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If you’re a broker-owner thinking of acquiring another brokerage, the biggest mistake you can make is to ask that rival point-blank: Are you for sale?
That’s according to panelists at Inman Connect Las Vegas who spoke Thursday in a session called “Should You Consider M&A? The Top 5 Things You Need to Know.” RE/MAX sponsored the session.
It’s getting harder and harder for small- and medium-sized brokerages to turn the kinds of profits they had in years past, according to panelist Scott Wright, partner at REAL Trends Consulting.
“One way to combat that margin compression that our entire industry is dealing with is growth and scale,” he told attendees.
“The top way to accelerate growth is making acquisitions. That scale also affords you the opportunity to develop other sources of revenue … [such as] affiliated services-type businesses like mortgage, title, escrow, property casualty, property management, home warranty, what have you.”
But identifying targets for acquisitions is a lot like agent recruiting, according to Wright.
“You know your market,” he said. “You understand who’s out there in the market, you understand who your competitors are. You really need to dig and figure out if someone’s got a succession plan or not. That kind of information can be at your fingertips if you’re good at building relationships.”
Calling a competitor can be one of the biggest steps to take, according to panel moderator and RE/MAX CEO Nick Bailey. But it’s a big mistake to ask them if they’re for sale, he said.
“Never,” Wright agreed. “That’s not how you approach the topic. It’s like recruiting agents. You’ve got to build that relationship. Not every meeting or appointment is gonna lead to an immediate opportunity for an acquisition, but building that relationship puts you in that position for when that person [is ready to talk]. Never ask if they’re for sale.”
Regarding valuations of brokerages, Wright said the valuation is “a multiple of your adjusted normalized net operating cash flow. And fair market value is just taking that multiple times that number — we call it adjusted EBITDA.”
What the multiple is will depend on a lot of factors, he said, but he’s seeing small-and-medium-sized brokerages attracting multiples between two and 3.5. He defined a small brokerage as one that has up to $8 million in revenue annually.
Factors that also impact valuation can include operational standards, financial trends, agent churn, the owner’s contribution to the company, the size of the market, the saturation of the market, the concentration of sales among your other agents, and synergies with their current operations, according to Wright.
He recommended that sellers have “good, clean financials” and have their vendor contracts, data, and other agreements in order.
“I know it sounds simple, but I can’t tell you how many transactions we’ve seen either fall apart or become a hot mess because people can’t find their information.”
He also advised brokers to keep their plans to sell confidential to avoid having the deal derailed.
Sellers should also have their internal house in order, he added.
“You want to make sure that you have a good organic growth strategy and a good story,” he said.
“Because even though you’re the purchaser, you’re still trying to sell yourself. You want to make sure there’s a good cultural fit with the potential targets. Understand that sellers are emotional. As a purchaser, you need to make sure you are the one who is steady, who is reliable and patient. They’re going to get what’s called deal fatigue.”
Bailey said, “Time kills deals.”
“Yes, it does,” Wright said, noting that it takes 90 to 120 days on average for a deal to close.
“We’ve seen deals close within 60 days,” he said.