There is no shortage of people and firms that want to buy just about any size of financial advisory firm, three experts told more than 300 attendees at the Invest in Women Conference, the Financial Advisor magazine-sponsored event that was held in Atlanta in early May.

While multiples—how many times cash flow an acquirer is willing to pay for an advisory firm—haven’t changed, rising interest rates and the tumultuous stock market are likely to have squeezed sales prices, said the panelists, which included Kay Lynn Mayhue, president of Merit Financial Advisors; Francine Miltenberger, managing director of DeVoe & Company; and Meredith Schwarz, vice president for business development at Wealth Enhancement Group.

So how much have valuations fallen because of rising rates and falling stock prices?

Since most financial advisors today charge clients based on assets under management (AUM), when the market tumbles, so do cash flows, said Miltenberger, who has done M&A for 20 years.

“When cash flows are compressed, it does have an impact on what buyers are willing to pay,” she said. “But what I see in the marketplace is very little change in what buyers are willing to pay in terms of multiples. If someone was willing to pay 12 times your cash flows a few years ago, chances are good they’re still willing to pay 12 times now,” but that multiple will be applied to decreased cash flows, so sales prices have decreased.

Fidelity reported 67 mergers and acquisitions in the first quarter, an 18% increase over the first quarter of 2022. January and February saw slower activity than the same months in 2022, but March made up the difference, the firm said. “While overall valuations may be ticking down, the environment continues to reward high-value firms with high, but plateauing, multiples,” said Laura Delaney, Fidelity’s vice president of practice management and consulting, in a separate interview.

High demand for firms is helping bolster prices. Miltenberger said there are at least 40 firms in the market to buy advisory firms at any given time, but warned “not all have the same level of experience or visibility. So one of the reasons to talk to a lot of different firms in the process is that every day new players are coming into the market that may fit your goals better.”

The moderator of the panel, Evan Simonoff, the editor-in-chief of Financial Advisor, asked if it still made sense for individual advisors to attempt to buy firms given all this competition.

“I remember going back to the days of the great recession before private equity discovered wealth management,” he said. “Data told us there were five to 10 buyers for every seller. Even then there were a lot of people looking to get out of the business. When does it make sense to be a buyer when there are so many competitors with deep pockets?”

Mayhue said there is a lot of interest and activity from firms in the billion-plus AUM range. Her firm, Merit, is a serial acquirer that has bought 20 firms. “There are other buyers active in the mid-range, looking for firms with AUM of $150 million to a billion. And then some that are OK with AUM under $150 million,” Mayhue said. “If you’re out there and you’re shopping for a firm in the $100 million to $150 million firm size, you won’t have that much competition.”

There is “not a big market” for a $50 million AUM lifestyle [practice], which makes them easier for other advisors to acquire, Mayhue added.

All the panelists urged sellers not to wait until they get bad medical news or decide on a dime they want to retire to begin looking for a buyer. It pays to shop around, Mayhue said. “If you’re looking to be acquired, you want to ask yourself the same questions regardless of the prospective buyer. Super-organized acquirers may cut into your culture. They don’t make exceptions. So if they need to get rid of five of your people because they’ve centralized their roles already, that’s what they’ll do.”

As a result, Mayhue said, firms that want to sell should “figure out what their non-negotiables are. We say no a lot more than we say yes. If I don’t want to have coffee with someone, why do I want them as a partner in my firm?” she asked.

Simonoff asked the panelists how long deals are taking from initial conversations to close.

“The process takes a lot longer than most people expect,” Miltenberger said. “From the day you decide to go down [this] path, it’s six to nine months. That’s the sweet spot, but it can take more or less time.”

“I’d second that,” Schwarz said. “It takes a lot longer than people usually think as you ramp up and educate the advisors you want to bring along with you.”

Mayhue urged prospective sellers to clean up their profit-and-loss statements early in the process. “Your dry-cleaning bill and kids’ camp may be fine for IRS purposes,” but they aren’t costs you’d want to affect your profit and cash flows for purposes of your firm’s valuation and sales price, she said.

She also said her firm will discount the value of a target financial advisor’s practice if they “haven’t built out the next generation of clients” and even the next generation of advisors.