In a recent study, Advisor Growth Strategies, a business consultant based in Phoenix, found that valuations for advisory firms rose in 2021 to nine times EBITDA, a 12% increase from 2020. The increase was a continuation from the previous two years. The increase in 2020 was a 21% jump from 2019, and 2019 marked a 29% increase over the previous year.
“But the rate of valuation increases is slowing, buyers are getting more picky, and sellers have to work all the harder to stand out,” the firm said in the study. .
The average transaction for 2021 included 77% cash, 21% equity, and 2% contingent payments. “The growing share of cash means more certainty; however, equity can be more attractive to the next-generation talent everyone is trying to get,” the study said. Major acquirers accounted for 69% of all deals last year, but they aggressively pursued less than 25% of their potential transactions.
DeVoe explained that some firms are delaying announcing new deals until the news is less dominated by other events.
“In addition, whenever there is sustained volatility it has a dampening effect on M&As,” he said. “But that is only for the near term. The structural underpinnings of the industry are going to drive M&As. Also, many firms do not have formal succession plans and that also drives M&As. Eight years ago the pressure started building and each year has seen more deals than the one before even during the pandemic. The future is going to get even more interesting.”
The industry will continue to have small, medium and large size firms, but it is in a period of consolidation. The influx of private equity will continue and will grow.
“It is going to be harder to be a buyer,” Dickson said. “We are seeing more deals where someone is willing to buy a minority share of a firm. If you want to be a buyer, you have to have a specific proposition to offer.”
On the other side of the equation, sellers are trying to align with the talent of a larger firm, DeVoe added.