As I write this, the S&P 500 just broke, even if only briefly, into bear market territory, down slightly more than 20% from its high at the beginning of 2022.  Registered investment advisor (RIA) owners who may have been considering selling prior to the double whammy of equities selling off and interest rates rising, may now be considering a delay in testing the market.  Although it may seem like a time to sit on the sidelines, there remain some good reasons to sell if you know how to maximize your value in a tough economic environment.

To be clear, there will be buyers for profitable, well-managed RIAs irrespective of the broader market or economic conditions.  However, since buyers often base valuation on the outlook for future earnings, the question for sellers is how to maximize value during a period when their revenue outlook may be declining due to decreased assets under management (AUM) due to the market selloff.

Beyond AUM and/or assets under administration (AUA) and top line revenue, the two factors that have the greatest impact on valuation are growth and margin.  If AUM and revenue are declining due to market factors that are beyond your control, it’s important to focus on the things you can control.  Winston Churchill likely paraphrased Machiavelli when he said, “Never waste a good crisis”.  He was talking about WWII, but the sentiment holds true for bear markets as well.  Take advantage of this market crisis to consider some moves to maximize your value, regardless of market conditions.

  • Review expenses and maintain margin
    Showing you can maintain margins as revenue declines will demonstrate your firm’s effective management and flexibility. Revenue expansion through the long bull market has allowed firms to expand their expense budget without impacting margin dramatically.  With RIA revenues likely to take a hit, use this opportunity to cut unnecessary expenses and maintain margin.  Pay closest attention to expenses such as travel, and other largely personal expenses that don’t drive current customer engagement or new client acquisition.
  • Focus on client acquisition
    New clients mean growing future revenue, and growth outweighs almost all other metrics in driving multiples higher. Demonstrating you can grow your client base in the face of tough revenue headwinds can have a significant impact on valuation.
    With that in mind consider increasing your marketing spend now when others may be pulling back.  Some investors unhappy with the response from their current advisor to the bear market may be up for grabs.  Pay particular attention to prospects you’ve talked to before but couldn’t close.  They may be open to a new proposal.
  • Double down on relationship management
    It’s an uphill battle to try and demonstrate growth if you’re losing existing clients out the back door just as fast as you bring them in the front. Hold onto current clients by over communicating.  Increase the frequency of phone calls, emails, newsletters, video conferences.  They can be done either individually or as a group but be sure your current clients know you share the pain of their loses (assuming you’re invested alongside them), but also that you have a plan for next steps.

This market has not been much fun, but it does not mean an end, or even a slowdown in RIA mergers and acquisition (M&A) activity.  It likely means that buyers will be paying closer attention to the details to be sure they make the best possible investment.  It also means that sellers will need to work a bit harder to maximize valuation by maintaining margin and continuing to grow.

There is no one answer every seller, but it’s important you to think through all the issues and consider all your options.  At ButcherJoseph & Co., we work with investment advisory firms through the entire process to help position your firm for a sale, analyze all your options so you can make the best decision for you to maximize value, and execute a sale process with a focus on personal attention.

If you are an owner who is thinking about selling your investment advisory business, we often begin the process with a complimentary feasibility study analysis, which can help you understand the value of your business and which type of buyer may be best for you. If you are interested in learning more, don’t hesitate to contact us today.