Inside the World of Crazy M&A Valuations
Ultra-low interest rates and a flood of private equity dollars seeking a decent return have driven the valuations paid in the M&A market to crazy levels, according to two of the most prominent acquirers.
Before we dig into those numbers, let’s consider how far we’ve come these last 20 years of advisory firm mergers and acquisitions. Back then, advisory firm owners were just beginning to discover that they were adding enterprise value to their practices, which might (who knows?) someday be monetized. Today, the trade press is filled with talk about “inorganic growth” – buying or merging with other advisory firms to achieve scale, efficiency and remote office locations.
For the most active acquirers, the goal is to secure themselves at the top of the food chain. As Peter Mallouk of Creative Planning put it in a recent Insider’s Forum webinar presentation, “We’re going to see a few enterprises emerge out of the profession.” Currently, he said, the top 25 wealth management firms control a significant percentage of total assets and clients, and the larger firms seem to be capable of attracting organic growth at a faster pace than their smaller peers. “Ultimately,” Mallouk added, “I think there will be five firms that have a disproportionate share of the marketplace; they will be truly national RIAs. And I think that 20-30 other large firms are going to control a lot of the rest of the assets. In all, I think 75% of all clients will be working with those firms.”
In addition to Mallouk , the webinar featured Tom Orecchio of Modera Wealth Management, and the presentation was moderated by renown business consultant Angie Herbers of Herbers & Company. (I was a quiet co-moderator.) Mallouk’s Creative Planning firm sits squarely near the top of that food chain, with 750 employees in 30 offices, having purchased a remarkable 14 RIAs in the past 15 months. Modera has 17 partners, six locations and $3 billion under management, and the firm has done eight deals since its inception. The two serial acquirers were there to discuss the sometimes-hidden details of M&A activity.
Modera and Creative Planning do acquisitions very differently from each other, and this illustrates the spectrum of opportunities that sellers have in what both presenters clearly consider to be a seller’s marketplace. Mallouk said that all of his transactions have been for cash – some up-front, the rest as part of an earn-out arrangement based on client retention. Modera, in contrast, is open to including cash in its deals, but offers mostly equity in the firm, and Orecchio views his arrangements more as mergers than acquisitions. Many of Modera’s partners came onboard through these merger arrangements; their partnership share was straightforwardly calculated as their firm’s proportion to Modera’s valuation at the time of the transaction.
But the firms were similar in other ways: They require the other firm to merge itself wholly into their corporate structure, adopting their branding and their way of doing business.