When Shari Greco Reiches and her team finalized the deal to sell the $1.2 billion registered investment advisor she co-founded in 2005, they didn’t choose the highest offer, but she believes they chose the best one.
“All of them were high, but some were a little higher,” she said of the buyers who bid for Rappaport Reiches Capital Management. “But this was my baby. I wasn’t going to go with a firm just because they were going to give 10% more—you want what’s best for your staff and your clients.”
After more than 20 Zoom calls with prospective buyers, Reiches, her team and hired consultants narrowed the list down to four firms. From there, EP Wealth emerged as offering the right mix of full firm integration, additional services for clients and career paths for its 13 staff members and two founders, including Reiches and David Rappaport, who became partners and regional directors.
“They weren’t even on our initial shortlist,” Reiches said of EP Wealth. “But you have to be open-minded. This was not retirement; it was the next chapter. So we wanted to know what our staff roles would be and what their comp would be—we didn’t want any surprises, and we wanted them to be happy.”
The sale of the Skokie, Ill.-based RIA was about a year in the making. It included taking a succession planning program held by Charles Schwab, interviewing multiple consultants and attorneys to find the right partners, and doing extensive due diligence on the final offers.
“Everyone we interviewed was impressive,” Reiches said. “But just because they are a great firm doesn’t mean they are the right fit. … You can’t be just focused on the numbers; you have to look at the full picture.”
Not focusing on the numbers may be easier said than done for RIAs looking to sell. According to industry players, valuations are at record highs, and most predict continued frothiness barring a major market setback. That is also why, according to the experts, firms such as Reiches, which are looking to be acquired but also keep growing, need to consider every deal carefully and not just target the highest bid.
Beyond the Sticker Price
Valuations are coming in at 15x to as high as 22x earnings before interest, taxes and depreciation, according to M&A experts. But often, those high multiples aren’t what advisors ultimately see at earn out, and the type of due diligence that Rieches and team underwent may point firms to lower bids in the hope of better long-term math.
Jessica Polito, founder and principal of Turkey Hill Management, said the multiples cited in the marketplace are “meaningless without context.” They are most often only achieved if a firm achieves very ambitious growth rates, she said.
“Talk of those multiples is driving some of the unrealistic expectations in the market,” she said. “You can get into the high teens if you retain all of your revenue and then grow a lot over a two- or three-year time period, which just doesn’t happen much.”
She said sellers should focus on the guaranteed payments, not the high end of the multiple.
“Unless you are already growing rapidly, anything on top of that guaranteed payment is found money,” she said.
John Orsini, a director at consultancy and M&A shop Marshberry, said buyers are extremely diligent when it comes to offers, but they may also be prone to “flex up” in price when they identify a firm that fits a specific need.
“Even though this year we are expecting close to 400 transactions, it’s still a generally illiquid market,” Orsini said. “For instance, if you are looking for something in the Western suburbs of Chicago, there might be a handful of transactions that happen in a year, and if that’s a gap in your offering, you’re going to bid that up.”
David DeVoe, CEO and founder of DeVoe & Associates, noted that high valuations will likely continue barring major market disruptions. In the firm’s recent survey of some of the industry’s most active acquirers, 85% expect valuations to hold steady over the next six months, with the remaining 15% being evenly split between a slight uptick or a modest decline.
“The highest valuations being paid are rational for those particular buyers,” DeVoe said via email. “Many of these consolidators have developed the capabilities to drive acquired firms’ organic growth and increase their margins. These key value drivers, plus the historic valuation arbitrage between what they can buy firms at versus what the next PE sponsor will value them at, yields the business case for extremely high valuations.”
Proceed with Caution
DeVoe said sellers should always pay close attention to the deal’s structure, not just the price tags.
“The old joke is ‘I will pay you any valuation you want … as long as I get to choose the terms,’” he said. “Sellers need to be thoughtful about their goals and ensure they are getting good advice. The deal structure can undermine a perceived high valuation. And the wrong buyer will make a seller’s life—and their clients’ and staff’s lives—miserable.”
He also pointed out what happened in late 2007 and 2008, when the financial crisis took out markets and “both valuations and M&A activity dropped dramatically.”
“More importantly,” he said, “many unqualified and sub-par acquirers were washed out of the market.”
For now, the risks in today’s market are more about execution and integration, or what DeVoe calls “misalignment.”
“If firms overpay and can’t integrate, operate or grow the acquired business effectively, the whole thesis breaks down,” he said. “And in a rising cost or slower-growth environment, that gets harder to hide.”
Orsini of Marshberry said buyers also conduct due diligence, often focusing on a firm’s ability to show consistent organic growth.
“There is absolutely risk to these buyers for paying too much, but that is why the quality of these diligence teams across the buyer space is so high,” he said. “The amount of rigor that they are putting into the diligence and the questions they are asking gives me confidence.”
Even so, Orsini said there can be risk when diligence is “abbreviated” to get deals through the pipeline. But for now, the offers will likely keep coming for sellers to evaluate and decide on their needs.
“We can’t predict where the market will go, but we still have a conversation or two a month with a new private equity-backed acquirer,” he said. “As long as new capital is flowing, with demand outpacing supply, valuations will remain strong for quality firms.”
Reiches, in the meantime, recommends sellers stay engaged and diligent throughout the entire sales process. She took her own deal down to the wire, flying the team out to California to meet with EP Wealth before signing.
“They were joking with us about all the questions we were asking about our staff,” Reiches said. “The money is good, but you have to make sure it’s the right setup for you and your clients. No question is silly. Surprises may come along the way. But you keep asking and asking and asking.”
#RIA #Sellers #Urged #Highest #Bids