David DeVoe: Literally hundred of firms need to be sold over the next several years -– just to solve for succession.

The RIA M&A market continues to be a no-show, though 2012 pace is ahead of 2011

Only the roll-ups seem to have the focus, knowledge, capital and deadly intent to get results in this market

October 23, 2012 — 3:29 AM UTC by Brooke Southall

5 Comments

Brooke’s Note: I get pummeled for information all but constantly about RIA deals. It’s a hot topic, especially among would-be buyers. So what the hell is wrong? In my opinion, it comes down to the Mark Hurley theory about how only the tiniest handful of RIAs has enterprise value. See: What to make of Mark Hurley’s latest prophecy that most RIA firms will go out with a whimper. Buyers know this and just want the bodies of fallen soldiers so they can strip them for valuables. Sellers know this and say to themselves: I might as well just hold on another year and I’ll gain more revenue for fewer hassles — and still have something to sell when the big buyer comes calling. Then there is the matter of deals being messy, humiliating affairs that involve getting along with Huns and Vandals. As one $3 billion RIA principal said to me: “We’ve never done a deal because we’ve never found a firm we thought was as good as ours.” It seems these issues need to be addressed as much as the wonders of discounted cash flows and the art of valuation.

The RIA business continues to churn out a pitifully small number of mergers and acquisitions and to add to its monumentally long list of excuses for why it’ll have to happen next year.

It’s a problem.

“The slowdown of transactions is disconcerting in regards to the needs of the industry,” says David DeVoe, CEO of DeVoe & Co., a San Francisco-based M&A firm for RIAs. “Given the demographics of owners in this industry, literally hundreds of firms need to be sold over the next several years — just to solve for succession. The longer firms wait to create a succession plan, the fewer the options they have.” See: M&A market reaching a new normal based on RIA-driven deals, say competing reports from Pershing, Schwab.

RIAs zigged down and roll-ups zagged up.
RIAs zigged down and roll-ups zagged
up.

Roll-up rampage

The good news — such as it is — is that the year-to-date assets under management for M&A deal activity reached $42.3 billion at the end of the third quarter, which virtually equals 2011’s full-year M&A AUM total of $43.9 billion. There were 10 transactions completed during the three months ended Sept. 30, totaling approximately $6.1 billion in AUM. The data reflect firms’ being sold with assets under management exceeding $50 million.

The not-so-good news is that these mostly weren’t RIA deals in the pure sense, since they were executed by roll-ups and other venture-backed “national-acquiring” firms that were using capital that wasn’t generated by collecting fees from clients who paid for financial advice. Indeed, roll-ups continue to be the dominant buyer category, closing seven deals this past quarter, bringing to 19 the total of such transactions completed year-to-date. See: One of a new breed of roll-ups taking center stage, United Capital is churning out deals again.

There are good reasons why roll-ups continue dominate RIA M&A.

“Consolidators continue to demonstrate momentum, despite other buyer categories showing declines,” DeVoe says. “Consolidators are able to win new deals, partially due to their methodical approach to M&A, which eclipses the potential 'distraction factor’. Although many advisors see the strategic value of M&A, only a portion of them have created a well-thought-out plan to execute the transactions, which is ultimately required to keep the deals on track through thick and thin.” See: Roll-up-like deals back on the rise in first quarter as RIAs look for succession plans.

Jon Beatty, who oversees mergers and acquisitions for Schwab Advisor Services, says that the relative trickle of deals reflects the same factors that many see behind a sputtering stock market.

“The uncertainty in the markets and the upcoming presidential election has led to a decline in M&A activity this past quarter,” said Beatty, the unit’s senior vice president, sales and relationship management “While national acquiring firms remain dominant players, RIAs as acquirers have been sitting on the sidelines waiting for the right opportunity.”

'Too busy with growth’

But even given the hubbub of politics — which, after all, never stops — the deal pace in the RIA business is tepid.

“The third quarter had fewer M&A transactions than one would expect for an industry of over 10,000 firms and RIA owner demographics,” DeVoe says. “Given that there has been no significant change in the key drivers for M&A during the last year, the slowdown is consequently the result of advisors being distracted by other issues … Anecdotally, I’ve also seen advisors who are too busy with growth and some who continue to seek higher valuations.”

