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Mergers and acquisitions

Mark Lucas, Partner, Barlow Robbins LLP advises on managing all the elements of a merger of independent estate agencies.

Mark Lucas

Mark Lucas imageThe Government’s decision in the Autumn Statement to ban letting agent fees places yet more pressure on agents. At the same time, consolidation continues apace. Whatever the economic pressures or market trends, mergers between agents are an inevitability; the ambitions of younger, upcoming agents and the retirements of older agents mean that independent agents are on a merry-go-round of changes in ownership.

Mergers and Acquisitions imageFor the ambitious, the bold or the well-placed, there are therefore a range of opportunities to complete strategic acquisitions. Typical reasons for merging include acquiring territories, taking out competitors, increasing the lettings portfolio and strengthening the acquirer’s brand. At Barlow Robbins we have seen a significant increase in confident, ambitious agents looking to increase their turnover, lower their costs and improve their profits.

HOW TO DEAL WITH A MERGER

When the possibility of a merger arises, the partners need to understand, with clinical precision, the purpose of the merger and be certain that the it will achieve the intended aims. Absolute clarity is paramount: too often mergers fail because their original purpose was inadequately identified.

STRUCTURES

Estate agent mergers are usually structured either as:

  • A transfer of the corporate vehicle which owns the agency; or
  • A transfer of the agency’s assets.

Lawyers and accountants must be consulted to get the structure right as the choice of structure has tax and risk consequences for both parties.

DUE DILIGENCE

In each type of merger, it is paramount that there is full due diligence from the acquiring agency and, by the same token, that the directors of the acquired agency understand the buyer’s reason for the deal: that knowledge will help both sides to secure what they want from the deal. Having said that, there are a number of distressed sales where the transaction takes place at a real pace, without any meaningful due diligence, in order to preserve the assets or to preserve the price. The benefit that thereby accrues is usually the preservation of jobs or the reputation of the acquired agency (or of its staff or directors.) Whilst a lower price may be paid, the real price to the buyer of moving quickly is a greater degree of risk.

THE PRICE

The value of the agency is always a function of the negotiation and what the parties are willing to pay or be paid. The lettings portfolio and financial advisory income has a definable value based on the recurring revenue, but the value of the pure agency work is temporary at best.

Staff will notice changes in partners’ behaviour and the gossip will start!

Buyers usually pay for the brand, the location, the reputation and the expertise. Sellers though must always insist on additional payment for the pipeline – with value being paid for properties on the market, sales agreed but not exchanged, sales exchanged but not completed and overdue (but not doubtful) invoices. The art of the negotiation is how much value should be paid for each. The price is also affected by the risk. The chief factors in the risk are: How good is the staff? Is the owner staying on to secure the goodwill? How strong and long are the leases? Are the employees an asset or a liability?

ISSUES AND PITFALLS

Behind the risk of the merger not achieving its aims, the most significant issues for potential buyers and sellers are:

  • The deal distracting the owner from the core business; and
  • Leaks causing unintended damage to the agency and its value.

Only experienced buyers and sellers will appreciate the amount of time and focus that mergers require. Most deals will take, at the very least, a month to negotiate and a month to execute. Our experience is that the average is more like six months to negotiate and ten weeks to execute. That process will distract both parties and cause lost sales unless the parties are supremely well-resourced and organised.

Staff will notice changes in the partners behaviour – closed doors, meetings out of the office, lots of paperwork, increased email traffic and phone calls from people other than customers. They will speculate and talk and the market will quickly hum with gossip. Sensible buyers and sellers manage the process, telling staff what is going on in stages and without spooking them – they don’t tell those who cannot be trusted.

The final message is that mergers are specialist deals requiring real expertise and experience. Make sure your advisers have genuine experience and understanding of the sector.

Mark leads Barlow Robbins’ Corporate and Commercial practice. DD: 01483 464202 marklucas@barlowrobbins.com 

February 17, 2017

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