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Our team's latest article discusses the total process of selling an RIA practice. We should be clear that this is distinct from valuing an RIA, which is one of several steps in the entire process. For a more thorough breakdown of RIA valuations, see our “How to Value an RIA.”
Selling an RIA Practice: The Steps
Although there are a few elements that differentiate selling an RIA practice from other types of companies, the process overall has four steps:
Preparation
Preparation encompasses two major activities:
Documentation: Your internal team gathers all of the relevant documents needed to appraise the value of the business.
Valuation: Your M&A advisor or a third-party agency reviews the provided documentation to determine the overall value of the business.
We’ve written in detail about these steps in “How to Value an RIA.” Although we will provide an overview of the process here.
Documentation typically consists of gathering key documents that illustrate the financial health of your business. Check the linked article above for the complete list, but most important for RIAs is any documentation detailing AUM and client demographics.
Valuation is typically not something that sellers do themselves. Rather, this is done by the M&A advisor or occasionally by a third-party agency specializing in business valuations. RIA valuations take this basic formula:
RIA Valuation = Valuation Methodology ± AdjustmentsValuation Multiple
RIA valuation methodologies break into three categories:
EBITDA | |
Formula | EBITDA = Earnings-Operational — Expenses + Interest + Taxes + Depreciation + Amortization |
Frequency in M&A | Most common due to its ability to predict the future value of the RIA as it will be under the new buyer |
Best For | RIAs with a steady income stream and low operational expenses |
Common Multiple | 7x-9x |
Assets Under Manasgement (AUM) | |
Formula | AUM = Σ(Client Account Balances) |
Frequency in M&A | Somewhat common; primarily used for RIAs whose wealth is tied up in assets. |
Best For | Wealth management companies |
Common Multiple | 2.5x-4x |
Revenue | |
Formula | Revenue = (AUM x AUM-based fee percentage/100) + Flat Fees + Commissions |
Frequency in M&A | Rare; many buyers have moved away from revenue-based valuations that often hide operational expenses |
Best For | Smaller RIAs with a high cash burn |
Common Multiple | 1-2% (Calculated as a percentage of total AUM at the time of sale) |
The method by which you value your agency greatly impacts your expected payout. Let’s use the example of the following RIA with the following statistics:
Sample RIA Statistics | |
|---|---|
Revenue | $5,000,000 |
Operating Expenses | ~1,500,000M |
EBITDA | $750,000 |
AUM | $598,500,000 |
5 Year Annual Growth Rate Average: | ~8.3% |
# Employees | 9 |
Average Client Age | 55yo |
# Clients | ~150 |
Client Concentration | Top 5 Clients = $30M (~30% of AUM) |
Fee Structure | 1.5% = ≤ $1M 1% = $1M-$5M .75% = $5M+ |
YoY New Clients | ~15 |
Past Acquisitions | None |
Overall, this company is doing fairly well for its size. Buyers would likely have some concerns regarding the high amount of AUM centralized in the top 5 clients as well as about the company’s fee structure with the accessibility of robo-advisors (Note: “fee compression” is a common concern for RIAs, not just this one) but they are overall doing well, with a steady stream of income and a manageable workforce.
Let’s see how these valuations shake out: The following table provides simplified valuations based on EBITDA, revenue, and AUM for the RIA described above:
Selling Your RIA Practice: 3 Sample Valuations
EBITDA | Revenue | AUM | |
Amount | $1,250,000 | $5,000,000 | $598,500,000 |
Adjustments (Based on company details) | High client concentration = High Competition = Consistent Annual Growth = Lean Staffing = | - $650,000 - $100,000 + $450,000 + $200,000 | |
Adjusted Amount | $1,150,000 | $4,900,000 | $598,400,000 |
Multiple | 8.9x | 3.1x | 1.8% |
Total | $10,235,000 | $15,190,000 | $10,771,200 |
Although there is a wide discrepancy between these final amounts, it’s important to remember that a buyer may not accept a revenue or AUM-based valuation depending on what type of business it is, ultimately negating the point of using that methodology. Consult with your M&A advisor to determine which is the best model for selling your RIA practice before you go too far.
Once you have an idea what your business is worth, it’s time to go-to-market. Your M&A advisor will be able to give you an idea of when you are ready for this stage.
Marketing
RIAs typically see three kinds of buyers:
Selling an RIA Practice: Common Buyers
Buyer | Description/Goal | Approximate Frequency in M&A | Examples |
Financial | A buyer whose sole intent in purchasing your company is to grow it and sell it later for a profit. | ~83% | Private equity groups |
Internal Sale | A member of your own team who is planning on taking over management moving forward. | ~11% | management buyouts, succession planning |
Strategic | Another RIA or a company in a related field (e.g. finance, fintech) seeking to acquire the seller’s company to increase their market share, eliminate a competitor, etc. | ~6% | Regional chain, direct competitor |
The reality is that you're very likely to be working with some type of financial buyer. All of our data suggests that at least 80% of M&A transactions in 2023 may have been done with a private equity group as the buyer. Whoever you end up working with, you will need to develop a pitch deck targeted towards their specific interests.
