Many Fidelity executives said that RIA firms should consider the option of selling their firms, Evan Simonoff writes on F-A Mag.
Advisors who fail to evaluate the weaknesses and strengths of their firm are putting their independence "at risk," Slater told firm owners at Fidelity's Inside Track conference in New York City.
“If you do nothing, you’re putting yourself in a precarious position,” Slater said.
Slater suggested that RIAs go through some of the key steps any business would follow if it were planning to sell itself.
A big obstacles in mergers and acquisitions is the gap between the businesses serious about selling and the firms exploring it.
David Canter, executive vice president in charge of Fidelity's custodian business, said that each firm has its own individual set of priorities, but if a consulting expert were to arrive "on earth from Mars" and study this profession, they would be definitely telling RIAs to consider cashing out.
If your firm is growing and has a variety of talent, there are many acquirers with a ton of capital looking to invest in this sector.
There are different models for selling firms to choose from, Slater said.
Slater added that no deals are being valued on a revenue basis but asset size remains important. The 4% of all firms have more than $1B but control 60% of all assets.
Earnings before interest and taxes plus depreciation and amortization is still the primary valuation metric. Firms with less than $250M in assets can suppose a buyer to pay 5 - 7 times EBITDA.
Entities with up to $500 might get 5 - 8 times their cash flow. Those multiples rise to 6 to 9 times EBITDA for firms with between $500 million and $2 billion in AUM.
For the largest RIAs with over $2B, an acquirer may pay close to 11 times cash flow, Slater added.
Salter noted that modern technology is crucial. Buyers don't want to buy a firm with outdated technology that will entail major investments.
