Being paid to be a property industry watcher means inevitably you pick up on trends that others, who are busy selling or letting properties, don’t see. And one of the stranger ones I’ve noticed in recent years is a trend that I’ve had confirmed by agency insiders; that both big and small agencies keep being sold for considerably less than their market value. This is all the odder given that estate agents are, at the heart of their operations, deal makers.

So the question is ‘why?’. And that’s something I’ll come to later, but first we need to bolt down how you value an estate agency.

I am assured by those in the know that the accepted formula based on annual turnover is to multiply lettings income by 2% and then add 100% of the property sales pipeline in order to attain a basic minimum value. Many agencies of course have other sources income such as financial services and sometimes their own portfolio of properties to add into the mix, but all this is irrelevant if the final sale price is still less than the one attained using the ‘basic formula’ mentioned above.

The Dexters-Marsh & Parsons deal

The most curious example of this is the recent sale of Marsh & Parsons by LSL to Dexters. The two companies announced the deal in January, revealing that Dexters paid £29 million for the 30-odd branch business, which employs over 300 people. The deal makes Dexters London’s largest network of estate agencies and at the time its Chief Executive Andy Shepherd said he aimed to double the size of Marsh & Parsons in the coming years.

(The disposal would)… further simplify the Group structure to allow us to focus on maximising our core opportunities, particularly in our Financial Services Network. David Stewart Chief Executive Officer, LSL

David Stewart, LSL Chief Executive, said the disposal would help the PLC to “further simplify the Group structure to allow us to focus on maximising our core opportunities, particularly in our Financial Services Network”.

One thing about the acquisition is clear – it was a very good deal for Dexters.

I am told that last year, Marsh & Parsons had a lettings turnover of £18 million and a sales turnover of £12 million (or a 60%/40% split) so, using the formula and doing it conservatively, this means that the company’s value is at least £48 million – some £19 million more than its selling price. From this figure you need to deduct the cost of getting rid of any unwanted branch leases and paying off any excess staff, but this does not wholly explain the huge gap between value and sale price – something LSL’s shareholders would expect to be at market price.

It is also likely, based on chats I’ve had with experts in this field, that the sale of Marsh & Parsons was not on the ‘open market’ and that some of Dexters’ competitors who would have loved to bid for the business did not get a look-in and were somewhat puzzled by this.

I have approached LSL for comment about the deal but their representative declined to add anything to the original statement put out at the time of the sale.

This is not the only deal of this kind in recent times. You may remember the sale of London agency Douglas & Gordon to Foxtons for £14.25 million which at the time was said to be, based on publicly-available information, several million pounds less than its ‘book value’. Let us turn to the likely reasons for these odd figures in both cases.

Tight margins

As industry expert Andrew Stanton has said in the past, low valuations of lettings turnover can be explained by the kind of portfolio being bought. If an agency has grown its portfolio by undercutting the competition to win landlords, this will make their profit margins wafer thin and of less value to a buyer.

This is unlikely to be a factor in the sale of Marsh & Parsons which along with Douglas and Gordon was famous for refusing to discount on property management and sales fees – making their ‘bargain’ sales even more puzzling.

Nevertheless, many said the sale of Douglas and Gordon for £14.25 million was a good outcome for the Talbot Wilcox family who ran the business, given its accounts revealed a profit of just £268,000 on a turnover of £16 million.

Another reason some experts have highlighted is that Marsh & Parsons just wasn’t bringing home the bacon against a background of lacklustre performance at LSL, which its most recent trading results revealed estate agency revenue down 6% from £131.6m to £123.4m. The most recent Marsh & Parsons accounts support this view, showing rising income but dropping profits.

Sold ‘under market value’

These are just two high-profile examples of businesses being sold for less than their likely ‘market value’ but everyone involved in the world of business mergers and acquisitions (M&A) tell me they are not isolated and that it is not uncommon for aggressive M&A sales people, who are employed by almost every estate agency of a certain size, to persuade the owners of small lettings and sales businesses to hand over their companies for a lot less than an open-marked bidding war might produce. And in one case in the Midlands recently, where a big corporate gobbled up a local minnow, that was up to 50% less.

Hold your nerve

The point of these stories is this – if you’re going to sell your agency after many decades of blood, sweat and tears, then look to these examples. It’s important that the deal works for both sides and isn’t about simple maths, but be sure to stand your ground when the ‘opportunity’ comes knocking.

MARSH & PARSONS – ALWAYS A PROVEN WINNER

Marsh & Parsons has always been known for its eye-catching, edgy and sometimes controversial advertising around London. Indeed marketing has been a strong card in its growth and success. The company has won multiple awards over the years for all aspects of its business, further burnishing its reputation – adding value to the brand. It is the current holder of ‘champion marketer’ with The Negotiator Awards, having won Marketing Campaign of the Year at last November’s awards.

The company has won multiple awards over the years… further burnishing its reputation and adding value to the brand.