A pitch deck is a slideshow that details your company's financial health. Often presented as a PowerPoint, it includes details regarding assets under management, client demographics, and any other reason why a buyer might want to consider your company over others. Below is a sample image of what you might find in a pitch deck regarding an RIAs clientele:
M&A advisor will likely walk you through what needs to be included in your company's pitch deck before it goes to market, however, it never hurts to be prepared beforehand. The list below details the essential Elements of an RIA pitch deck:
Page Type | Description |
Executive Summary | A high-level overview of the RIA as it appears to buyers, emphasizing the positive aspects of your company and encouraging interested buyers to read more |
Financial Statistics | An overview of the AUM, revenue, and EBITDA of the RIA, depicting the overall financial health of the company |
Product Overview | A summary of the services offered by your RIA, including any features that set the company apart from it’s competitors |
Client Information | Arguably the most important addition to your pitch deck, client information covers the client demographics and average AUM per client of your business, depicting the overall health of your revenue streams |
Market Information | Any important or relevant market trends that might affect your valuation. Do not shy away from things that might negatively affect your valuation, but be sure to discuss what is being done about it |
Company Traction | A historical look at the company’s growth, often stretching the previous 5 years, showing how key financial statistics have grown over time |
Business Model | The operational expenses of the RIA (e.g., salaries, tech spend, rent) that affect the overall valuation of the RIA |
Competitor Information | An overview of competitor offerings and a synopsis of how your products compare to (and exceed) them |
Key Employees | Any members of R&D, upper management, and C-suite that play an integral role in your company’s infrastructure |
With your pitch deck completed, the next step is to send it out to interested parties. Most often, your M&A advisor will have a network of prospective buyers that they can reach out to directly, however, sometimes the marketing phase takes the form of an auction, in which multiple buyers make bids for the seller’s team to review.
When reviewing offers, we recommend keeping the following in mind:
What’s Your Goal? Every seller has a goal for their sale. Some are looking to retire, some are trying to close as quickly as possible, and others are trying to preserve their RIAs legacy. Does the offer in front of you reflect that goal? Even if it is appealing otherwise, keep your eyes on that goal as your compass to assess which offer seems most appealing to you.
Multiple of What? We wrote previously about the importance of the valuation method, but it’s important to remember that buyers will often make offers based on an “adjusted EBITDA” following their due diligence (See section below). Remember that 0x1000=0; it doesn’t matter what the multiple is if the buyer has significantly discounted the value of your business.
Due Diligence
Due diligence is often the least active period of selling your RIA practice, as it mainly consists of handling inquiries while buyers conduct a separate valuation. A few things that RIA owners selling their RIA practice should keep in mind include:
Expect a slew of SEC checks and state audits. RIAs experience more stringent compliance and regulatory requirements than other forms of business because of the sensitive nature of their client materials. As buyers conduct their review, it’s likely that state institutions will be checking with the seller to ensure no information leads occur.
Client information is key. RIAs of every stripe live and die on their clients, so expect due diligence to analyze customer information under a microscope and have relevant documentation ready to be requested.
Your tech stack is being examined, too. RIAs are more tech-oriented than other businesses, so expect due diligence to closely examine your tech stack, from high-end analytics programs to apps for daily operations.
Final Negotiations
At the “end” of due diligence, buyers will come to you with the results of their valuation. Ideally, their valuation has found no redundancies or inconsistencies from your initial valuation, but if they have, your M&A advisor will take the lead on final negotiations while the teams settle on the final offer.
Unlike other industries, which are seeing a rise in equity-based deal structures, selling an RIA practice is still a cash-dominant transaction. Transactions we’ve seen in our SF index in the last three years suggest that the average percentage of cash in deal structures is actually rising:
Cash vs Equity in RIA Valuations, 2021-2024(Projected)
Earnouts - recurring payments occurring as the purchase company passes certain financial milestones - are also very common in RIA transactions, which is primarily due to the emphasis that the business model places on client retention. Similarly, expect non-compete agreements - agreements that the seller will not work within the industry for a set period of time - to play a central role in your deal structure due to the high concern about competition and fee compression.
Once final papers have been signed and any initial payments have been made, the last thing to do is inform your clients of the change in management. We advise focusing on the advancements that new ownership can bring them (e.g., “I’ve taken this company as far as I can and I know [buyers name] can take it even further.”) and thank them for their loyalty.
Selling Your RIA With an Advisor
Despite how extensive this guide may seem, the reality of selling your RIA practice is even more complex. Even sellers with prior M&A experience get lost in the process, which is why it’s always better to have an experienced advisor on your team. In fact, our research shows that professionally represented sellers make 30% more on average than those who choose to represent themselves.
The teams at Sica | Fletcher have worked with thousands of RIAs to ensure a timely deal process that ends with the highest possible payout. If you have any questions about the information in this guide or if you would like to speak with someone about selling your RIA practice, give us a call here or using the contact information below.
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