FA ’ S 2024 RIA SURVEY & RANKING
ue or subtracts from value is do we have client concentration risk ? Do we have a next generation of investors identified ? Or the next generation of leaders identified ?”
Furey says it ’ s no longer a slam dunk for RIA firms to come to market and think they ’ re going to be flooded with offers when cash is no longer cheap . “ Because of the cost of capital being higher … there ’ s less cash at closing because debt is more expensive . There ’ s more equity in deals because equity is expensive , too , but what buyers will do , if their multiple is higher than the seller ’ s multiple , there ’ s arbitrage there , they get accretion , so they ’ re putting more equity in deals .” He also sees more earn-out requirements , so the seller has to keep growing the business .
Some big acquirers have learned their lessons after getting into trouble by structuring deals so that management cashes out and effectively retires on the job . Furey asks : Why would an owner who sold and got all the cash up front have any motivation to work hard to keep clients around ?
“ I like today ’ s environment more because there ’ s more risk-sharing ,” he says .
Laura Delaney , the vice president of practice management and consulting at Fidelity and an M & A expert , says that the structures of acquisitions have changed , where all-cash deals are falling by the wayside while mixtures of equity and cash are becoming more the norm as interest rates rise and capital becomes more expensive . “ Equity is becoming more of a currency ,” she says . “ For smaller firms who are being acquired by a larger firm , if a smaller firm is going for eight or nine times their EBITDA and the larger firm ’ s worth 20 , well now the [ acquired ] firm ’ s worth 20 . I think the smaller firm would like an equity stake in that combined firm .”
For acquirers buying firms at earnings multiples around 13 to 17 times EBITDA , the deals are being split into more equity up front followed by a retention payment followed by about three years of earn-outs . About 98 % of clients typically stay on after the deal is done , says Delaney , taking the number from a 2023 Fidelity study .
“ Beauty is in the eye of the beholder ,” she says , “ But there are things we have identified that either add to value or detract from a firm ’ s value . It is about looking under a firm ’ s hood .”
Some firms might get a lower valuation because they have some commission business , but she says sometimes commission business is good . “ What generally adds to valjoin the INVEST IN WOMEN community
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36 | FINANCIAL ADVISOR MAGAZINE | JULY / AUGUST 2024 WWW . FA-MAG . COM