2023 Mid-Year Update on Advisor M&A and Financing
Advisor M&A activity skyrocketed over recent years, reaching unprecedented levels prior to and during the pandemic. Despite uncertainty in the markets, advisor M&A transactions continue at an elevated rate compared to the last decade, though slower than the last three years. One of the most notable trends we are seeing is the shift in the nature of deals, with greater diversity among buyers and sellers as well as deal types.
It has been regularly reported in various industry reports that larger transactions (over $300MM in AUM) have altered their deal structures to involve more shared risk between the buyer and seller. These changes typically include a lesser amount of cash at closing and a larger percentage of the purchase price tied to client retention and other performance metrics.
On the other hand, deal structures involving smaller firms (under $300MM in AUM) or solo practitioners have remained relatively the same. We are still seeing roughly the same rate of cash, typically 50% – 80%, paid at closing on acquisition deals. It is also not uncommon for the buyer to borrow 100% of the purchase with the seller getting the remaining amount owed within 1 year.
Valuation multiples have remained unchanged for the most part. However, the down market has negatively impacted revenues and profits which has lowered the actual price paid on many deals. Despite market fluctuations, we expect Revenue Multiples to remain in the 2.5-3.0x recurring revenue range on most deals.
One of the most noteworthy changes in M&A deals in recent years is the increase in internal successions. In fact, over the last three years internal successions have grown to nearly match external acquisitions as a percentage of deals being financed by PPC LOAN on an annual basis. We expect this trend to continue for many firms, especially as they see the financial benefits and the positive impact it has on reducing client attrition.
Despite recent bank failures and other economic factors, capital and lending options for investment advisors remain robust. Those banks named in the recent rash of failures do not represent the typical lenders serving financial advisors. Those banks failed for several reasons including a niche market focus for some, exposure to high-risk investments, and ultimately bad management. Most lenders are very diligent in managing risk and their overall exposure, as well as better at managing the overall operations and finances of the bank. So, there are still many lenders out there who are willing and able to lend to financial advisors.
Interest rates still have a chance of another increase in 2023, but most expect the Fed to go into a holding pattern. Some are even predicting rate cuts at the end of 2023 or early 2024. Despite the unknowns, prime reached 8.25% with the last increase and rates are at their highest levels since specialty lending programs were introduced back in 2013 Advisors seeking loans from lenders who finance at “prime +” may start to see rates reach 10% and higher by year end. Despite higher interest rates, 100% financing will still be available to advisors with an existing business and strong equity position in their firm. Overall, the Advisor M&A market is still robust and active. Despite rising interest rates and market uncertainty, advisors are still enjoying high multiples and good returns on equity. This is largely due to sound practice management and buyers recognizing all the ways they can monetize client goodwill post-acquisition. Deal structures will continue to evolve to meet the needs of the current market, with more shared risk between buyer and sellers. More importantly, we will continue to see a rise in internal successions as the purported advisor age wave begins to swell and a new generation of advisors rises in the ranks of practice leadership.