“Once you have the client relationship, there is financial technology, other insurance, and a lot of other things that you can sell through the distribution channel. Having that channel is unbelievably attractive for buyers, and they’re willing to pay a premium for that cross-sell.”
And like Darian, he believes it’s still early innings.
“I’m looking at the TV now. The Dow, S&P and Nasdaq are all at record highs. And maybe tech companies like Tesla’s valuations are high. But in our world, at the end of the day, these companies that are buying us are still trading for pretty normal values—they’re not trading for 25 times cash flow, they’re still trading for 10 or 12 times cash flow, which is high, but not crazy.”
Keep it Real
Sellers’ market or not, it’s critically important to stay grounded and realistic about the potential for a career-making deal, or it can all easily fall apart.
A Fidelity study from January found that while firms being acquired are worth more now than they were five years ago and EBITDA multiples have increased, sellers appear to have inflated expectations of their firms’ values compared to the reality of the market.
“Sellers expect an EBITDA multiple ranging from 8x to 10x, according to the buyers surveyed,” Fidelity noted. “As a result, buyers surveyed estimate that, on average, nearly 40% of their deal conversations fell through in the last five years due to unrealistic valuation expectations by the sellers.”
“Firm valuation is as much of an art as it is a science, and we believe the most successful firms will be those who take the time to understand all of the dynamics involved and align their own motivations with the value their businesses bring to the table,” Scott Slater, vice president of practice management and consulting for Fidelity Clearing & Custody Solutions, said in a statement. “We continue to see a rapid pace of M&A, but our study showed that there could be even more deals happening if valuation expectations were better aligned.”
The majority of participating firms in the study agreed that unrealistic comparison multiples in large sales (91%) and a lack of understanding of valuation drivers (83%) are the top factors driving sellers to overvalue their businesses.
Other drivers include a misalignment between seller cash needs and firm value (61%), being too close to the business to recognize weaknesses (57%) and failure to recognize the synergies sought by buyers (26%).
The research also revealed that when it comes to making a deal, sellers and buyers are coming to the table with differing motivations and expectations.
“Rather than being opportunistic in their approach to M&A, sellers can better understand what buyers are looking for, and build those interests into their succession strategy and timeline to help improve their pricing and increase appeal,” Slater added.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
