Was Marsh & Parsons a good buy?
Big news this week was the acquisition of Marsh & Parsons by London rival, Dexters. But was it worth £29million, asks business transfer specialist Adam Walker?
The sale of Marsh & Parsons to Dexters took almost everyone by surprise but it is just further evidence of the increasing pace of consolidation within our industry.
Hardly a day goes by without an announcement about yet another acquisition and for every acquisition announced publicly I can tell you that several more are concluded in private. In December 2022 alone we completed deals worth over £10 million most of which have not yet been publicised and our pipeline of deals for 2023 already stands at over £40 million. We have never been so busy.
Why so many mergers?
So what is driving this frenzy of merger activity? Well, the answer in short is the mathematics behind the economies of scale. This means that however big a company is, there is a bigger one still that wants to gobble them up.
March & Parsons was sold for £29 million on a nil cash balance basis and its reported profit was £1.8 million. This means that it was sold for 16 times profit which would give the buyer a return on capital of just 6.25% .
It was sold for 16 times profit which would give the buyer a return on capital of just 6.25% .”
This sounds like a very high profit multiple but this is not how letting businesses are valued. Dexters already has a large network of offices across London so Marsh & Parsons will be integrated with these which will in time give them huge cost savings and a much better return on capital.
The purchase price should therefore be calculated using the formula X times letting turnover + 100% of the SSTC pipeline, minus lease disposal costs, redundancy costs and the cost of disposing of unwanted supplier contracts. This produces a very different figure to a straight multiple of the current level of profit.
Improved efficiencies equal profit
Let me give you a simple example using rounded figures for the sake of simplicity. A well-run letting agent has a turnover of £1 million p.a. and a profit of £200,000 (20% ). This agent sells their business to a competitor who has a shop next door to them for £2 million (2 x turnover).
After the sale has completed the buyer will have no premises costs, no marketing costs, no IT, accountancy, HR or compliance costs and considerable staff savings through improved efficiency. As a result of these savings the profit from the business they have bought will increase to £500,000 (50%).
This means that they will get the purchase price back in 4 years and so achieve a return on capital of 25%. If part of the purchase price is borrowed the return on capital will be even higher.
These simple mathematics are what is driving the consolidation of the lettings industry.”
There are very few other investment opportunities that give a 25% return on capital with so little risk. These simple mathematics are what is driving the consolidation of the lettings industry.
While the mathematics are beyond dispute the reality is that many letting agents still enjoy running their business and are not ready to retire yet. This means that the consolidation of the letting industry, while inevitable, might take another 10 years to complete.
I will be 74 years old by then so whilst I still greatly enjoy doing what I do, I just might be ready to retire myself by then.
Read the news report of the Marsh & Parsons acquisition.
