Financial advisory firm owners who want to sell are overestimating their value and consequently losing out, according to a report by Fidelity Clearing & Custody Solutions.

Although firms are worth more than they were just five years ago, they are not worth what the sellers expect, Fidelity said in its “2019 M&A Deal Valuation and Structure Study” of serial acquirers.

Firms being sold today have a median value of seven times their EBITDA (earnings before interest, tax, depreciation and amortization) value, Fidelity said. The value 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,” the Fidelity report 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.”

“Firm valuation is as much of an art as it is a 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, in a statement. “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.”

Fidelity’s 2019 study surveyed serial acquirers involved in nearly 150 transactions over the last two years, which accounts for more than half of all RIA transactions tracked by the company during that time.

Firm owners are overvaluing their firms because they are confusing their cash needs with the firms’ values, because they are too close to the business to recognize weaknesses and because they are not recognizing the synergies sought by buyers, the Fidelity study said.

Buyers do not expect dealmaking to slow anytime soon. Seventy-four percent of participating firms expect to increase their dealmaking activity, and 26% want to continue their current momentum. None of the firms intend to do fewer deals, the study said. This echoes conclusions in the latest DeVoe & Company RIA Deal Book, which predicted that dealmaking would continue to increase through the next decade.

“With firms expecting increased M&A activity in the future, understanding deal structure is increasingly important,” Fidelity said. Sixty-one percent of the buyers offer retention bonuses to the selling firms’ owners. Deals take an average of nine months to complete.