While some RIA firms have recently been able to sell at lofty valuations, it’s important to not let the outliers skew the overall valuation perspective. For every story published about a firm selling for a large price, there are many other stories that go unwritten about firms selling for much less attractive valuations. The value of a registered investment adviser (“RIA”) firm will range dramatically based on a multitude of factors including its overall size, profitability, and client composition. There is also a general misconception that advisory firms tend to sell for a “multiple of revenue.” While that may be the case on rare occassion, the majority of firms will be value based on a mulitple of earnings before interest, taxes, depreciation, or amortization (“EBITDA”) and other more cash flow focused metrics.
It’s also important to note that although valuations are presently considered to be relatively high compared to historical norms, most industry insiders still point to a marketplace where the number of firms looking to buy other firms far outweighs the number of firms looking to sell. As such, there continues to be a relatively low volume of sales relatively to the overall number of firms in the industry. According to a recent Devoe & Company report, there were 145 total RIA mergers and acquisitions completed in 2016. This compares to 135 deals completed in 2015. Thus, while there is a steady trickle of consolidation in the industry, the number of new firms created each year continues to far outweigh the number of firms acquired each year resulting in a growing number of total registered firms.
Key Valuation Factors
- Public market comparables
- Revenue size and growth rate
- EBITDA size and margin
- Client retention, average age, and concentration
- Management team depth
- Advisor loyalty and production concentration
- Health of capital markets
Potential Buyer Types
- Traditional RIA Firm
- Roll-Up / Consolidator Firm
There a few dozen consolidators currently active in the industry. Some of the more notable players in this group include Focus Financial Partners, Hightower, and United Capital. These firms first emerged in the industry about a decade ago and remain a consistent buyer of medium to larger-sized RIA firms.
- Financial Sponsors
The lines between a financial sponsor and consolidator can also blur as demonstrated by the recent acquisition of Focus Financial Partners by Stone Point Capital LLC and Kohlberg Kravis Roberts & Co.
- Banks and other Financial Institutions
Potential Valuation Ranges
Display two examples with charts
We strongly suggest that the Chief Compliance Officer of all RIA firms, regardless of total regulatory assets under management, regularly review if the firm is required to make a Section 13 or Section 16 filing.
Lexington Compliance and RIA in a Box LLC are not law firms, investment advisory firms, or CPA firms. Lexington Compliance and RIA in a Box LLC do not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.