The number of RIA mergers and acquisitions has spiked, and the median size of the deals are getting bigger, but half of the time buyers walk away from the negotiating table because of valuations they think are too high.

Those were the conclusions of Fidelity Investments’ “2023 M&A Valuation & Deal Structure Survey,” whose results were released by the custodian today.

Fidelity recorded a 237% spike in RIA buyouts in its most recent study period, comparing the 492 deals reported between January 2020 and March 2023 with the 146 deals reported between January 2017 and July 2019. The median deal size rose between those two time frames, with the median assets under management acquired firms rising from $250 million to $400 million.

Fidelity surveyed serial acquirers and the 500 deals they did over the last three years, which accounted for nearly 75% of all RIA transactions the company tracked.

One of the findings was that buyers walked away from 52% of evaluated deals—and the sticking point was that they thought sellers were overvaluing their firms. It said 87% of the time, buyers walked away because of misaligned valuations, while 73% of the time buyers walked away from a deal because the firm’s culture was off plumb with the buyer’s.

When it came to valuation problems, 83% of the time that meant buyers thought sellers were using unrealistic comparison multiples, while 77% of the time it was “the lack of understanding of valuation drivers.” In 47% of the cases, the buyers thought the sellers were too close to their business to see weakness. All told, these problems led sellers to overvalue their businesses, according to buyers.

“Interestingly, nearly half of sellers (49%) utilized a third-party for firm valuation From a buyer’s point of view, 33% of deals had higher valuations for firms who used a third-party versus comparable firms who self-calculated,” Fidelity said in its press release.

The study also noted buyers’ and sellers’ differing motivations for doing deals: 77% of firm owners said their motivations for selling were to get operating duties off their shoulders and focus on clients. Seventy percent said they were interested in full or partial liquidity. And 40% said they lacked a succession plan.

Buyers, meanwhile, were interested in buying talent—a motive cited by 90% of them—while 63% said they wanted to enter new geographic markets and 50% said they wanted to grow their share of assets.

Fidelity said revenue multiples for firms had risen to about 3.25x from 2.25x in the study period, while median multiples for cash flow (or EBITDA, earnings before interest, tax, depreciation and amortization) increased to the 9x to 11 x range from the 7x to 9x range for the previous study period from 2017 to 2019.

Fidelity said the increase in multiples stemmed from firms’ high organic growth, from aggressive next-generation leadership and from firms’ key geographical footprint.

In an interview with Financial Advisor in late May, Laura Delaney, Fidelity’s vice president of practice management and consulting, said there has been a shift in deal structures. “When money was cheap and there was a lot of deals happening at fast cadence we heard many deal structures were 80% cash and equity up front followed by a 20% deferred payment over two to three years. We’re seeing that shift where it’s de-risking on the buy side. It’s more favoring the buyer where it’s more like 65% up front or 60% up front cash and equity.”