DeVoe adds that RIAs with unshakable focus are out there succeeding in M&A — notably Buckingham Asset Management LLC which recently bought Cupertino, Calif.-based Founders Financial Network LLC as a an aggressive move in building its Silicon Valley beachhead. The company is using it to bring in 40 or more fresh Facebook millionaires. See: Why sudden wealth at Facebook is gushing into a $17-billion RIA and triggered a merger of two DFA giants.

“Buckingham Asset Management is a good example of an RIA that demonstrates a methodical approach to M&A. With six deals under their belt, they have developed a methodology to help advisors stay the course through the complex process of selling a firm.” See: Giant DFA customer puts young CEO in charge to execute ambitious national plan.

Still, it’s notable that the Founders deal was not without roll-up influence, considering that Buckingham is owned by Focus Financial Partners, LLC, the $50-billion national acquirer.

Despite a track record of anemic deal flow, DeVoe says he continues to build out his capabilities for handling more transactions — hiring two investment bankers in the past five months.


Mentioned in this article:

DeVoe & Company
Consulting Firm, Mergers and Acquisition Firm
Top Executive: David DeVoe



Share your thoughts and opinions with the author or other readers.

Image

Elmer Rich III said:

October 23, 2012 — 8:53 PM UTC

An orderly, successful business transition is a win for every stakeholder — including the vendors, suppliers and partners (remember that!).

Brooke does, another, good job of reporting and thinking about the situation. Here are some our experiences and impressions.

1. Demographics is Destiny – Not much about the future is predictable but aging and death rates are. The Boomer generation is the largest in history and is heading towards retirement. Business transitions will happen after funerals haphazardly, if not planned before.

2. Liquidity Needs are Growing – Funding retirement is becoming more expensive because of longer lives, inflation and expanded life-style needs. Owners must maximize the valuation of their businesses and get paid. Caution: In the past, getting paid vs promises has been a problem.

3. Acquisition are the Best Way to Grow — Some good, but not well known, research says acquisitions beats organic growth hands down. Logically, it makes sense. Organic growth has become very expensive of resources and very, very hard. Most markets are saturated.

4. Growth is the Key Business Value — Everyone wins if the business continues to grow for the 3-5-10 years following a transition. Buyers buy growth and sellers get paid on growth.

5. Valuations are Usually Wrong — Few firms do a formal valuation with a valuation firm that understands the industry and can articulate the real value. Everyone loses if the valuation is wrong. For the long-term health of the business — a seller getting overpaid and a buyer underpaying create problems.

6. It’s Not Just About the Money – Once a good valuation is in place, the terms of deals are pretty much standard and driven by accounting conventions. Much more ambitious and powerful are the psychological and intangible aspects of a transition. What are spouses and family interests? What ambitions does the owner(s) have after the transition. What are the interests of key employees? These usually become problems when they are not discussed openly and iteravely.

7. It’s Not a “Deal” It’s a Transition of a Lifetime Business – We are as hard headed as anyone but – the deal is just the first step in maximizing the value of this business, that usually took a lifetime to build. You can “win” the deal and “lose” the business.” If the business doesn’t A) Continue and B) Grow — everyone loses. Everyone. Client’s, vendors, partners, suppliers, employees, supporting professionals, etc. Everyone. Typically any investment banker will get their fee and “win” regardless however — so be cautious there.

Now is a good time to be a buyer or sellers. Sellers are not competing with everyone rushing for the exit and buyers face reasonable valuations.

Image

Elmer Rich III said:

October 23, 2012 — 8:52 PM UTC

We work with buyers and sellers. We are doing more of this work. We’re good at it. Our transactions work for both parties long term. It’s gratifying. An orderly, successful business transition is a win for every stakeholder — including the vendors, suppliers and partners (remember that!).

Brooke does, another, good job of reporting and thinking about the situation. Here are some our experiences and impressions.

1. Demographics is Destiny – Not much about the future is predictable but aging and death rates are. The Boomer generation is the largest in history and is heading towards retirement. Business transitions will happen after funerals haphazardly, if not planned before.

