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An appetite for growth

publication date: May 1, 2010
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The property market is still in varying degrees of disarray, yet some of the UK’s most successful property agencies clearly believe that the ongoing difficult financial situation in the UK is not a barrier to success – which is excellent news for the whole industry. PROPERTYdrum interviewed the Managing Directors of three very different property companies, all have an appetite for growth.

What are their goals? How is their market developing, what are the challenges?

Bob ScarfeBob Scarfe of Countrywide Estate Agents, (sales), which has recently acquired the franchise to develop the Sotheby’s International Realty brand in the UK.

Paul WellerPaul Weller of Leaders (lettings) which recently completed an MBO and restructure injecting new capital for growth from Bowmark Capital, RBS and Lloyds Bank.

Dominic AgaceDominic Agace, of Winkworth (sales and lettings franchise) which has ambitious plans for growth following their AIM listing on the LSE in November 2009.

Q Times are still tough in the property market, are you confident that your particular sector is set for dramatic growth?
Bob Scarfe, Countrywide. “Market volumes have decreased so much that there won’t need to be a dramatic return to ‘normal’ transaction levels for there to be significant growth. We’re simply focused on having the best share of any market. While sales volumes are still low – half of what they should be, compared to historic norms, we have gained significant market share and intend to build on that. We have three years worth of pent up demand out there with people who could move but have chosen to sit tight and wait – up until now. Now, with mortgage lenders showing encouraging signs, we can only hope that this will tempt home movers back to the market.”

leadersPaul Weller, Leaders. “Leaders is working hard on expansion plans to at least maintain the rate of growth we have achieved over the last 4-5 years, during which time we have grown from 18 to 43 branches and quadrupled our fee income. We believe the lettings market will continue to grow as a response to housing needs and socio-demographic trends, a shortage of good quality homes, increasing reliance on the PRS to support social housing need, the difficulty for first time buyers to enter the market and, finally, the attraction of residential property as an asset investment class. However, even without dramatic growth in the underlying market Leaders can continue to grow through its acquisitive strategy.”

Dominic Agace, Winkworth. “Currently the sales market is the driving force in our business, with the lettings market proving more difficult as lettings stock is being moved to the sales team to satisfy demand. It is our integrated and local approach that makes our company profitable in all markets. We don’t believe there is medium-term dramatic growth in sales, lettings, or management due to the ongoing economic headwinds. However, there are opportunities for local proprietors with the help of our brand to win market share over larger, less agile corporate agencies.”

Q Which is your preferred expansion route?
Dominic Agace, Winkworth.
“We are looking at acquisitions in line with our franchise model. We are keen to discuss acquisitions or joint ventures with other franchise networks, as well as the acquisition of franchise revenues of existing independent agencies on a local or regional scale that would welcome the support of our systems and a capital injection, to develop their business without the loss of equity.”

Paul Weller, Leaders. “Our appetite for acquisitions is varied. We are happy to buy the shares in corporate entities or to purchase assets and goodwill. Historically we have acquired businesses that have taken us into new towns, extending the geographical footprint of our network. Many acquisitions have been portfolios that we absorbed into our existing branch infrastructure. We have purchased single and multi-branch businesses.”

SothebysBob Scarfe, Countrywide. “We’ve always tried to strike a balance between acquisition and organic growth; the two are not mutually exclusive. We operate 40 local brands, each with their own history and we pride ourselves on how we use our expertise with local market knowledge to grow great businesses in the heart of the communities that they operate. This market presents plenty of opportunities, we’re open to all of them; Sotheby’s is a prime example, although our plans to expand this brand in the UK will mostly centre on opening our own new branches.”

Q What are the usual reasons for a company selling to you?
Paul Weller, Leaders. “Owners’ reasons for sale are varied. Retirement, the need to spend time caring for a sick relative, or a desire to follow a new business venture are all reasons we have seen in recent acquisitions. We have also bought a considerable number of lettings portfolios from estate agents who then continue to operate their sales agency. Reasons for such sales have also been varied; the need to raise cash to restructure partnerships and pay out retiring partners, cash to keep the sales agency afloat, or a desire to return to sales agency as the sales market recovers.
As a letting specialist (who doesn’t engage in sales) Leaders is in a unique position; sales agents are prepared to sell their lettings portfolios to us rather than another estate agent. Further, we often agree an ongoing mutual sales and lettings referral arrangement to benefit of both parties.”

Dominic Agace, Winkworth. “There are plenty of agencies out there that are looking to exit due to financial difficulties. We look at the circumstances of every agency individually; our model is simply to invest in good agents and good businesses. Certainly, we don’t believe that all agencies that may be in financial difficulty are bad agencies. We look for agents who want to grow their business through either expansion or growing local market share.”

Q What do you look for when considering a business proposition?
Dominic Agace, Winkworth.
“This varies from one applicant to another, but typically, looking at prospective franchisees, we look at a combination of ability, experience and investment.
The Winkworth franchisee needs to be capable of running a healthy business whilst maintaining our high standards. They must also be sufficiently funded to make the right impact in the chosen marketplace. In most cases our franchisees come from estate agency (former managers and directors) or propertyrelated backgrounds, however we would always consider someone with a keen interest in property, who is prepared to train and learn alongside an experienced team. We are also keen to enter new strategic locations, to open in new markets that affiliate with our network across London and areas further afield which fit our market profile.”

