Just 25% of deals in 2020 have contained a clawback feature, down from 67% in 2019, according to RIA consultancy Succession Resource Group.
RIA sellers are trading higher values on their firms for less risk in M&A transactions so far in 2020, according to consultancy Succession Resource Group (SRG).
The search for certainty has resulted in a sharp reduction in deals with contingencies and clawback features since the end of 2019, the Lake Oswego, Oregon firm said in a recent M&A outlook report.
While values dropped despite initial expectations for a ‘strong’ 2020, SRG found that just 25% of deals this year have contained a clawback feature, down from 67% of deals in 2019. Meanwhile, 50% of transactions were all-cash deals.
SRG helps financial services firms and professionals value, buy, and sell their businesses, as well as plan for succession and long-range transition of ownership. The firm’s RIA clients typically have $1bn or below in assets under management.
Despite a short-term decline in revenue through June, values for RIA firms remained consistent, dropping less than 1% through the first half of 2020, the firm said. The average multiple of revenue of 2.72x in 2019 slipped to 2.70x through the end of the second quarter of 2020.
SRG said the impact of the Covid-19 pandemic on advisor revenues ‘rebounded much quicker than initially anticipated,’ but that the market volatility will likely serve as a catalyst for advisors who were considering a sale at any point in the next 1-3 years.
Kristen Grau, executive vice president of SRG, said she anticipates increased deal volume as early as this summer based not just on the pandemic but increased compliance challenges (Regulation Best Interest, for example), the ‘graying of the industry’ and aging clients, as well as a lack of succession planning.
According to SRG, the average advisor age is 55 while the average age of an RIA seller is currently 63. Meanwhile, going into the pandemic, 33% of advisors already expected to retire in the next decade.
Brian Lauzon, managing director at investment bank InCap Group, said there continues to be an ‘aggressive appetite’ for acquisitions and that multiples have remained steady for RIA firms in the range of $400m to $3bn in AUM.
‘Leading up to Covid, earn-out periods were shortening and it wasn’t unusual to see a deal with a one- or two-year earn-out,’ Lauzon said. ‘Currently — and we believe going forward — we expect earn-out periods to return to historical norms of three to four years.’
For InCap’s end of the market, Lauzon said all-cash deals have ‘historically been rare’ and will likely continue to be so for the foreseeable future.
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This article was first published by Jake Martin.
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