Was the acquisition of Acorn by LRG a good deal?

In common with most industry commentators, I was very surprised to hear that the Acorn Property Group has been sold to Leaders Romans. The main reason for my surprise is that most of the big corporate buyers are only interested in buying letting businesses at the moment. At the very least, they require that target businesses earn at least half their revenue from lettings not sales and Acorn does not meet these criteria. So, why did LRG buy it and did they make the right decision?

The comments so far have been almost universally negative. People have pointed out that the economic forecast is very gloomy and that Acorn could make a huge loss next year if the market turns. Others have commentated on how dependent residential sales revenue is on the ability of the management team and have predicted that if the senior staff leave, the revenue will collapse. I disagree with these comments and I believe that Acorn could turn out to be a very good buy for LRG.

Inevitable downturn?

My first reason for believing this is that I do not think that a downturn in the property market next year is inevitable. Property has always proved to be a very good hedge against inflation and at a time when the inflation rate will halve the value of cash every five years, many investors will want to put their money into property which should help to maintain prices.

The second issue is that even if there is a downturn next year, the revenue of a well-run sales business will not reduce to nothing. LRG will almost certainly have protected themselves from a drop in profits by paying a significant portion of the purchase price by way of an earn-out and this will motivate the Acorn management team.

There is much that residential sales agents can do to maintain their income during a downturn. For example, they can take measures such as cost cutting, fee increases and marketing initiatives to win market share. I did a great deal of consultancy work for Romans during the 2008-2009 recession and their performance during this difficult period was sparkling.

The third issue is that recessions in the housing market do not last forever and when measured over the whole cycle, most sales businesses make a far better profit margin than most letting businesses. LRG has a new financial backer, so the acquisition can be properly judged in due course.

The fourth issue is that the cost of buying a sales business is far lower than the cost of buying a letting business. If valued on turnover, a pound of letting income is worth at least four times as much as a pound of sales income. If valued on profit, a pound of letting profit is worth two to three times more than a pound of sales profit. This should give LRG a better rate of return.

The fifth issue is that LRG’s timing is good. Because of the economic outlook, sales businesses are typically selling for less than half as much as they were achieving five years ago before the Brexit referendum vote. The market for sales businesses is very volatile and their value will probably increase sharply when the outlook is brighter.

The final issue is that the marriage value of Acorn becoming part of LRG will mean that its paper value will increase immediately. A business that generates 100 per cent of its income from residential sales is currently worth very little. However, if a sales business is combined with a letting business, then its value will increase hugely. This is why so many sales businesses have been buying letting businesses recently. On top of this, of course, a business the size of LRG is worth a much higher multiple of profit than a smaller business. All in all, the acquisition of Acorn at this time could prove to be a very shrewd move by LRG.

Quiet sale

However, for me, the most surprising aspect of the deal of all was that Acorn appears not offered for sale on the open market. Acorn was not one of my sales and I have no inside knowledge of the price paid or the other terms of the sale. However, twenty-five years’ experience of selling businesses tells me that the only sure way to achieve the best price for a business is to run a proper marketing campaign involving multiple buyers with a formal closing date for offers in order to stimulate the maximum competition. Any business owner who does not do this will always be left wondering if they could have achieved a higher price for their business.

Budget bungle

As this article went to press Liz Truss announced her badly misjudged mini budget. In times of economic uncertainty property has always proved to be a good hedge against inflation and purchases by cash investors who are not affected by increased mortgage rates should help to prevent a crash in property prices. The letting market should also do well, fuelled by an increased number of buy-to-let investors and an increased demand from tenants who are no longer able to obtain a mortgage. Friday’s budget is bad for the vast majority of people, but I do not believe that the recent doom-laden forecasts about its impact on the housing market will prove to be correct. Let’s hope I am right!

Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.
www.adamjwalker.co.uk