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Want to get ‘off the market’?

“You couldn’t give it away at the moment.” That’s one expert’s verdict on the prospect of selling a sales-based estate agency business, thanks to Brexit political paralysis. But, says Richard Reed, it’s not all doom and gloom.

Richard Reed

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According to that same business broker, if you have a lettings-based agency, you can sell it “all day long” – providing it offers a part or fully-managed service. Adam Walker, founder of Adam J Walker & Associates, claims that the Brexit uncertainty of the past three years has Adam Walker imageresulted in the loss of 937,000 house sales. He says home owners are “sitting on their hands”, waiting for politicians to make a decision – and he warns that is unlikely to change unless there is a last-minute deal with the EU. But that doesn’t mean estate agents don’t want to sell up. A combination of factors drives some owners to try to sell their business, ranging from retirement to the poor state of the housing sales market or the ban on tenancy fees.

A lettings business focused on part/fully-managed tenancies is very saleable. With several people bidding we’d get a very good price and they are in high demand. We can sell them all day long. Adam Walker, Adam J Walker.

Walker’s advice to anyone with a sales-only business is to hold off selling it until Brexit is finished and wait for the market to recover. “If they can’t do that then they will probably have to shut it down, thank it for giving them a good living for the past few years and move on with their lives, the chance of selling it for any significant sum of money is almost zero.”

Estate agency: hold… lettings agency: sell

However, Walker says it’s a different story if you have a lettings-based business focused on part or fully-managed tenancies. “That is a very, very saleable business. In most areas we would have several people bidding against each other, and through competitive bidding we would get a very, very good price and they are in high demand. We can sell them all day long.”

The let-only agency that merely finds tenants for landlords is much harder to sell and doesn’t make “anything like the same prices”, he warns, while a sales-only business is “completely unsaleable” at the moment.

A mixed business, offering both sales and lettings, needs to have at least 25-30 per cent of the revenue coming from lettings to attract buyers. “If the lettings are any less than that it is very hard to sell.”

Not all doom and gloom

Link to Business featureHowever another major player in the business brokerage arena doesn’t agree it’s all doom and gloom for an owner looking, perhaps, to retire and sell a sales-only estate agency. “You can’t dispute that there’s a blip,” says Marc Daniels of Addisons. “But I’ve always sold estate agents and letting agents. Some of the people I speak to say they only want to sell lettings, but I’m selling sales right now.”

A lot of agents north of 50 are looking at their options. The way the government is looking at licensing, it’s going to be harder for smaller firms to meet compliance requirements. Marc Daniels, Addisons.

He says he has just sold the southern England division of Jackson- Stops. “They sold out because it was the right time. I’ve got people who want to retire at 50 – it depends on circumstances. Half of the are always retirements for me.” Daniels says, he has just completed a deal for a chain in north-east England after finding two buyers who ended up bidding against each other because the business fitted in structurally with their plans.

Consolidation

Link to Business featurePeter Nicholls, at Ideology, a business brokerage sees a continued move towards even greater consolidation within the industry as inevitable, as more and more smaller agencies sell up. “A lot of agents who are north of 50 are looking at their options,” he says. “The way the government is looking at licensing, it’s going to be harder and harder for smaller firms to meet the necessary compliance requirements.

We’ve had sales where the bidding has started quite low and it’s ended up going for more than even we’ve thought, the only way you get that is through competition, whoever you use. Peter Nicholls, Ideology.

“Business is going to carry on changing, and it’s probably a business that older agents don’t recognise. They’ve been used to having a pretty free hand to do what they like and find it difficult to be muzzled by legislation.”

Nicholls sees a greater move online as inevitable, with fewer high street branches.

“Estate agents are basically a retail business, and what’s happening on the high street affects them,” he says. “I think the model is going to change. Does Countrywide really need 700 offices all round the country on every high street of every main town you can think of, any more than smaller groups do? For all the criticism of Purplebricks it maybe leads the way in terms of the hybrid mode – the move in the future will be less offices covering a wider area.”

Increased regulation

Another factor influencing some agents to call it a day is the ever-tightening field of regulation.

