Residential sales businesses

Let’s look first at residential sales businesses. If you have a strong brand and a talented manager, it is certainly possible to cold-start a new office in a neighbouring town. The process is well-proven. It usually involves touting other agents’ unsold instructions, flooding the area with marketing material and possibly offering discounted or even zero percent fees for an introductory period. The cost, however, is considerable. You need to fit out the shop, pay for the marketing, make an allowance for the cost of the discounted fee period and pay rent, rates and staff salaries for six months before the money starts coming in.

Launching a new branch is costly, it can be six months before the money starts coming in.

Buying an existing business is therefore an attractive proposition. It reduces the set-up costs and gives you a pipeline of under offer properties and a register of instructions to sell from day one. Residential sales businesses are in my opinion still undervalued. Whilst exceptional businesses are now selling for good prices again, many sales-only businesses can still be bought for little more than their pipeline value and even long established and profitable businesses rarely sell for more than two to three times their profit. This is often much less than the cost of a cold start.

Residential letting businesses

Letting businesses sell for much higher prices. The main reason for this is that it is much harder to build a letting business from scratch. It is difficult to tout other agents’ un-let instructions because the landlords don’t live there. Most marketing material is ineffective for the same reason. Even if you do manage to reach the landlords, you will find many of them are very loyal to their existing agent.

Even if they are prepared to consider using a new agent, they will not be able to do so until the next time the tenant gives notice which may be months or even years away.

For these reasons, good letting businesses can sell for as much as twice their turnover and exceptional ones sometimes make even more. Whilst it sounds a lot, it can still be cheaper than the cost of a cold start. If you buy a letting business in your home town or a neighbouring town, you will get considerable economies of scale. The cost of marketing, tenancy administration, property management and accounts will all be reduced and the profitability of a bought-in letting book can be as high as 50 per cent.

What to look for

It is very important to buy the right business. What you should be looking for in a letting business is a long established well run business with a high percentage of fully managed properties and a high percentage of longstanding landlords. As long as the handover is handled properly, you can expect to retain nearly all the business for many years to come.

Recently established businesses, businesses where most of the landlords are dealt with on a let-only business, businesses with a transient client base and businesses with compliance problems are much less certain propositions and consequently they sell for much lower prices. A really scrappy let-only business with poor compliance might sell for as little as 50 per cent of turnover if it can be sold at all.

For the sales business, you should be looking for a long established business with a good reputation and a stable profit over several years. Recently established businesses sell for less. You should also be a little cautious about buying a business that trades under the proprietor’s own name. The client’s loyalty is often to Joe Blogs personally rather than to Joe Blogs Estate Agents Ltd and when the proprietor leaves, the goodwill can leave with them.

Finding a business

Businesses are usually sold because the owner wants to retire or change career, because partners no longer wish to work together or because of financial difficulties (which may often be caused by divorce or other personal issues rather than any problems with the business). You will probably be able to draw up a list of possible acquisition targets in your area. It is best, however, to approach them through a professional intermediary such as your lawyer or accountant as your competitors will naturally be cautious about admitting to a competitor that they may be selling. Businesses are also available via business transfer agents and the smaller ones may even be advertised in Dalton’s Weekly or on the specialist websites. The owners will probably want you to sign a non-disclosure agreement before they meet you and you should ask your solicitor to draw one up.

Agreeing a price

There are several different formulae that are used to value an estate agency or letting business but ultimately the only thing that matters is what profit you will make from the acquisition. In order to determine this, you will need to put the current and anticipated income and expenditure into an Excel spreadsheet. The offer that you make should be based on a multiple of the anticipated profit. Don’t be frightened to walk away if the price is too high. There will always be another opportunity and you may get another chance to buy the business later at a lower price. Many businesses, especially those that are offered for sale by their owners, go to the market at too high a price. If you are patient, the price will often come down.

Raising the finance

Even six years after the banking crisis, raising finance for an acquisition can still be quite tricky. In theory, a sales pipeline, an instruction register, a lettings book or a business that has made consistent profits over many years are tradable assets which should be treated as suitable collateral for a loan. In practice, banks don’t see things this way.

The first port of call should be your own bank but you should expect them to ask for a personal guarantee secured against your home or other assets. Any overdraft facility that you negotiate is likely to be based upon the track record of your existing business rather than the one that you are buying.

If your bank cannot help, you may need to turn to a private investor (a business angel), to a specialist business finance broker or to a peer to peer lender. Lists of these can easily be found on Google.

If you are making a large multi-million pound acquisition, it may also be worth approaching venture capital funds but the cost involved will be significant.

The legal process

Once the offer has been agreed, you will be expected to confirm it in writing. This document is known as Heads of Terms. It is typically four to five pages long and sets out all the key terms that have been agreed in addition to the purchase price. It will need to be prepared by a solicitor. Before instructing a solicitor, you should ask them three key questions. One, are you an expert in mergers and acquisitions and do you spend 100 per cent of your working time in this field? Two, have you been involved in the sale or purchase of an estate agency or letting business before? Three, will you agree to a fixed fee for the transaction?

Making the right acquisition at the right time can transform your business – but take advice!

If the purchase price is less than £250,000, you will probably be buying the assets of the business rather than the limited company. This is a much quicker, cheaper and less risky process and the sale should complete within six weeks. If the price is over £250,000, you may be asked to buy the limited company. This is much more complicated and expensive and it will take at least 12 weeks. There may also be tax implications which you will need to discuss with your accountant.

Number crunch

Before you commit to a cold start, do the maths to see whether an acquisition would be a cheaper and safer way to achieve your objective. Making the right acquisition at the right price at the right time can be transformational for your business. But buying the wrong business can spell disaster so make sure that you take professional advice at every step along the way.

Best practice

Compliance expert, Andrew Montgomery at Montgomery consultants, looks at some potential pitfalls of buying and selling business and how to avoid them.

A few years ago a friend of mine decided to sell his classic MG. The trade was saying that his car was in demand and getting a premium price and as he polished it every month it was clean and shiny. Buyers came and a price agreed. Job done: all happy?

Well no! No MOT; Chassis rust; pinpoint corrosion in the engine; brakes seized and an offer at half the asking price.

Had he maintained the car regularly, tested it out and understood what buyers would be looking for, he would probably have achieved his asking price.

What relevance is this to selling a new business?

When a business comes to the market, buyers will want to see more than a smart and shiny office with logoed cars.

Buyers will be looking for the things that will bite them, such as the problems buried within the business that will cost them additional money above the sale price and that could lead to civil or criminal prosecution, which could tarnish their name.

So part of the purchaser’s acquisition plan will be to sample all parts of the business, including accounting systems, deposit handling and balances, landlord and vendor authorities, ID and residency systems, EPCs, gas certificates, vendor offer procedures, and so forth.

Montgomery Consultants are called in to undertake many of these purchaser inspections on a compliance basis (NAEA, ARLA, RICS, Ombudsman), and I am constantly surprised at how easy it would have been for most business owners to address compliance and systems errors prior to putting their businesses on the market, and therefore saving a sale or keeping its value.

The encouraging change in the past years has been that many company owners are looking ahead at their exit strategy by undertaking due diligence inspections on their own companies, well in advance. Reducing compliance risks and providing adequate systems, reduces direct fines and litigation in the present, which then enhances the bottom line, which in turn enhances the value of the business. It also provides a far stronger platform for growth either generically or through acquisition.