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Advisor M&A Trends for End of 2022 and Beginning of 2023

M&A activity has exploded in the financial advisor industry over the last five years. Access to capital, the entry of new buyers both within the industry and from outside private equity firms, and enterprise-oriented practices have all contributed to this upward trend. To find out what advisors can expect for the end of 2022 and the coming year, we reached out to Ryan Grau, VP of Business Valuation Services and Partner at FP Transitions.

According to Grau, 2022 is predicted to close as another record-breaking year for M&A activity despite turmoil in economic markets. This includes mergers, internal purchases, and external acquisitions. “With the uncertainty around interest rates, markets and the political environment it is difficult to predict what the M&A market will look like in 2023,” notes Grau. He goes on to explain that much of the industry is comprised of “lifestyle practices” that are largely operating on autopilot. “Those lifestyle practices tend to be heavily reliant on the market for growth,” says Grau. On the other hand, Grau sees that “businesses with multiple owners, especially those diversified by age internally, tend to fair tumultuous markets better and may even grow.” This is because the diversity internally tends to lead to greater diversity among client groups as well as better market engagement through mediums like social media, which can help drive new business and keep the practice profile elevated.

Grau notes that the market turmoil has had an impact on revenues, which in turn has somewhat impacted practice values and sale prices. However, he clarifies that the impact is not significant. Says Grau, “We factor in market turbulence in or growth forecast when valuing practices. However, despite the current state of the economy and markets, we are still seeing strong multiples for fee-based and fee-only practices, just as we did in 2021.” Currently Grau and his team are seeing multiples on fee-only RIAs averaging at roughly 3 to 4 times the top line gross revenue. When using EBITDA on a normalized basis, the average tends to be in the 8 to 10 times range for fee-only RIAs. Grau doesn’t believe we will see a material decrease in multiples going into 2023. If anything, we may see multiples leveling off for a while before increasing at a slower rate compared to recent years.

This information is useful for advisors looking to continue or begin an acquisition strategy in the 2023 years. The disproportionate ratio of buyers to sellers is expected to continue, as many new would-be buyers have entered the market while lifestyle practice owners have continued to hold on to their practice long after the typical age of retirement. Market turmoil can sometimes cause these advisors to sell, while others may hold on until markets stabilize. So, the supply side of the acquisition equation may remain low, despite market pressures. Would be buyers should do everything they can to position themselves as a strong candidate in order to remain competitive in acquisitions in the coming year.