Across the industry, many articles call out the stark imbalance on the ratio of buyers and sellers in the independent advisory space typically citing that there are about 80-100 buyers for every practice for sale. One might then ask how this impacts what continues to be a robust M&A environment? In reality, the technology trends driving the lack of available practices, combined with well-capitalized mega-RIAs and serial aggregators, have altered the playing field.
In an era of rising valuations, buyers and sellers must become more selective, focusing on solid businesses with operational efficiencies and solid regulatory histories rather than a strategy of trying to acquire any and all, while sellers must not get enamored by the size of an offer and miss the stipulations that often come with a stratospheric purchase offer.
Firms with a long-term view, those not swayed by temporary trends nor encumbered by short-term fixation on liquidity events to satisfy limited partners, are not interested in quick wins. These are the firms I believe offer stability and long-term sustainability that advisors seek when entering a transaction. These firms are committed to establishing long-term relationships that work for everyone: advisors, their clients and the firm itself.
Achieving this successfully means looking beyond the numbers to assess alignment between all parties and operating within a framework that offers flexibility to meet advisors’ needs at every stage of their business’ lifecycle. It means maintaining a “forever” investment horizon that is relationship-centric and not bottom-line driven.
Looking Beyond Valuations
Across the industry, we’re seeing a consistent pattern of climbing valuations as too many dollars are chasing too few targets. While growth rates and profit margins remain the biggest valuation levers, they do not tell the whole story. Owners who can’t explain expense variances or comingle personal and business expense without a way to untangle them may be the tip of the financial disorder iceberg and eroding their own sale value. Stagnant forward-looking growth expectations are a red flag, as well.
We’re seeing a consistent pattern of climbing valuations as too many dollars are chasing too few targets.
Revenue matters – but so does its predictability and stickiness. Aging clients and minimal next-gen relationships undermine a firm’s long-term worth as well. But it is the educated buyer with a proven diligence method who wins deals. And for sellers, it is those who know their firm’s financials and can speak to a repeatable process that attracts the best offers.
What’s A “Win?”
M&A takes many forms. Minority investments, phased buyouts and full acquisitions are all viable options for advisors, depending on their succession needs. Taking the time and making the effort to find the right balance is an investment in the future. And it’s a recipe for enduring success.
We’ve seen opportunities that looked compelling initially, only for due diligence to reveal leadership, succession or cultural challenges that made moving forward the wrong decision. Sometimes, the best outcome isn’t closing a deal. It’s recognizing when the fit isn’t there.
Such decisions do not happen in a vacuum. Enterprises must operate with intention. The ability to maneuver through dynamic situations is no accident. It’s by design and is a function of:
Control: Who is truly in charge of the business decisions? Being answerable to outside firms expecting returns at a set point in time can compromise a firm’s ability to do what’s best for advisors and their clients.
A Permanent Capital Mindset: Firms that make decisions to achieve quick exit multiples are not putting advisor or client interests first.
Flexibility: Rigid M&A playbooks focused on driving specific platforms or product adoption in the name of higher returns cannot adjust for creativity to meet advisors where they are and develop structures as circumstances evolve.
Sellers should look closely at any too good to be true sky-high offer.
Values: Cultural alignment should win out over maximum price. While the phrase “buyer beware” is common, in this seller’s market, sellers should look closely at any too good to be true sky-high offer in terms of platform mandates and operational constraints often seen from firms backed by outside money.
The Future Is Being Built Now
AI will shape the next generation of advisory firms, for better or worse. Successful firms will use AI as an efficiency layer – not a staff replacement. Automating administrative work and using the increased bandwidth for relationships and planning will be the hallmark of tomorrow’s success stories.
Winners will scale via AI for time consuming manual tasks such as paperwork, meeting prep and note taking, while keeping advisors focused on relationships and financial planning – increasingly critical deliverables as longer life expectancies demand longer planning horizons and multi-generational client engagement to retain assets.
Firms that thoughtfully leverage AI to scale smart and embrace AI-driven efficiencies will be the ones positioned to carry out acquisitions – instead of being the ones acquired.
Kris Emick is First Vice President, Succession and Acquisition Solutions at Cambridge Investment Group.
