RIAs continue to buy and sell their businesses this year as M&A deals in the industry reach record levels.
A total of 40 M&A deals, representing $30 billion in assets under management acquired, were completed in the RIA channel in the first half of 2010. That’s the strongest first half on record in terms of deal volume, according to Schwab Advisor Services which started tracking the data in 2003. There were 16 deals completed in the second quarter compared with 24 in the first quarter this year.
Schwab’s managing director of the strategic business development group, David DeVoe, says he expects the upward momentum of RIA M&A activity to continue. That’s because advisors have a bit more time to focus on their business strategies now than they did during the crisis. It wasn’t long ago that RIAs were working overtime to deal with an influx of client anxiety. Now RIA principals are ready to pick up where they left off around 2008, DeVoe says.
Another factor motivating RIAs to consider doing deals again is that valuations are making a slow and steady comeback. “As the market has gained a degree of stability, we see advisors in many cases grow their business,” DeVoe says. “Many have also made economic improvements to their businesses which results in stronger cash flows and better valuations.” A firm with $100 million in assets can expect around four to six times EBITDA, he says. A firm with $500 million can expect between five to eight times EBITDA.
Small firms are currently driving the uptick in M&A deals. Of the 40 deals done so far, about 53 percent involved firms with $250 million in assets or less compared with 33 percent in years prior. The average deal size was $771 million through the first half of 2010, compared with $1.5 billion last year.
DeVoe says that may be because smaller firms have an easier time closing a deal than larger ones. “Firms with $250 million have less complex issues to address and have fewer partners. That makes the negotiation process move much faster,” he says. He adds that he expects a few billion dollar deals later in the year.
“In years to come, we will see 2009 as a short-term decline within a broader increase of RIA M&A activity,” he says.
Second Quarter RIA M&A Deals
Q2 2010 16
Q2 2009 10
Q2 2008 14
Q2 2007 12