Navigating the M&A Industry

David DeVoe founded DeVoe & Company in 2011. The company supports wealth management companies with consulting, M&A industry guidance and valuation services. Since launch, they’ve assisted over 500 high-level companies. They were the most active investment bank for RIAs between $250MM and $3B in AUM in both 2018 and 2019. David’s previous positions include Schwab and American Express. David was named ‘RIA M&A Guru’ by Barron’s.

Interesting fact: David is my FIRST repeat guest! 90 shows ago, he was my first ever guest interview.

Early Deals (And Missed Opportunities)

David shares that, after starting a t-shirt business in college, he missed a deal opportunity. He had relationships with manufacturers and retail outlets, but when he transitioned he simply left the original business rather than selling it. I can share David’s pain here. I missed an early opportunity in deal-making as well when I didn’t sell a flyer delivery business I started at age 15. When I left for college two years later, I just gave it up. The issue? A lack of understanding enterprise value! I didn’t understand the financial power in contracts, cash flow, and existing infrastructure at the time.

As David matured, he realized that deal-making held huge potential for both business growth and relationship building. In fact, David had a meeting scheduled after this interview with a connection he made in his first ever deal he closed while running an M&A industry platform. That deal occurred over 17 years ago, and the connection is still serving both parties.

EP Wealth recently took on private equity, and as a result a reporter reached out to David. Why? Because about 17 years ago David’s second deal, while a part of Schwab, was connected to this company. By leveraging deals as a way of forming connections and creating relationships, David has come a long way since being the guy who missed his first deal-making opportunity.

M&A Industry Growth + Projections

The M&A industry is a complex field! 2019 was a healthy year in the RIA industry, and David would love to see that repeated in the future. In 2019, the field had about 30% deal growth. Overall it was in a good place, exhibiting strong and steady growth.

However, David notes that this industry will have hundreds and hundreds of advisors selling in the next couple years. This is partially because the average owner age is 62 years old. (The average adviser age is 53.) However, out of about 10,000 firms, only 30% have written succession plans.

With these numbers, David believes we should be seeing 300 transactions per year. Instead, we hardly see 100. With each year we don’t see a full 300, we see an increase in the backlog of transactions that will need to occur in the future. David would rather see a 30% year after year trajectory, rather than a flatline followed by a massive spike that overwhelms buying power.
I do note that everyone in the industry has expected more deals, faster. Listen in to the full show to hear David’s thoughts on that, as well as the extended age of retirement.

M&A Engagement Trends + Covid 19

David’s noticed that recently, advisors have been engaging with M&A not only as a retirement play, but as a scale play. Folks are realizing that the game continues to change, and are interested in perhaps becoming part of a mega-firm rather than staying smaller and growing more slowly.

Prior to Covid 19, David notes that January 2020 was an all time high of monthly activity. The year started with a bang! This was driven by valuations being at an all time high. Profitability and growth were unlocked, and everything was full steam ahead.

Deals began dropping, from an all time high to less than 50%, in February. By March, Covid’s impact was in full effect. David delineates a 3-phase process that the industry is moving through as a result. (For more numbers, I recommend the DeVoe RIA M&A Deal Books!)

Phase 1: Deals are getting done if they were already established or moving through the pipeline. Advisor’s are starting to look ahead a bit.

Phase 2: An overall lull of activity and a decrease in the initiation of new deals. Firms under a billion really slowed down; firms over one billion actually increased. Overall, this phase created a 4 month lull.

Phase 3: A surge of activity is common here, and is what we’re currently seeing. Many firms are back on track; David notes his firm had a record setting Q3. The surge from early in the year seems to be back, and ideally will be a V curve.

Covid is real, and is impacting deals and even as they pick back up deal structures. However, the market continues forward. David hopes the COVID 19 experience will inspire advisors and firm owners to mitigate risk by creating succession plans now that risks have unfortunately become all too real for some.

Next Generation Talent & Succession

Sometimes advisory firms don’t want to take a hard look for that upcoming talent in the next generation. This can be because they already have the sense that they don’t have the talent in place. On the other hand, sometimes they’ve waited too long, and they’ve reached a point where the firm’s size indicates an internal succession won’t be fiscally possible.

David’s question: If that’s the case, now what? If there isn’t someone in house who can afford a take over, what options does an advisory firm have?

A recent survey showed that 57% of advisors say that if they had to transfer ownership to G2 today, it would be bumpy at best. Many firms reported they don’t have a strong enough second generation in place to even consider that a feasible option. Only 10% said this transfer could lead to the company being run as well or better.

This could indicate firms can’t look within; however, David does encourage advisory firms to strongly consider the next generation when possible. He notes that this is a professional industry. Firms need to consider how they can train up leaders, and how they can migrate some responsibility so that the next generation WILL be capable of taking over. He also notes that this is beneficial for your clients. They want to know who will run their accounts, and they have more peace when they understand you have a viable succession plan in place.

Human Capital & Thoughts on the Future

Devoe & Company has been creating programs, like their coaching accelerator, to provide coaching and guidance to advisors. David finds that human capital is key to growth, and is passionate about providing ways for advisors to grow in their ability in order to strengthen the industry as a whole.

Because M&A is a dynamic industry, David expects to see additional activity and continued growth. Eventually, he expects to see the numbers return to around 30% growth per year. He also expects to see the emergence of mega-firms with private equity backing that will increase creativity within the field.

This will likely create diversion and diversification, which David expects to lead to greater value being offered to clients. David does note that the small, medium, and large will continue to exist, and expects to see growth on all fronts. This also includes the use of technology to drive growth directly, as well as to aid in creative delivery and data usage. The application of technology and intelligence will only increase, and those in the field should expect dynamic changes as time progresses.

To hear more about trends, listen in to the full episode here!

Corey Kupfer is an expert strategist, negotiator and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author and professional speaker who is passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.

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