Where’s the exit?
Pandemic aside, 2021 may well go down as the year of acquisitions and business sales, says Charlotte Flake – and you may be in a sellers’ market.
Once agents got over the initial shock of the pandemic and came to terms with the pressures of running their business in a different way, it appears many have jumped at the chance to cash in on a strong market or go out on a high. Whilst we are all familiar with the major players (Connells buyout of Countrywide and The Property Franchise Group acquiring Hunters to name just two), there have also been plenty of deals done in the independent arena too.
But is it a level playing field across sales and lettings?
Buoyant buyouts
Although industry news has mostly been filled with record-breaking house prices rises and completion times, it’s not the sales businesses that are drawing most of the interest – yet. Despite the rental sector experiencing slower growth and a tidal wave of voids, there is no denying that a solid managed portfolio can provide some income security in almost any kind of market and are therefore highly sought-after.
Industry veteran in business transfers, Adam Walker, says that prices are the highest they have been for five years. He commented, “I have been selling estate agency and letting businesses for 25 years and 2021 has been our best year ever. The value of a good managed letting business has increased by 15 to 20 per cent as a result of Covid because it has proved that managed lettings income is very resilient and recession proof.”
The value of a good managed letting business has increased by 15 to 20 per cent as a result of Covid because it has proved that managed lettings income is very resilient. Adam Walker, Adam J Walker Associates.
Tracy Bradley of business transfer agent, Haversley agrees and claims that there is no shortage of buyers for lettings businesses that have withstood the challenges of the tenant fee ban and most recently, the pandemic. On the flip side, brokers allege that the value of let-only businesses has declined, not least because of the uncertainty, but also because of the greater risk of compliance breaches with unmanaged properties.
Sales businesses, though more difficult to value and slower to recover, are expected to see increased valuations next year following the strength of the property market in 2021.
Marc Daniels, Managing Director of business transfer specialist, Addisons, added: “Property management and lettings businesses will always sell as they produce a repeat income. Sales businesses are selling but not at the level of letting companies. However, we have seen and sold a fair number as they represent great opportunities in good markets and have excellent trading names in which to establish lettings departments and other avenues of income.”
Property management and lettings businesses will always sell as they produce a repeat income. Sales businesses are selling but not at the level of letting companies. Marc Daniels, Addisons.
And this income is critical to sales success apparently.
Valuations and viability
Where sales-only agents don’t have managed books to value their business on, they must present themselves as a viable brand ripe for expansion into lettings or other income streams to get the best outcome.
Walker advised: “For a seller who is planning to sell in more than 12 months’ time, there are many other things that can be done to increase the profitability and value of a business. For a seller of a sales only business, the key issue will be to get the timing right…and I am forecasting that values will increase significantly next year.”
As Daniels so eloquently put it: “Simply, do more property management and lettings, keep control of the bottom line and don’t get into onerous commitments.”
There is always the challenge of getting the balance right between expectations and reality too, says Daniels.
Addisons, which specialises in the sales of letting and estate agency businesses, has enjoyed a record year and already has £16m worth of sales in the hands of solicitors ahead of the new year, but chooses its clients carefully for this reason.
“The only problem with selling sales businesses is the sellers’ expectations of value,” said Daniels. “Due to Brexit and Covid, the majority of income over the last three years has been compressed into the last 12 to 18 months and vendors require a value based on a short time scale rather than looking at the profits over the last three years. We have sold more sales agency to realistic sellers on this basis, but have also refused instructions if client expectations cannot be achieved.”
Out with the old and in with the new?
What hasn’t changed much are the reasons for buying and motivations for selling. Branching out – quite literally – remains a key driver for acquisitors looking to grow an existing lettings portfolio or take on a ready-made management business, expand into new locations or increase market share. Likewise, all this could be part of a longer-term sale plan to boost the valuation and saleability of the business in the future.
For many exiting agents, Covid has only accelerated plans, says Haversley’s Tracy Bradley, “Business owners have had time to re-evaluate priorities and are deciding to just go for it – either wanting to buy or expand or sell to release capital for other business ventures or retirement.”
Daniels also believes that the pandemic hasn’t had an impact overall, with the same amount of sellers entering the market. He added, “The majority are selling either due to retirement or having been in agency too long dealing with administration, staffing or legal issues, which take them away from their enjoyment of selling. But a significant difference we are finding is that many more sellers are willing to stay on in a consultancy role and this benefits both buyer and seller in the transition of a smooth transfer of ownership.”
And it appears these news owners could be brand new, as Daniels reports a notable increase in first time buyers. “A palpable difference [this year] has been the first-time buyer. There are more looking and seem to have finance from investors,” commented Daniels. “There are some major buyers who attempt to dominate the market in acquisitions, but in our 30 years of experience, they come and go.”
A game of two halves
From a buyer’s perspective, views appear to be split. One group that has been on the expansion trail for a while is Linley & Simpson, part of the Lomond Group. The company believes the current environment is ripe for matchmaking, with opportunistic buyers and eager sellers waiting in the wings.
Since the start of the pandemic, they have sealed 14 deals, 10 of which have been completed in the last year alone. The latest purchase of independently-owned and family-run Moores estate agency in Leeds and residential lettings specialist homes4harrogate secures another foothold in Yorkshire and adds more than 500 properties to the group’s rental portfolio.
