Advisory firm values slip; big buying small

For the first time in up to a decade, the average sale price of an advisory business fell last year, according to two separate soon-to-be-released studies.
The decline in value, although relatively small, reflects the lower revenue and profit levels of 2009 — the period on which last year’s transactions were largely based — as well as uncertainty over the future economic and tax climate, and heightened desire on the part of sellers to exit.
The firms sold last year tended to be smaller than in previous years, the studies found, and that may have held down valuation multiples.
“Sellers are selling out to the first buyer who has a plan and confidence in the future they don’t have anymore,” said David Grau Sr., president of FP Transitions LLC, which produced one of the studies.
The firm, which provides succession-planning services and operates what it says is the largest open market for buying and selling financial services practices in the United States, analyzed the 198 transactions in which it played a part in 2010. The deals involved the sale of all of the advisory firm’s assets or equity.
According to the study, average practice values declined by 3 basis points to 2.31 times trailing-12- months’ revenue for fees and/or trails, down from a high of 2.34 times in 2009.
FP Transitions generally works with smaller practices of one to five owners, a staff of between one and 20 people and a valuation between $100,000 and $20 million, Mr. Grau said, noting that firms within those parameters account for about 95% of the independent financial services market.
A separate assessment by Pershing Advisor Solutions LLC and FA Insight of about 41 publicly announced sales and acquisitions of RIA firms in 2010 showed a decline in valuation of as much as 15% from the market peak of 2007 for the “best firms.” The study is slated for release in coming weeks.
Pershing’s study found that roughly 18% of sellers in 2010 managed less than $100 million in assets, double the percentage of the previous five years, said Mark Tibergien, chief executive of the Pershing LLC unit, who noted that smaller practices tend to sell at lower multiples.
But Mr. Tibergien said that he expects sales to rebound this year and already sees “an increase in the number of conversations around mergers.”
Although valuations de¬clined, the number of deals rose, according to Schwab Advisor Services. Last year, RIA mergers and acquisitions rose sharply to 109 deals involving $156 billion in assets, up from 70 deals worth involving $100 billion in assets in 2009, Schwab said last month. (For a snapshot of some notable recent deals in the advisory industry, view the InvestmentNews Deal Tracker).
Surprised by the findings, Mr. Grau said that he had expected valuations to rise, just as they had in every year since 2000, driven by the imbalance of buyers to sellers.
But unlike 2009, when 33% of sellers negotiated with just one buyer, 43% of the advisers that FP Transitions worked with last year didn’t shop their business.
Sellers worried about the potential expiration of the Bush tax cuts and discounted their price in return for a larger down payment or an all-cash deal. Average down payments surged to 32%, an increase of 10.3% over 2009, according to Mr. Grau.
Sellers who put their business on the open market fared slightly better than those who limited their negotiations, said Mr. Grau, noting that open-market transactions sold at an average of 2.35 times trailing-12-months’ recurring revenue last year, up one basis point from 2009.
RIAs cited their own highly individual reasons for selling, and several who were interviewed said that they are happy with the structure of their deals.
Glen Janken, for example, decided to become a math teacher after spending 25 years as a financial planner and RIA. He made the decision quickly and sold his Beverly Hills, Calif.-based business, which managed just under $100 million in assets, last May, less than a year after attending a seminar for RIAs on selling a practice.
The deal closed in July.
After Mr. Janken put his business on the market, he received more than 40 inquiries, which he narrowed down to just a handful.
“I had a bunch of criteria” for choosing a buyer, he said.
“I wanted a firm that was ethical and focused on financial planning that would handle the financial planning process the way I had. I was not looking for someone who was trying to buy a bunch of names,” said Mr. Janken, who also wanted the acquirer to retain his employees.
He ended up selling to Summit Wealth Management Inc. in Atlanta, a larger RIA firm with six offices nationwide.
Mr. Janken said that he is satisfied with his deal, which came in at a multiple of about two times annual revenue. But he said that deals shouldn’t be judged by revenue multiples alone, adding that how buyers deal with the structure of the business and how payment is distributed also are important.
Capital L Group LLC, an asset management holding company, has grown from $40 million in assets under management to $1.5 billion in 18 months, primarily through acquiring smaller RIAs, said Brian Church, Capital L’s national sales director. He said that his company is still interested in buying.
Some advisers leave the business when they sell, but more of them stay on and run their business in partnership with Capital L, Mr. Church said.
He said many advisers join Capital L in part because of how tough it is to work alone. “It is not what everybody thought it would be,” Mr. Church said.
Steve Norton sold his practice to Capital L last year, largely so he could continue building his business. He now works as an adviser at the firm.
“You get to a point as an independent adviser where you max out what your capabilities are just by time,” he said. “If I want to grow, I can hire someone and pay a salary or latch onto a larger group and leverage off their billing.”
At 34, Mr. Norton has many years to develop his business, and he that said he structured his deal with that in mind, taking a somewhat lower payout that will continue over a long period of time, a situation that might not suit an older adviser nearing retirement.

Capital L took the first step in calling, he said, but the interest was mutual. Mr. Norton had participated in an acquisition several years ago and felt that he received a fairly high multiple on his earnings.
The trend is rapidly moving toward RIA practices’ buying other, smaller firms. About half the acquisitions Pershing tracked last year involved an RIA firm buying another, double the rate from a few years ago, when consolidators accounted for more transactions.
Mr. Tibergien said that he expects that trend to continue.
Peter Langer, a sole-practitioner RIA for 22 years who managed $125 million in assets, did his homework when he decided to sell his 80-client practice last year. He received two independent valuations of his firm, which he said differed by about 2%.
He also spoke to more than one potential buyer, including a Fortune 1000 company, before he sold to Vinton Fountain of Fountain Financial Associates Inc., a fellow RIA who practices nearby in Wilmington, N.C.
Mr. Langer continues as a consultant to help transition his clients over the next two years.
He said that he received near the high end of the commonly cited range of between 1.5 times and three times annual revenue.
Mr. Langer achieved his own financial retirement goal, which allowed him the freedom to sell, but upcoming regulatory changes resulting from Dodd-Frank played a role, too.
“I couldn’t give clients the face time I wanted to if I got bogged down in more compliance,” he said.
The uncertainty of the shape of new regulations was a worry, as well.
Now that his deal has closed, Mr. Langer is helping the transition go smoothly over the next year or so. He no longer keeps up with regulatory developments, but whenever he happens upon some new reporting requirement, it only serves to underscore his decision to leave.
“Everything I read makes me glad,” Mr. Langer said.
E-mail Lavonne Kuykendall at [email protected].

Related Topics: RIA Marketplace, Valuation