Before the coronavirus pandemic hit, many financial advisors were likely fielding offers to sell their firms to the highest bidders. After all, valuations for RIA firms had reached dizzying highs by the beginning of this year, a result of competition for clients and the inflows of private equity money into the space. According to a Fidelity report, “M&A Valuation and Deal Structure—Insights from Leading Serial Acquirers,” median valuation multiples for deals had reached seven times EBITDA in the years since 2017, up from five times five years ago.

So what would you do if you were already in the middle of a deal to buy? What likely happens?

In a webcast this spring, Echelon Partners’ founder Dan Seivert fielded those and other questions regarding deals in midstream. One chief financial officer of a $10 billion firm, for instance, asked Echelon what to do if a letter of intent to merge had already been signed when a Covid-19-type cataclysm occurred. The market swoon has tanked AUM fees, and thus revenues. Falling valuations are likely to follow.

The good news is that many deals already in progress will likely go through, but that doesn’t mean it’s going to be absolutely smooth sailing.

Once the letter of intent is signed, said Seivert, “toward the latter part of what is oftentimes a five-page document, there are conditions to close, and sometimes they relate to maintenance of client revenue.” Usually it means keeping client revenue at 75% to 80%. “Sometimes it’s as high as 95%,” he said. “But what that would trigger is a recalibration in the valuation of the deal structure.”

Still, in the post-letter-of-intent stage, “I think that there’s going to be increased scrutiny with the purchase agreement and some of the terms there in terms of the earn-out and what happens at the close,” Seivert added.

Echelon came up with a slide presentation that checked off a number of milestones for a deal. If the deal is in the stage after the signing and before the close, “Most sellers can’t back out, but some buyers will have the option to,” Echelon said. And market turmoil at this stage can force purchase price adjustments. A skittish clientele may also object at this point, Seivert noted, but advisors have hopefully calmed their clients in the current situation anyway.

Even without a letter of intent however, “any formal process that isn’t in a definitive agreement stage is likely pushed down the road four to six months,” said Marty Bicknell, the chief of Overland Park, Kan.-based acquirer Mariner Wealth Advisors. “I am seeing things get delayed, not canceled. Deals that are in the definitive agreement phase should continue and close. We closed a deal on March 31 for a $400 million firm in [New Jersey]. Any [buyer] that renegotiates a deal, or stalls because of funding, is probably done being a buyer. This is a small industry and that would be a reputation killer.” 

The current turmoil is likely going to affect deal structure, as others such as David DeVoe of DeVoe & Co. have pointed out. According to Fidelity, until the coronavirus struck, there had been a definitive trend in which buyers paid more cash up front for advisory firms and thus required shorter earn-out periods. That’s going to likely change as buyers are now in a position to pay less up front and will likely ask sellers to stick around for longer earn-out regimes.

According to Echelon, in the current environment there will be an advantage to sellers in mid-deal if they didn’t have earn-outs.

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