More Sway for Firm Sell­ers

A fren­zied M&A mar­ket means own­ers are get­ting full pay­ment for ac­quired firms sooner.

Financial Planning - - CONTENTS - BY CHARLES PAIKERT

Pay­offs come sooner in a hot M&A mar­ket.

The fren­zied seller’s mar­ket for RIAS has dou­bled the amount of cash that ad­vi­sory firm own­ers can com­mand up­front and has short­ened the length of time in which sell­ers are re­ceiv­ing full pay­ment for their firms. “Ev­ery­one is con­cerned about the end of the bull mar­ket, and sell­ers want to cap­ture the high,” says Dave Bar­ton, vice chair­man of Mercer Ad­vi­sors. The stan­dard model for an RIA M&A deal has been a down pay­ment of 30% cash and 70% paid in prom­is­sory notes over five years, de­pend­ing on the num­ber of clients the firm re­tains over that pe­riod, Vic Es­cla­mado, man­ag­ing di­rec­tor for Devoe & Co., said dur­ing an ad­dress at the firm’s M&A + Suc­ces­sion con­fer­ence in June. But the amount of cash be­ing paid out at clos­ing has been trend­ing “way higher” in the past year, some­times even ap­proach­ing 80%, ac­cord­ing to David Devoe, the con­sult­ing firm’s founder and man­ag­ing part­ner. Buy­ers are now pay­ing sell­ers around 60% to 70% in cash when clos­ing most deals, with the re­main­ing amount paid off within a year, de­pend­ing on re­ten­tion rates, Bar­ton said in an in­ter­view with Fi­nan­cial Plan­ning. “Sell­ers get­ting full pay­ment within one year is def­i­nitely a sea change,” says Bar­ton, who over­sees M&A for Mercer. Joe Du­ran, CEO of United Cap­i­tal, says he’s also see­ing as much as 60% cash be­ing paid at clos­ing. Firm own­ers should take ad­van­tage of the M&A mar­ket’s “acute seller’s mo­ment,” Bar­ton says. The risk they’re tak­ing by not cash­ing in now is be­com­ing a seller dur­ing a bear mar­ket down­turn, he adds. While a re­ces­sion would cer­tainly de­press val­u­a­tions, Devoe say, struc­tural changes in the RIA busi­ness will con­tinue to keep the vol­ume of M&A deals high for five to eight more years. Devoe noted that last year was the fourth suc­ces­sive record year of RIA M&A vol­ume and the 2018 first quar­ter also set records for most trans­ac­tions (47) and most sales of es­tab­lished RIAS (30).

“Ev­ery­one is con­cerned about the end of the bull mar­ket, and sell­ers want to cap­ture the high,” says Dave Bar­ton of Mercer Ad­vi­sors.

A hot M&A mar­ket has re­sulted in cash pay­ments at clos­ings trend­ing “way higher” this year, says con­sul­tant David Devoe, founder and man­ag­ing part­ner at Devoe & Co.

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