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