Paul Weller, Leaders. “We are concerned to understand a number of factors. Location is important but not critical; we can always re-site a business and often do. More important is the size of the local market and our ability to grow the acquisition to a worthwhile critical mass. Initial size isn’t important, provided the growth opportunities are present; we often enter a town with a relatively small acquisition, which we then add to by further acquisitions. The length of time the business has been established is a factor as this will indicate a more stable client base. The quality of the portfolio managed is critical as poor quality property would damage our reputation.”

Q What is the approximate cost of opening a new branch?
Bob Scarfe, Countrywide. “A number of variables are involved like the lease and fit out costs which are dependent on the office and its condition. Other considerations include the brand itself; whether it’s a new brand which would need significant online and offline investment to get it off the ground – advertising, promotion, launch, website and portal investment, etc. The staff costs also hugely vary depending on the size of the team and if they’ve come from another office or through acquisition, etc.”

Dominic Agace, Winkworth. “This is dependent on local factors; rents and advertising costs which vary hugely from area to area. However, a starting point for a franchisee is a requirement to access working capital of at least £100,000.”

Q What is the single thing most likely to wreck a sale?
Paul Weller, Leaders. “Once we have engaged with a vendor in negotiation, completed our preliminary enquiries and agreed Heads of Terms it is most unusual for the transaction not to complete although our due diligence exercise can reveal problems that we had not anticipated (this is rare). Even a shortage of client funds will not prevent the transaction as we would simply ensure that a proportion of the purchase consideration was paid into the client account at completion rather than to the vendor. Most issues, provided that we know about them in advance, can be catered for. Consequently the single issue most likely to wreck a sale would be a dishonest vendor trying to conceal from us problems that will inevitably surface.”

Q How long does a purchase take?
Paul Weller, Leaders. “We can progress acquisitions to a timetable that matches a vendor’s. The important thing is to agree a timetable and stick to it as we generally have many acquisitions underway, so it’s a logistical problem to juggle completion dates; if an acquisition starts to slip we do not allow it to have a ‘domino’ effect on timetabled acquisitions, we reschedule it. We can happily complete an acquisition in four weeks if a vendor is prepared to work at the same pace and we do not have conflicting acquisitions already timetabled. Equally we can negotiate over a longer term; our is currently 10 years!”

Dominic Agace, Winkworth. “This varies significantly; there can be a long ‘getting to know each other’ period. Through our model the ‘proprietor’ will still be involved once they have joined the Winkworth network, so we both have to be happy that we share the same values and aspirations.”

Q Do the principals usually stay with the company?
Paul Weller, Leaders.
“We find that most vendors are trying to exit the industry or refocus on sales agency if residential lettings has developed as a sideline. However, on occasion a business owner may very well remain with Leaders and develop a substantial career. A good example of this would be where we have acquired a jointly owned business where the majority shareholders retire but a minority shareholder wishes to remain.”

winkworthDominic Agace, Winkworth. “Yes! These are the people we are investing in and who we believe are an integral part of making the agency successful in its local market.”

Q Are there usually redundancies?
Paul Weller, Leaders.
“It is very rare. As it is our practice to retain all customer facing activities in the branch, the majority of roles continue. The role that does present some difficulty is the accounting function as we operate centralised company and client accounting. If the business had sub contracted this role to an accountant there is no redundancy issue. In other cases, the vendors themselves have been doing the accounting so again there is no role redundancy. If the business does employ accounting staff we consult with them.”

Q What’s the biggest challenge in acquisitions or new branches?
Dominic Agace, Winkworth.
“The geared nature of estate agency is the most challenging part. When it is your own money involved, the temptation is to hold back on investing in your teams and business until income has built up. In reality, you need to invest, prior to receiving the income, to get the income and realise the potential of the business.”

Bob Scarfe, Countrywide. “The most exciting prospect is deciding on locations and prioritising our growth. But with the right branch staff and experienced agents in senior management, it’s not difficult at all – it makes life exciting and presents opportunities for our staff to progress.”

Paul Weller, Leaders. “The most challenging aspect is the integration of the business into the Leaders’ operation and the management of the transferring staff. However, our acquisition integration team are highly experienced in this task. It is normal for us to complete an acquisition on a Friday, and have loaded their database onto our own IT systems by opening for business the following Monday, having worked through the weekend.”

Q And the most exciting?
Paul Weller, Leaders.
“I guess the exciting thing about our acquisiton strategy is seeing the company grow from its humble origin as a single branch business in Brighton to a substantial brand across the south east of England. Especially as it has remained effectively a family run business with a very personal family company ethos, allowing many of our staff to develop rewarding career progression with us that many companies would find difficult to deliver. We have countless examples of employees who joined us years ago in very junior roles either directly or through acquisition who have developed into senior management roles.”

Dominic Agace, Winkworth. “Year two! When the hard work of year one feeds through to a steady stream of consistently profitable months. On a more immediate level, taking on high-value instructions, which they would not have been able to get on their own.”

Bob Scarfe, Countrywide. “Speaking on the Sotheby’s brand – working in partnership with one of the best known and respected brands in the UK.”

Q Where will you be in 5 years?
Dominic Agace, Winkworth. “We would like to see Winkworth increase by over 50 per cent over the next five years, opening offices nationally and internationally.”

Paul Weller, Leaders. “Our business plan is to continue to grow Leaders at approximately the same rate for the next five years. However, as a result of our recent restructure we are also now able to consider larger acquisitions beyond our traditional geographical territory.”

Bob Scarfe, Countrywide. “We have ambitious plans to build on the significant market share growth we’ve enjoyed over the last two years... but you’ll have to wait and see how we utilise all our brands and services to do that.”