About once a week when I’m reading my daily dose of trade press I come across another giant aggregator acquiring some multi-hundred million dollar RIA. I usually read these articles because I’m always interested to hear the terms of these deals. One problem I find, however, is that the deal terms are often non-specific. Another problem I find is that these transactions are not representative of the deals that most independent wealth managers should expect: these deals are for large and often institutional firms whereas most independent firms are solo practitioners and small ensembles with assets of less than $100 million. As a consequence, many firms in the business have incorrect expectations about the deal economics they can expect if and when they sell their firms.
Let’s take a closer look. The deal multiple often quoted in research surveys is about 2.1x gross revenues. But those multiples represent the deal economics of a large institutional firm that can sustain revenues without the principal of the firm. The reality is that there is a range of deal economics more like 1.0x to 2.5x gross revenues. Smaller firms often tend towards the lower end of the range because the firm cannot sustain itself without the principal, or it is not growing or it possesses an aging client base. Few advisors are ready to accept that their firm may not deserve the “average” deal economics of a survey that is not representative of its peers.
To get a better idea of what is actually going on in the market place I asked industry expert David DeVoe, Managing Partner and founder of DeVoe & Company, what firms are really being sold for. David said “around 65% of firms with around $100 million in AUM sell for 4-6x cash flow, firms with $500 million sell for 5-7x cash flow, and firms with $1 billion sell for 6-9x cash flow.” These multiples are consistent with the 1.0x to 2.5x revenue multiples quoted earlier when cash flow is adjusted for future expense levels, i.e. paying an advisor to assume client responsibilities for the selling advisor.
But price, while important, isn’t the number one concern of independent advisors who have spent their lifetime building these businesses even though the sale of their firm is probably the single largest financial transaction of their lives. Indeed, we have surveyed hundreds of advisors about continuity and succession issues, and learned that identifying a firm who could provide the same high level of care to clients was the number one requirement.
Pinnacle Advisor Solutions therefore created its own continuity and succession plan named PRISM to support independent advisors nationwide. PRISM addresses the need to provide clients with an industry leading firm focused on exceptional client care; providing a competitive pricing structure; and adding one additional feature so important to independent firms – revocability – so the advisor is free to change directions at any time if necessary.
Pinnacle offers its PRISM solution to a select number of advisors who fit our criteria each year.