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Buying an agency
publication date: Mar 31, 2010
However, PROPERTYdrum’s pages also record branch openings, acquisitions and major spending on flagship sites with eye watering rents. Players large and small see opportunities where others find none. All business is risk, but risks can be calculated and are there to be run. THE CASE FOR INVESTING NOW
There is a case for investing now and during the difficult years ahead. The arguments are persuasive, at the most basic level, demand for homes whether owned or rented exceeds supply. Demographic changes; we live longer, we have more single person families, we have a wasteland of poor housing in urgent need of replacement and empty industrial areas that lie useless and overdue for development. There are opportunities. Large heavy industry, the big employers of the past, has gone eastwards and will not return. Smaller knowledge based companies will demand high quality workspace and the scientists, technicians and skilled managers will demand high quality housing to match. Recovery may be slow but the opportunities for those in the housing market will be increasingly evident. See the trends, plan ahead. Opportunities come in all shapes and sizes, an agency looking to expand will be interested in improving coverage in the chosen territory, moving into a new area but close by where there is already name recognition of the existing brand. There should be economies of scale through centralising head office, accounting and perhaps some management functions. Marketing costs need not grow in proportion to the number of branches, web cost is a prime example. Larger and more populated web sites are more attractive to the searcher. Similarly, local press advertising can often serve several branches if acquisitions fit media footprints. LOCATING THE TARGET
Finding a potential buy is not too difficult, winning it is the hard part but that comes later. Local knowledge is a must, but cannot replace a thoughtful process of research. Sole traders and partnerships do not leave traces at Companies House but limited companies do. Online searches are easy, while small companies can avoid publishing a full set of accounts these are often useful clues – full names and addresses of directors and shareholders with details of their holdings.
Sadly, there are no longer many business agents specialising in agency transfers, so a small space inside the predator’s weekly property pages, advertising in the local newspaper and on the office website is the next best thing. Clients do not object to their agency wishing to expand, most find it encouraging, so simple tag lines, “We are interested in purchasing other good quality agencies, call my private line in confidence” will certainly be read by other agencies. VALUE POINTERS
Acquisitions are greedy consumers of money and the time of principals long before the contract is signed. Skilled managers work out a list of value pointers to show the way to preferred targets. Length of time in business, reputation, and income streams that could be added to those of the acquisitor or be introduced by the purchaser to the target, once owned, increase value of the enlarged business. Synergies that avoid duplication and reduce headcount form part of the value analysis. Equally important is the absence of unwanted liabilities, long leases without Notice provisions, asset leases that last too long, and contracts of employment that are too costly or restrictive should be avoided or be factored into price negotiations. What will it cost? There are no yardsticks, everything is down to the perceived value of the enlarged business in terms of profitability, future growth opportunities and the market value of the new whole. There are some current beliefs which can be a nuisance if a fake sense of worth is embedded in the mind of the target. A sales agency, unless of long standing and with an enviable reputation, may be worth little more than the value of the pipeline, to be paid as completions are finalised. Small extras for a decent lease in a good location and a douceur for fixtures and fittings can be used to sweeten the pill. Letting agencies selling their services at cut rates are worth nothing except to a purchaser willing to work for a wage in an owned business of no value. Small firms with less than 150 properties under management can fetch between 50 and 75 per cent of one year’s fee income and will appeal to the young entrepreneur looking for a starter business without the burden of fees paid to a franchisor.
Sophisticated purchasers decide price using discounted cash flow techniques – a good accountant can do the maths if the freely available computer programmes are beyond the acquisitor’s skill. DOING THE DEAL
Check that your funding is in place or readily available before going too far. Red faces at completion time are embarrassing, worse is the waste of time, effort, and reputation due to bad planning over every facet of the target business. Appoint an experienced commercial solicitor to advise at an early stage of the process; but keep the negotiations direct with the principals of the target company. Many deals are lost when solicitors or, perhaps, even worse, financial advisors take on the role of principals and try to improve a transaction beyond the key points agreed by vendor and purchaser. Simply stated, if a deal can be agreed it can be written down in the form of Heads of Terms, signed by both parties, but always ensure that this is subject to a programme of Due Diligence. This programme is vital and should cover every facet of the target business. A full Due Diligence programme is too lengthy to cover in this article, but will be the subject of space in a future issue of PROPERTYdrum. Once Due Diligence is complete, additional negotiation is often necessary to adjust pricing, preferably downwards, or require warranties from vendors against future costs or possible problems. While cash is king, many good deals provide for deferred consideration to be paid if future performance targets are met. Offering equity, shares, in part payment may not be wise since new shareholders may forget their business has been sold and interfere beyond reason. A useful instrument – “Deferred Redeemable Loan Stock” – carries interest at an agreed rate and is in common use; but do not support the Loan Stock with guarantees – if you can get away with it. Remember the people who are the real asset of any business, TUPE, and tax considerations. Happy Hunting! |
Recent research by PROPERTYdrum posts a warning; agencies, both sales and lettings, are shutting up shop at an unprecedented rate. Halifax went for £1 plus a substantial incentive from the vendors. Countrywide is shedding unprofitable units, small chains shut branches when leases expire and stand alone agencies close down when money and credit run out. Jobs lost, hopes deferred, personal tragedies occur as guarantees are called in and assets seized. Gloomy stuff indeed. 
Making contact is not difficult, even if it entails weary evenings at NAEA or ARLA meetings and attendance at local estate agency branch meetings. Putting the word out – we are looking to expand, got any useful ideas? – may not win an instant response but will certainly be passed on in the form of gossip. A lunch or drink with competitors is a useful tactic and can produce direct responses and an opportunity to start negotiations. 
Values rise for businesses with 200+ properties under management. Prices around one year’s fee income or better for firms of exceptional value and profitability are seen as a norm but often unrealistically so. Larger firms move away to prices based on profits net before tax with the vendor’s costs added back, less the cost of new management. An adjusted P/E ratio of 4-5 times earnings is realistic. 