CEO, Nick Simpson, says that the “Covid factor” has been a dominant theme and that an increasing number of agency owners are seizing the opportunity to re-evaluate their lives, on a personal and professional level, and then deciding to exit the marketplace. He said, “Many who are approaching us with a desire to sell are those hands-on owner-operated independents who set up in the 80s and 90s, just as we did. These are the people for whom retirement is now beckoning as they approach their 60s.
“They tell us that now is the optimum time for selling up. Whatever the recognised funding formula for acquisitions – a typical one being annual turnover multiplied by 1.5 – the sum is an irresistible temptation for those who have spent a lifetime in the industry and are now weighing up the uncertainty of a Covid future.”
Whatever the recognised funding formula for acquisitions – a typical one being annual turnover multiplied by 1.5 – the sum is an irresistible temptation… Nick Simpson, Linley & Simpson.
Simpson warns others on the lookout for acquisition opportunities to not fall into the trap of thinking that’s the end of the process though. “It’s very much the start and you must have the right people and the right processes in place on the other side of signing on the dotted line,” he said. “That’s just as important as all the mandatory checks that must take place pre-purchase – we focus on financial, legal and operational due diligence – but the required post-acquisition infrastructure is all too often overlooked. Without this operational capacity and capability, you run the risk of falling down on customer service and seeing clients waving goodbye just as quickly as you said hello.”
Another group renowned for its acquisition activity is Belvoir. In March, they bought out the Nicholas Humphreys network which accounted for an 8% increase in revenue to June 2021 in addition to the 33 per cent increase related to underlying business.
Although Belvoir also admits to acquisitions being a major growth strategy, and one they push through their Assisted Acquisition Programme among franchisees, the year has been slow from that side of things. With the market being so buoyant, CEO Dorian Gonsalves believes less owners were willing to let go. “I would describe the acquisition market as quiet in 2021,” claimed Gonsalves. “And the reason for this was because the sales and lettings markets were incredibly strong and business owners were resistant to selling at that time. However, the market is changing again, and stock is currently very low for both sales and lettings. Consequently, many business owners are now reviewing their exit strategies and we are starting to see more acquisition opportunities becoming available.”
The market is changing again, and stock is currently very low for both sales and lettings. Consequently, many business owners are now reviewing their exit strategies. Dorian Gonsalves, Belvoir.
With a dedicated Acquisition Team focussed on reviewing and analysing opportunities, Belvoir is committed to expanding via this route and are particularly interested in independent agents. Gonsalves added, “Belvoir values a business on its viability and then we project how we believe that business will perform over the next five years so that our franchisees can develop new income streams that will build a profitable business with a saleable asset. We value a business on its income streams and each stream has different values.
“Independent business owners are often concerned about the future of the business they have built, but Belvoir’s business model has proved itself to be extremely robust and being part of such a recognised and reputable Group, with outstanding levels of franchise support is extremely beneficial.”
DIY or BTA?
Plenty of agents go it alone when buying and selling businesses but it’s often an onerous trap to fall into with a less than expected return at the end. Daniels has already established that companies like Addisons separate the wheat from the chaff, selecting only reputable and serious businesses to present and represent, but Walker provides another word of warning. “I am astonished that so many people try to sell their business themselves and it is very unlikely that the best price will be achieved by doing this,” he said. “There are literally hundreds of things that can go wrong during a business sale and one of the most common problems is when buyers try to use due diligence issues to reduce the price agreed or pull out of a transaction at the last moment for no reason. And we know who they are.”
Tracy Bradley concluded, “I’m not just saying this because I am one, but a Business Transfer Agent is indispensable. We can help you maximise your sale price, tap into a vetted, ready and waiting network, keep the momentum going and achieve a fast and error-free sale.”
Business owners have had time to re-evaluate priorities and are deciding to just go for it – to buy or expand or sell to release capital for other ventures or retirement. Tracy Bradley, Haversley.
TOP TIPS FOR AN EXCELLENT EXECUTIVE SUMMARY
by Haversley’s Tracy Bradley
Prepare an Executive Summary of your business covering the following:
- Business Operations – Everything that happens on a day to day-to-day basis that keeps the business going and earning money.
- Products & Services – Everything you offer landlords / sellers / buyers
- Current Financial Status & Historical – YTD figures / Annual Turnover are always good to have to hand for a business valuation and any potential buyer. 3 years accounts history is recommended.
- Employees – Roles, responsibilities, length of service, salaries
- Assets – Computers, phones, cars etc.
- Ongoing Contracts & Terms – Premises lease, Your Move, Right Move etc.
- Sales – Pipeline / Sales Agreed value, Cancellation rate
- Lettings – Number of fully managed / Let Only / Tenant Find and Fee Income (% of rentals) Get a Business Transfer Agent (BTA). A great BTA is Indispensable! With a BTA you can:
- Maximise Your Sale Price – Using their experience and insight, a BTA is driven to get you the best price for your Lettings / Sales business. They are market experts!
- Tap into their Network – The BTA will reach qualified buyers quickly.
- Land a Better Offer – Through expert negotiation
- Vet Buyers More Systematically – The BTA will advise / help with this process
- Enjoy a Faster/ Error Free Sale and Save Time – Advice on due diligence expectations and advice every step of the way.
- Keep the deal discreet / confidential – This is imperative. The last thing you want is for your staff to find out that you’re selling and become anxious / concerned and potentially leave prior to a sale being agreed.
- Keep The Momentum Going – A BTA will liaise with both parties and solicitors to ensure that the process is smooth and that completion is reached in a timely manner (between 6 to 12 weeks).
A Business Transfer Agent can help you maximise your sale price and tap into a vetted, ready and waiting network.
