Advisor M&A Interest Remains High Despite Difficult Dealmaking Environment
New data shows advisors continue to have a strong interest in pursuing mergers and acquisitions with firms that share their investment philosophy and demonstrate cultural synergy, reveals Dimensional’s 2023 Deals and Succession Study. Data from Dimensional’s 2022 Global Advisor Study showed that high-performing firms are more likely to grow through M&A than their lower-performing counterparts.1
“Having a purposeful M&A strategy allows business owners to set criteria to evaluate opportunities and move forward with deals that align with organizational strategies and goals,” said Catherine Williams, Head of Practice Management at Dimensional. “In general, it is hard to do a deal, whether you are a buyer or a seller, and creating buy-in across the firm can help drive deals over the finish line.”
According to the Deals and Succession Study data, nearly 55% of firms are actively looking to engage in some type of M&A activity within the next two years, up slightly from 52% in 2022. Among firms actively considering M&A, the top three responses indicated that 27% want to acquire a firm, 23% want to acquire a team, and 26% want to be acquired.
The percentage of firms actively looking to be acquired went up significantly over the past few years—from 7% in 2021, to 21% in 2022, to 26% in this year’s study. Nearly a quarter of firms (23%) reported having a defined strategy for M&A, up slightly from 20% in 2022.
The top response for pursuing M&A across all firms was to increase the value of their business. Small and large firms chose “increase cash flow/profits” as the second reason, while midsize firms focused on enabling buyout or succession. Other reasons for M&A include scaling the business and acquiring new talent.
“Firms may be turning to an acquisition strategy to find potential next-generation talent, which may provide a succession solution,” said Williams. “However, only about one-third of respondents stated they have a documented succession plan.”
For both buyers and sellers, lack of alignment across investment philosophy and firm culture was the top reason for not moving forward with a deal.
While valuation was not highlighted as a deal-breaker, firms were consistent on how to determine the value of their businesses. Respondents could select more than one valuation methodology, but nearly three-quarters (73%) said they used a multiple of annual revenue, with the next closest selection being a multiple of earnings cash flow or EBITDA (earnings before interest, taxes, depreciation, and amortization), with nearly 30% of respondents.
Study findings also show that 32% of firms have a succession strategy in place, down from 44% in 2021 and 35% in 2022. Of the firms with succession plans, 67% are looking to implement their plan within the next 10 years, and nearly half (47%) within five years. When asked to rank the top three challenges to implementing a succession plan, 52% of firms said identifying a successor was a top challenge, while 31% highlighted the time frame to implementation.
“As first-generation wealth managers look to their own retirement, it is clear that the financial advisory industry is in need of education support to help pave the way for ownership transition,” said Mark Gochnour, Head of Global Client Services at Dimensional. “Dimensional has worked closely with financial advisors to build thoughtful, client-focused coaching and training modules that facilitate management discussions on succession, ensure alignment on broader vision, and help owners identify key goals in any potential transaction.”
Dimensional 360TM is a suite of services providing investment support, effective client communication, and business strategy resources to help financial advisors and investment professionals manage and grow their business.
Fielded in February 2023 ahead of the firm’s Deals and Succession Conference, the Dimensional Deals and Succession Planning Study queried more than 200 advisors on the reasons for pursuing M&A, deal-breakers, and financing options. Dimensional’s 2022 Global Advisor Study is a benchmarking study of more than 800 financial advisors. More information on both studies is available upon request.
Footnotes
- 1According to Dimensional’s 2022 Global Advisor Study, high-performing firms had 33% of new assets from M&A compared to 7% of new assets for other firms. The study is an advisor benchmarking study conducted annually, which recently ranked firms based on five metrics, including revenue growth, client and employee retention, profit margin, and revenue per advisor. High-performing firms scored in the highest-rated quartile on average in these categories.
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