Who will buy United Capital and why?

United Capital is likely to have a new owner by the summer.

The RIA, one of the nation’s largest with approximately $23 billion in assets under management, initiated a recapitalization process in January, hiring New York investment banking firm Moelis to solicit bids from potential investors.

United is not commenting on the current stage of the firm’s recapitalization. But industry executives familiar with the process believe the negotiations have reached a final stage, with a handful of potential buyers poised to buy a majority stake in the firm, a pioneering industry aggregator.

Here are some frequently asked questions about the likely impending sale, including possible buyers, the firms' perceived strengths and weaknesses, how the RIA is being valued, the role of its FinLife software and the fate of CEO Joe Duran.

Who is likely to buy United?

Probably a large private equity firm, or an RIA backed by one, but there may be a surprise.

Duran said in January United wants to have “a single partner,” most likely a PE firm.

Private equity firms, also called sponsors in deal-making circles, have been a major force in RIA M&A for several years, led by such firms as KKR and Stone Point Capital, which took Focus Financial Partners public last year. Lightyear Capital, Genstar Capital and Thomas H. Lee also have controlling stakes in large RIAs.

But a potential buyer may be a private equity firm who has not previously invested in the advisory business and is attracted by the success of Focus, the reliable recurring revenue and potential price appreciation of the asset.

In fact, so many PE firms are interested in the RIA market that these firms often buy and sell to each other. “Sponsor-to-sponsor deals are not uncommon in this industry,” says investment banker Liz Nesvold, managing partner of Silver Lane Advisors.

Goldman Sachs may be a wild card in the race to seize control of United’s $23 billion in assets. The Wall Street giant declined to comment, but expressed interest in at least one other large RIA that was for sale last year, according to a person with knowledge of the matter.

Goldman has made no bones about its interest in the mass-affluent wealth management market. It launched Marcus, its digital consumer banking service in 2016, and is eyeing collaboration with partner firms on an upcoming wealth management platform. And in an earnings call earlier this month, Goldman Chief Financial Officer Stephen Scherr pointedly noted that the “very large” mass-affluent market has $9 trillion “across more than 20 million U.S. households.”

What do potential buyers like about United Capital?

The RIA's AUM, along with its footprint in 29 states and ability to scale after successfully integrating so many aggregated firms, are attractive assets — and very rare.

“There are not a lot of platforms of that size that come on the market,” says Nesvold, whose firm was sold to Raymond James this month.

United’s emphasis on what it calls “financial life management,” exemplified by its proprietary behavioral finance-oriented FinLife software is also appealing, says industry analyst Alois Pirker, research director at Aite Group. “United has a unique planning approach and has found a good way to scale it to the mass affluent market,” he says, adding that he thinks founder Joe Duran is an asset. “He’s an experienced leader, the face of the firm and evangelizes the financial planning message. It’s the Ric Edelman effect.”

Dakota Wealth Management CEO Peter Raimondi, no stranger to buying and selling RIAs, agrees. “Joe adds value,” Raimondi says. “He’s demonstrated an ability to execute. If he leaves, the buyer pays less.”

What gives potential investors pause?

The average account size at United is $328,251, and the average client size is $935,297, according to data from the latest SEC Form ADV.

“If you’re not interested in the mass affluent market, you’re not interested in United Capital,” Raimondi says.

Although United has nearly 100 locations, about half are outside the country’s top 20 metropolitan areas. “United has many top line strengths,” says investment banker Steve Levitt, “But one negative is that there so many offices, and some are sub-scale.”

And like all RIAs that are for sale, United’s organic growth rate from net new assets will be closely scrutinized. “I think United’s organic growth is not as exponential as investors would like to see,” Pirker says. “That’s the curse of aggregation.”

What about FinLife?

It’s unclear how valuable potential buyers think the planning software is.

Boosters point to FinLife’s user-friendly interface, ability to engage clients and produce detailed client profiles based on behavior finance principles. Detractors say it’s merely a customized version of SalesForce’s CRM software that isn’t hard to replicate.

United, of course, would beg to differ — and has spent more than $30 million developing FinLife.

The number of RIAs who have licensed FinLife CX has risen from five in 2016 to a current total of 46. Nonetheless, it still faces a daunting adoption challenge. The RIA says it charges $600 annually for each client who uses the software, with over 6,300 signing onto date, plus installation and maintenance fees.

“There’s also training involved and altogether that’s a big ask for advisors,” says fintech consultant Bill Winterberg. “The actual execution has to take years.”

Envestnet’s recent acquisition of PIEtech, owner of financial planning software MoneyGuidePro for $500 million to compete with Fidelity’s eMoney may be a hopeful sign for FinLife.

“It validates the value of financial planning software, and FinLife may be more comprehensive,” says Winterberg, principal of Atlanta-based FPPad.com.

However, MoneyGuide Pro and eMoney control over half of the market, according to Financial Planning’s most recent tech survey. And FinLife didn’t even show up among the top 12 financial planning products cited by advisors. While that makes FinLife’s efforts to capture market share “a steep hill to climb,” Winterberg says, “It’s still a market where a standout solution can make some waves.”

How will United be valued?

The Focus IPO set the benchmark valuation for large RIA at a multiple of 16 times EBITDA.

Industry executives say United had hoped FinLife would put a fintech premium on its valuation, but add that it is unlikely. Nonetheless, they say United can fetch a handsome multiple of 12 to 16 times EBITDA. As with any firm, there are plenty of idiosyncrasies that will be factored in, including Duran’s executive leadership (see below) and the firm’s financial life management branding.

“The problem with valuing United for an institutional buyer is they’re not only buying assets, they’re buying a philosophy,” says Pirker. “And if you’re not happy with it, you’re going to walk away.”

But two factors are very much in United’s favor: a strong seller’s market and the firm’s unusually large size. “It’s a very active market,” says Levitt. “People know this is a great moment.”

And the law of supply and demand means United is well-positioned to take advantage, in spite of whatever flaws are uncovered in due diligence. “This is a valuation that will be based on scarcity,” says one veteran dealmaker.

What happens to Joe Duran?

He’d like to stay.

In an interview in January, Duran said a new investor ideally would “cut a check for hundreds of millions of dollars, and say, ‘Keep on doing what you’re doing and let us help you do it quicker.'”

A private equity firm or other institutional buyer with no experience in the financial advisory business is likely to welcome Duran’s leadership and want him to remain as CEO, industry sources say.

But a buyer who already has an executive RIA team may have different ideas.