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What Does a Sellable RIA Look Like These Days?

March 22, 2017

A RIA’s size, the demographics of its clientele as well as its advisor force, and the owner’s ability to negotiate are the three main factors buyers use to value an advice practice, says the Wall Street Journal.

“Lifestyle” practices where the owner can’t pay anyone to run the business aren’t of any interest to potential buyers at all, Todd Thomson, chairman of Dynasty Financial Partners, tells the newspaper. For professional practices, meanwhile, the key is to clear the $10 million revenue hurdle.

The multiples paid on earnings before interest and taxes for RIAs with $10 million or more are about eight to 10 times, John Furey, founder of aRIA, a consulting firm and association of seven RIAs, tells the Journal.

For firms with revenues under $10 million, those multiples are only four to seven times. The reason buyers are willing to pay higher multiples for firms with $10 million or more in revenue isn’t due to growth or margin rates, according to the Journal — firms with $2.5 billion or more in assets actually trail behind the median on both. Rather, larger firms have more clients and are therefore likely to keep standing if some leave.

The majority of RIAs are out of luck, according to the Journal. Of the 4,183 wealth-oriented RIAs registered with the SEC, just 527 manage $1 billion or more — the threshold, according to Furey, for being likely to pull in $10 million in annual sales.

Even for practices that are attractive to buyers, a lot will depend on the owner’s negotiating prowess, says the Journal. Buyers prefer to pay the owner a higher salary in order to reduce the sales price, while it’s in the best interest of the owner to negotiate a higher sales price with a lower salary, for tax reasons. The difference can amount to hundreds of thousands of dollars, the newspaper says.

Demographics also play a major role, according to the Journal. Ultra high net worth investors will transfer up to 39% of their wealth over the next 20 years, the Journal writes, citing a 2015 Wealth-X report.

Meanwhile, industry estimates suggest that advisors lose between 66% and 98% of the assets that get transferred to the next generation, according to Vonnegut.

As a result, RIAs should pay attention to Millennials, and may want to merge with other practices that can complement theirs to build scale. But Thomson tells the Journal there’s no better time to sell a practice than right now.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here if you have a paid subscription.