You can't blame an RIA seller for being puzzled.
Private equity has created a strong opportunity to sell independent advisory firms. Demand is strong, prices are high and
Often, the reason is the seller's own salary.
Common wisdom holds that RIA owners should boost their adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — as high as it can justifiably go. The idea is simple: Every dollar you can move from expenses to add-backs is a dollar the buyer will multiply.
That leads to removing personal expenses from the firm's P&L statement, setting aside costs for conference travel and software testing and reframing last year's marketing hire as a one-time investment in firm growth.
Yet after years of working with RIA sellers while buyers analyze the financials, I've found that adjusting the numbers to show lower, not higher, profits is the best way to maintain a sales price — particularly when it comes to stating the owner's pay.
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One founder exit = two hires
It's here that sellers stumble. RIA founders assume it will take one hire to replace them, when in reality most quietly do two jobs: running the firm and acting as lead advisor for the clients who make up a big share of revenue. That means hiring two people, not one, after an exit.
I worked with the owner of an advisory firm that made about $5 million a year. She paid herself $400,000 and reported $1.5 million in adjusted profit. However, she still managed clients that accounted for a third of that revenue while also running the business. Properly replacing her would require hiring one person to run the firm and another to serve those clients, which would cost around $700,000 a year, not $400,000. This extra $300,000 in costs would come straight out of her profit. Her true, defensible profit was $1.2 million, not $1.5 million.
The owner hadn't done anything dishonest. She'd simply never made that adjustment to herself, so the buyer made it for her — in week six of due diligence, after she'd anchored on the higher figure. With RIAs trading at a
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Clean valuations preserve asking prices
The notion that a lower profit figure puts more in the RIA-seller's pocket sounds backward — until you remember the headline price isn't what they actually collect. In such M&A deals, a large share of the money comes later, tied to keeping clients and hitting targets after the sale.
A clean figure a buyer can't poke holes in moves more of the deal into cash today, and less into payments you might never fully see. It also keeps the process calm: no mid-diligence surprise, no renegotiation and no loss of momentum right when you need the buyer leaning in.
Because even in this hot M&A market, buyers can afford to be selective. With more than one-third of advisors, controlling over 40% of industry assets, headed toward retirement, according to Cerulli, acquirers have more firms to choose from than they can buy. The clean ones win.
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Real EBITDA value
If a sale is two or three years out, I advise founders to do the hard number adjustments now.
Work out what it would really cost to replace everything you do, and run your profit on that basis. Then set your asking price on what's left — and have an outside accountant pressure-test the number before a buyer does.
It will be a smaller number than the padded version. But an EBITDA value that reflects realistic replacement costs, leaving little for buyers to question, will be the one still standing at closing — and usually the one that pays the seller more.
