Peter Nesvold of Nesvold Capital Partners says he can remember a time when an advisory practice selling for 10 times its EBITDA seemed outlandish.
Now it's not unheard of for RIAs to fetch 20 times EBITDA — a common profitability measure standing for earnings before interest, taxes, depreciation and amortization. Driving much of the skywards leap in valuations are large aggregator firms deriving their financial fuel from private equity.
If 10-times EBITDA once seemed unimaginable, now it's a "50% premium on that," said Nesvold,
"Trees don't grow to the sky, as the saying goes," Nesvold said. "But valuations continue to nudge upwards."
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That's not to say every owner of an RIA considering a sale can simply expect a 20-fold payout. No one likes to hear the words "it depends," but that's the only accurate way to sum up firms' valuation prospects, said David DeVoe, the founder and CEO of the M&A consulting firm DeVoe & Co.
The variables influencing acquisition prices run the gamut from a firm's assets under management and the strength of its management team to its ability to bring in young talent and achieve business expansion on its own without counting market gaints or other extraneous influencese. DeVoe, for instance, that every 1% increase in such "organic" growth corresponds with a 7% rise in its valuation.
Even so, it's only the biggest firms that can reasonably expect tip-top valuations from purchasers, DeVoe said.
"If an investment banker tells you they can sell your firm for over 20 times EBITDA, you should hang up," he said. "Unless your firm has tens of billions in AUM, they are deceiving you."
Much also depends, DeVoe said, on the acquirer itself. Private equity-backed aggregators are often willing to pay top dollar because they see themselves in a race to gobble up the best RIAs before their rivals do.
When a firm with proven profitability and established plan for growth under capable managers comes into the sights of private equity investors, that's when valuations can skyrocket, DeVoe said. And there are plenty of eager buyers out there.
Firms like
"Larger seasoned acquirers, including private equity-backed players, are in a race to scale quickly and enhance their own equity valuations, which drives competition for top-quality firms," DeVoe said.
Nesvold said a firm's ability to fetch high-valuation multiples corresponds fairly closely with its assets under management. Wealth managers with less than $1 billion in assets typically get eight to 10 times EBITDA, and those with $1 billion to $3 billion will often be able to claim 12 to 14 times. It's only when the AUM exceeds $5 billion that the multiples begin to approach 20, he said.
Like DeVoe, Nesvold said there are always nuances to consider. Firms, even small ones, that have moved toward becoming "institunionalized" are often able to sell for higher prices. Steps along this path include things like appointing a chief financial officer or head of client services. Wealth managers with experienced advisors and support staff are likely to command a premium.
"It's the difference between having a business and running a practice," Nesvold said.
The consulting firm Advisor Growth Strategies found in its latest
But acquirers who deemed a particular purchase prospect as an "ideal" fit were willing to increase their offers by 25%, the report found. Rather than falling headlong into a bidding war, Advisor Growth Strategies said aggregators have in fact become more selective. The median EBITDA offering actually fell by 1% from 2022 to 2023, according to the report.
Both Nesvold and DeVoe thought the range of prices still being offered for firms is a sign that valuations aren't getting out of hand. Some of the most desirable practices may be going for 20 times EBITDA or even more, but there are still plenty of deals being done for half that multiple.
Nesvold's advice for any firm thinking of shopping itself around was to keep its plans close to the vest. Rumors of a deal can lead employees to start looking toward the exits without having an understanding of the bigger plan.
"It really should be reserved for senior, need-to-know people within the organization," Nesvold said. "Because rumors move quickly in a vacuum. People start putting their resumes out and recruiters start to call."
DeVoe said it also never hurts to consult an outside expert.
"Selling your firm is not a DIY project," he said. "It is your life's work and the most valuable asset. Hire a professional, just like your clients hired you."
