Should RIAs brace for a pullback in deal valuations?

After a banner year for RIA mergers and acquisitions, would-be sellers might have come into 2025 with somewhat high hopes.

With a full-year tally of 366 deals in 2024 – representing a 14 percent annual increase in transactions – the most recent RIA M&A report from Echelon Partners predicted another robust year, pointing to a "highly fragmented market, promising growth prospects, and ample supply of motivated buyers and sellers." 

Of course, now there's a lot more bearishness in the air. The tariff threats unleashed by President Donald Trump within his first two months in office have hurt the stock market, bringing the S&P 500 into correction territory at one point. Recession fears have also become a legitimate concern, with the commander-in-chief declining to rule out the possibility of recession as his antagonistic stance on global trade stokes fears among domestic businesses and industries.

All that begs the question: should advisor owners be concerned about a pullback in RIA valuations? Eric Leeper, CFO and principal at FP Transitions, doesn't think the sky is falling just yet.

"I think a healthy concern is warranted, but I wouldn't let it rise to the level of a panic," Leeper told InvestmentNews in a recent interview. "We haven't really seen a whole lot of changes."

After periods of blistering growth and election years, Leeper acknowledges that there tends to be a greater awareness of gravity potentially taking effect. The fear has been greater with the current administration, he says, as the implications of tariffs on the broader economy start to sink in.

But by and large, M&A deals have been structured to withstand macroeconomic challenges for the past 10 years, Leeper says, pointing to adjustment mechanisms that offer downside protection based on how much revenue is received.

"In larger deals, particularly deals which we would consider to be well-structured, deals where we have an equity swap in play, that equity is going to adjust on both sides of the ledger," he said. "When we use stock in the transaction, you're basically just transferring risk from one entity to another, so it doesn't fundamentally change the risk profile."

Depending on how long an economic or market pullback lasts, Leeper says RIA practice valuations could shrink as base values start to decline and multiples start to compress. While he's not seeing signs of a recessionary contraction at the moment, there's been a trend of growing discernment among the most active acquirers over the last 18 months or so.

"What they're saying is 'we're still going to pay a high multiple, but we're going to reserve those transactions for the firms that represent the best fit,' " Leeper says. "Nothing that we're seeing suggests that M&A [valuations] are going to pull back ... Where a practice might have had 10 really well-qualified buyers, we might only see three for a given practice, which I think highlights the importance of due diligence."

Based on the scores of transactions that FP Transitions is involved in – the firm works on more than 100 deals yearly, according to Leeper – he says spreads have remained fairly large, with the top bidders paying up to 20 percent more than the average offer for a given target.

Still, some advisor-owners might want to proactively recession-proof and maximize the value of their practices ahead of a transaction. For those cases, he says having a differentiated organic growth strategy is crucial, particularly if they want to get attention from mid-sized buyers within the $10 billion to $100 billion AUM range. Apart from that, he argues investing in talent is essential, especially when it comes to enticing larger organizations.

"Firms are fighting for talent right now," Leeper says. "If you have a team that is in place, that is solidified, and in a lot of cases, equitized, meaning they are an equity owner of that practice, and they are going to come along with the transaction ... This increases the value and the durability of the practice."