Fidelity found that firms sold today have a median value of seven times their EBITDA (earnings before interest, tax, depreciation and amortization). That value has increased from five times the earnings level five years ago. However, owners expect to set selling prices at eight to 10 times the earnings level.

“Sellers appear to have inflated expectations of their firms’ values compared to the reality of the market,” Fidelity said. “As a result, buyers surveyed estimate that, on average, nearly 40% of their deal conversations fell through in the last five years due to unrealistic valuation expectations by the sellers.”

To avoid valuation missteps, Nesbit said, “advisors need to do a reality check all the way through and look at their business model, who their players are and who their clients and demographics are.”

“I could have this great business,” she said, “but if all my assets are from 70-year-olds and I don’t work with any younger clients, that will hurt my valuation. Advisors pay more for good quality firms that have top players, for instance CFPs and CPAs. That adds to the depth of the relationships clients will continue to have with the firm.”

She now helps the firms she consults with preserve both their talent and their clients in M&A deals, something she tried to do when she sold GFS.

“I made the decision when I was searching for an acquirer to keep my team involved throughout the process. I wanted to get feedback and provide reassurances that we were bringing them with us, not looking for a deal that would strip them out. We were very careful, and we help our advisor clients now do the same thing.”

That is critical to keeping your client base intact, Nesbit said. “You have to preserve your client base. We help advisors stay focused on the end client—their investors.”

Firm valuation is as much art as science, “and we believe the most successful firms will be those that take the time to understand all of the dynamics involved and align their own motivations with the value their businesses bring to the table,” said Scott Slater, vice president of practice management and consulting at Fidelity Clearing & Custody Solutions. “We continue to see a rapid pace of mergers and acquisitions, but our study showed that there could be even more deals happening if valuation expectations were better aligned.”

“With firms expecting increased M&A activity in the future, understanding deal structure is increasingly important,” said Fidelity, which found that 61% of buyers offer retention bonuses to the selling firms’ owners and that deals take an average of nine months to complete.

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