The growing group of buyers pushing M&A deal volumes back up after last year's slowdown are asking sellers for more information and longer "earnout" periods after acquisitions.
Dealmaking across the industry is on a pace to fall by 8% this year to 315 transactions — but the 75 announced in the first quarter represented an uptick from the low in 2022's fourth quarter amid falling stock and bond values and concerns about a potential recession last year, according to investment bank and consulting firm Echelon Partners. The number of deals could have risen even higher. Buyers have balked at more than half of the potential deals they considered over the last three years, they told Fidelity Investments in a survey last month.
Earnouts — contract provisions tying payments to future business after the close date — come up frequently in the talks among prospective buyers and sellers. Mismatched expectations on either side can often derail the deal negotiations or, worse, lead to lengthy and costly litigation between the parties after the transaction, according to experts.
Potential buyers "are conducting more heightened due diligence on potential sellers and being more selective in their acquisitions," Patrick Bomhack, a lawyer who works on M&A deals in wealth management at Milwaukee-based O'Neil, Cannon, Hollman, DeJong & Laing, said in an interview. Sellers' common view that they'll be "compensated for what they have built" over their careers operating their advisory practices is only "partially true."
"Buyers want longer earnout periods and an increasing amount of the purchase price to be allocated to the earnouts rather than being paid in cash at closing," he said. "If you are a seller in today's market, you need to be prepared to commit to performing in the post-closing period in order to earn your full purchase price. … Sellers need to make sure they are partnering with a buyer they really believe in and want to work with, because a significant chunk of the purchase price will be contingent on that relationship going well."
Still, the "smart money" of investors such as private equity firms keeps flowing to registered investment advisory firms "as a land of opportunity for acquirers," Bomhack noted. A smattering of announcements around the July 4 holiday reflects how the continued momentum is helping major players grow larger.
The day before, New York-based Steward Partners celebrated its 10th anniversary as a firm of more than 200 independent advisors managing almost $30 billion in assets under administration a decade after welcoming its first team. Steward received minority investments of $50 million from The Cynosure Group in 2019 and $100 million from The Pritzker Organization two years later, plus a credit facility of $140 million led by Apogem Capital in 2022.
"The key to our phenomenal growth has been our equity partnership business model which gives advisors the freedom to do what's truly best for their clients backed by the support of our entire network," Steward CEO Jim Gold said in a statement. "We fully expect the next 10 years to be even more fruitful as we continue to implement our long-term strategy."
Morristown, New Jersey-based Private Advisor Group, which secured its first ever outside infusion of capital from Merchant Investment Management in 2021, facilitated an acquisition by one of its 750 advisors who purchased the business of another one after his unexpected death. West Hartford, Connecticut-based WP Financial acquired Sage Financial Design, which has four employees and $95 million in client assets, after the passing of the selling firm's owner, Robert Sheldon "Whitey" Thompson.
"Bob was a well-known figure in my hometown, and his work laid a solid and respected foundation for financial planning," Bill Rabbitt, the owner of WP Financial, said in a statement. "Our goal is to honor his legacy, minimize any disruption for investors, and elevate their planning support through technological advancements and innovation."
Last month, the most active wealth management acquirer of 2022, Denver-based Mercer Advisors, reportedly received a valuation of more than $3 billion in its latest minority private equity investment by Altas Partners. On July 5, the firm of more than 890 advisors and other employees managing $48 billion in client assets said it had acquired Day & Ennis, a Macon, Georgia-based RIA with $400 million across about 250 client households.
"As my partners and I planned for the future, we realized we needed to add scale to our business as well as bring other expertise under our business tent," founder John Day said in a statement. "For us, it was a decision to either build it ourselves or join an existing larger firm that shared our mission, vision, and values, with the scale and additional in-house services we were looking to add."
