SAN FRANCISCO — The frenzied seller's market for RIAs has doubled the amount of cash that advisory firm owners can command upfront and has drastically shortened the length of time in which sellers are receiving full payment for their firms.

"Everyone is concerned about the end of the bull market, and sellers want to capture the high," says Dave Barton, vice chairman of Mercer Advisors. "I hear that every single deal."

The standard model for an RIA M&A deal has been a down payment of 30% cash and 70% paid in promissory notes over five years, depending on the number of clients the firm retains over that period, according to Vic Esclamado, managing director for DeVoe & Company, speaking at the firm's M&A and Succession conference.

But the amount of cash now being paid out at closing has been trending "way higher" in the past year, sometimes even approaching 80%, according to David DeVoe, the firm's founder and managing partner.
Buyers are now paying sellers around 60% to 70% in cash when closing most deals, with the remaining amount paid off within a year, depending on retention rates, Barton said in an interview with Financial Planning at the conference.

"Sellers getting full payment within one year is definitely a sea change," says Barton, who oversees M&A for Mercer.

Consultant David DeVoe says cash payments have been trending "way higher" in a hot M&A market.
Consultant David DeVoe says cash payments have been trending "way higher" in a hot M&A market. Orange Photography

Joe Duran, CEO of United Capital, says he's also seeing as much as 60% cash being paid at closing. "The market is frothy, and terms for sellers are getting better," Duran says.

Firm owners should take advantage of the M&A market's "acute seller's moment," Barton says. The risk they're taking by not cashing in now is becoming a seller during a bear market downturn and a subsequent decline in valuations, he adds.

While a recession is inevitable and will certainly depress valuations, DeVoe says structural changes in the RIA business, including aging demographics and the need for scale, will continue to keep the high volume of M&A deals coming for another five to eight years.

DeVoe noted that last year was the fourth successive record year of RIA M&A volume and the first quarter of 2018 also set records for most transactions (47) and most sales of established RIAs (30).

Charles Paikert

Charles Paikert

Charles Paikert is a senior editor at Financial Planning. Follow him on Twitter at @paikert.