2. Liquidity Needs are Growing – Funding retirement is becoming more expensive because of longer lives, inflation and expanded life-style needs. Owners must maximize the valuation of their businesses and get paid. Caution: In the past, getting paid vs promises has been a problem.

3. Acquisition are the Best Way to Grow — Some good, but not well known, research says acquisitions beats organic growth hands down. Logically, it makes sense. Organic growth has become very expensive of resources and very, very hard. Most markets are saturated.

4. Growth is the Key Business Value — Everyone wins if the business continues to grow for the 3-5-10 years following a transition. Buyers buy growth and sellers get paid on growth.

5. Valuations are Usually Wrong — Few firms do a formal valuation with a valuation firm that understands the industry and can articulate the real value. Everyone loses if the valuation is wrong. For the long-term health of the business — a seller getting overpaid and a buyer underpaying create problems.

6. It’s Not Just About the Money – Once a good valuation is in place, the terms of deals are pretty much standard and driven by accounting conventions. Much more ambitious and powerful are the psychological and intangible aspects of a transition. What are spouses and family interests? What ambitions does the owner(s) have after the transition. What are the interests of key employees? These usually become problems when they are not discussed openly and iteravely.

7. It’s Not a “Deal” It’s a Transition of a Lifetime Business – We are as hard headed as anyone but – the deal is just the first step in maximizing the value of this business, that usually took a lifetime to build. You can “win” the deal and “lose” the business.” If the business doesn’t A) Continue and B) Grow — everyone loses. Everyone. Client’s, vendors, partners, suppliers, employees, supporting professionals, etc. Everyone. Typically any investment banker will get their fee and “win” however — so be cautious there.

Image

Mike Byrnes said:

October 23, 2012 — 8:16 PM UTC

'Stripping the fallen for valuables’ is a sad, scary and true analogy Brooke.

Succession planning would be a bit less of an urgent issue for advisors if they would just create continuity agreements in case of death or disability. That gives those trying to grow an internal successor longer to go through the time-consuming process.

Advisors, read my RIABiz article on the topic called, “Have an aversion to succession plans? Consider a continuity pact as a vital baby step” found at http://www.riabiz.com/a/10963492/have-an-aversion-to-succession-plans-consider-a-continuity-pact-as-a-vital-baby-step

Don’t put it off any longer… your family and clients will be happy you didn’t!!! – Mike Byrnes, President of Byrnes Consulting, LLC, www.byrnesconsulting.com

PS just tweeted this @ByrnesConsultin

Image

Brooke Southall said:

October 23, 2012 — 4:48 PM UTC

Hi John,

Thank you for adding this body of information. I know that firms like yours are optimistic and growing for what you believe is coming down the pike. And with RIIA, you’re working to do something about it from a broader perspective. In other words you’re putting your money, and heart, where your mouth is. Deal flow isn’t everything but it’s a leading indicator that we can all understand (at least a little). And deal flow is always tepid, tepid and more tepid. The only thing I’ve seen in the RIA M&A business that’s as consistent as the lackluster deal pace is the certainty that 'next year’ it’ll all start to pick up. So my journalistic skepticism is on red alert.

Brooke

Image

John Furey said:

October 23, 2012 — 3:46 PM UTC

The M&A market has been and will be volatile in terms of the number of transactions in any given period. However, advisory firm owner demographics tell us that owners are getting older and more transfers of ownership are inevitable. Over the next decade, the number of transactions should only go one direction – higher!

Sometimes we (as an industry) tend to shine the light too brightly on deal flow and succession planning. This is only the end game that all owners will eventually have to play. Owners should give equal attention, if not more attention, to addressing key structural issues in their business such as continuity planning, certainty for clients, employees & owners in the short and intermediate term, and growth planning that drives future revenue/limits business risk. Firm owners that focus on these areas will find their options for succession to be far greater. The key is to be proactive and plan for what the end game could be – think 10 year horizons!

There is reason to be optimistic about the future of the industry. The number of succession and business continuity options are increasing and advisors will have greater choice. Not only are the options increasing, but our industry’s ability to effectively facilitate transactions is also rising. aRIA, along with other large RIAs, are taking a leadership role in terms of educating their peers on their options, how to build sustainable advisory firms, and solve for key strategic challenges this article mentions.


Submit your comments: