over time can facilitate gradual succession while preserving governance authority in the interim. Sellers can hand-pick successors, shape culture, and ensure continuity of client relationships.
Finally, internal transactions avoid introducing new third parties with their own investment horizons. Many private equity-backed buyers operate under defined holding periods and return expectations. Internal transitions allow the firm to remain independent of those external timelines.
Framing the Decision
The decision between internal and external transactions is rarely purely financial. Culture, legacy, client continuity, governance preferences, and personal objectives all matter.
However, valuation dynamics are central to the conversation. External buyers may be able to pay more due to perceived synergies, growth opportunities, and a lower cost of capital. Internal buyers typically cannot match those headline multiples.
That does not mean internal transactions are inferior. Rather, they serve different objectives and can, in many cases, enhance long-term value, particularly when viewed as part of a staged strategic plan.
For RIA owners, the question is not simply “which option produces the highest multiple today?” but “which path best aligns with our long-term objectives for ourselves, our employees, and our clients?”
About Mercer Capital
We are a valuation firm that is organized according to industry specialization. Our Investment Management Team provides valuation, transaction, and consulting services to a client base consisting of RIAs, asset managers, and trust companies.