The Money Laundering Regulations introduced in 2017 following a new EU directive increased the financial and administrative burden for estate agents with its demand for greater due diligence on both sellers and buyers.

On June 1st this year the Tenant Fees Act came into effect, removing a valuable source of income for letting agents by banning most letting fees and capping deposits paid by tenants. “Agents typically made 20 per cent of their income on that,” says Walker. “What will happen as an absolute inevitability is that fees will be passed on to landlords, and the landlords will put the rent up to pay for it.

“Letting agents make 20 per cent if they are lucky, if they lose 20 per cent of their revenue they will never make a profit ever again.”

He warns that compliance issues are getting more and more onerous. “It’s harder for the small players,” he says. “The big boys have departments to deal with it.”

Preparing to sell

So if you’re determined to sell, for whatever reason, what is the best approach?

Our experts agree the most important thing is to make sure your business is ready for sale. Surprisingly, only about one in five sellers Walker meets have properly prepared their business for sale.

One of the most important things is to eradicate practices that might come back to haunt you during the due-diligence process, says Nicholls.

“When you have found a buyer their lawyers are going to be asking you lots and lots of questions.”

Daniels is more blunt. “You’ve got no idea how lawyers can screw up deals,” he warns. If you plan to sell you should carry out a three-stage preparation process:

Eliminate any questionable practices such as having a car for your son or daughter on the books, or other personal benefits that will be an instant red flag to an accountant.

Get all your books in order. Make sure you have at least three years’ accounts, accurately and professionally prepared and presented. Produce a simple business plan, showing past performance and business growth potential – but keep the figures realistic. No-one is going to be fooled by growth figures plucked out of thin air, and anyone who has watched Dragon’s Den will be aware of the type of reaction such exaggerations are likely to produce from a hard-nosed buyer.

Sit down and talk to a business broker, discuss pricing and look at potential buyers in your area. Make sure you are comfortable with the broker and their approach, and check their track record.

Valuing your business

So how do your value your business? It’s not straightforward but the good news is the broker will help with your valuation. They work on a commission basis – generally around three per cent – so the more you make from the sale, the more they make.

However, clearly it is useful to go into the meeting with some idea of what you might expect – or even just to decide whether it’s worth putting it on the market in the first place.

Brokers will be honest if they think your expectations are too high. They are the experts – they know the market.

Part of the value of your business will be based on ‘goodwill’ – the value of your brand and its ‘pulling power’ in the marketplace – which is very hard to quantify.

Other factors include:

  • A multiplier of net profits over at least a three-year period.
  • Turnover across the same period – profits can be massaged, turnover is harder to disguise.
  • For a lettings business, the value of your management-fee book is a key factor.
  • Sector benchmarking – what similar-sized businesses have sold for recently.

Much will also depend on geography, competition and the buoyancy (or otherwise) of the local housing market – some areas of the country are performing much better than others.

“The answer is not simple,” says Walker. “Some businesses are sold on profit and some on turnover, but the multiples vary hugely for different types of business.

“One letting business could be worth two or three times as much as another according to the mix of managed versus let-only income.”

Nicholls warns that over the past couple of years buyers have become unwilling to place significant value on the goodwill of the sales side of a business. “They would rather negotiate a percentage payment for the seller’s work in progress and sales register.”

When it comes to lettings and management portfolios, he says it varies according to geography, and the strategic importance of the acquisition to the buyer. “As a general indication, 1.5-times the annual management turnover would not be too far away, together with additional sums for let-only and rent-collect turnover, together with any peripheral income such as insurance commission.”

Don’t try DIY

One thing our experts all agree on is to avoid a ‘DIY’ sale. “DIY sales are an absolute disaster,” says Walker. “You will never, ever get the best price if you deal with someone who approaches you directly. “The only way to get the best price is to have a proper competition where you have several different buyers competing with each other in a fair and transparent way.”

Nicholls says the problem with a direct approach is you have no way of knowing whether you’ve achieved the best price.

“We’ve had two or three sales where the bidding has started quite low and it’s ended up going for more than even we’ve thought, and the only way you get that is through competition, whoever you use.

“The right advice always is go to someone that knows your market and can offer it to a wider number of potential buyers.”

August 28, 2019

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