RIA M&A: The Evolution of Deal Structures Contains Lessons for Both Buyers and Sellers

By Katie Bruner & Aaron Halser

Featured in Wealth Management.com's 2024 Market Outlook

In spite of all of the macroeconomic and geopolitical headwinds that have impacted the wealth management industry over the past several years, RIA deal volume remains resilient. Year-over-year data underscores this tenacity—through mid-November 2023, SkyView Partners had funded 54 deals totaling approximately $170 million, on par with deal funding achieved by the same time in 2022, with a fourth quarter that looks to outpace 2022.

One thing that has become certain over the past several years, and that will continue to be a factor over the course of 2024 and beyond, is the fact that deal structures have changed in lockstep with the undulation of the economy and the markets. This reflects the RIA industry’s continuing evolution into a more mature marketplace. And while these dynamics may have accelerated over the course of 2023, lessons from these longer-term shifts can help firms go beyond obsessing over the Fed’s every move. Dealmakers can ignore the steady drumbeat of pessimistic headline noise and focus instead on their strategic plans to be buyers or sellers.

In that respect, there have been dramatic changes. Buyers are becoming more savvy and increasingly critical when evaluating deal metrics. As part of their due diligence, they are taking a closer look at prospects’ business models—scrutinizing historical growth rates, client retention, key personnel, fee structure, service models, and geographic footprints. Even soft metrics, like company culture, are factoring into a buyer’s consideration. Structural changes are evidenced by retention periods now extending up to 24 months, adjustments in initial purchase prices and down payments, an emphasis of performance-based back-end incentives, and new stipulations for buyer equity.

For sellers, adapting to these changes means putting aside their emotional attachment to the business they built, embracing a more disciplined, objective approach to telling their story. Securing a desired valuation requires providing favorable data for critical business elements such as earnings before interest, taxes, depreciation and amortization (EBITDA); client and staff retention rates; new asset pipelines and employee incentive plans.

While some sellers might balk at providing this level of detail, presenting clear digestible information to prospective buyers is akin to using real estate staging techniques to showcase a house’s best features and attract the best offers. Sellers are discovering that they must do this “staging” work to achieve the best multiple for their practice. Sellers in this market are evaluating their post-sale involvement to capitalize on upside in the form of backend deal structures.

The RIA industry is well positioned for continued growth into 2024 as the demand for financial advice continues to outpace the industry’s capacity. While many M&A pundits continue to place an emphasis on the number of transactions completed, we believe it’s more prudent to acknowledge that while deal structures have indeed changed, demand is still strong and should contribute to the continued health of the industry in 2024 and beyond.

View the original article by Katie Bruner & Aaron Hasler published in WealthManagement.com's 2024 Market Outlook here.