Mergers of independent estate agencies: the market and the price

Consolidation continues apace amongst traditional estate agents. The raft of pressures on agents is increasing and these pressures have two strong effects.  

Firstly, they increase the need for agents to cut costs, increase turnover and territories and strengthen brands.  

Secondly, they increase the willingness of independent agents to join up with larger brands or with groupings of agents. 

Let’s not forget also that the industry is brutal. The most successful are the most energetic. Older agents will struggle unless they can recruit, maintain and grow teams of enthusiastic motivated staff - and manage them assiduously. Many older agents are therefore looking for a ‘way out’.

They can achieve an exit, principally, in three ways: by selling the business to a larger agency, by merging with a similar agency in the same area or by selling to the staff, in effect, by MBO (management buyout).

The first key to whether a merger is possible is the availability of funding for the deal. The listed agents generally have access to capital. For the rest, the ability to the deal depends on private equity backing (think Leaders and Romans) or on private funding, that is, by cash raised personally from the private wealth or resources of the acquirer’s owners. 

The second key is that the target business must have value. A lettings portfolio or financial advisory income is helpful but the real value is in the goodwill of the business, which is a nebulous and slippery concept at best.   

Goodwill only exists if the brand is trusted by its market to deliver its USP, that is, what it represents itself as providing. Those who wish to sell must know what the USP is and what they are offering the buyer. Is the USP access to a market or territory? Is it a reputation for service? Is it relationships with the right kind of sellers? Is it location?

Only when that USP is identified, can a seller begin to identify who the potential buyers are and what they will pay. Our experience is that there is always a market if one looks hard enough, talks to enough people and accepts that the price is what the buyer is willing to pay, not what the sellers want the buyer to pay.

Subject to the basic principle that the price will always be a function of how well the parties negotiate and what the parties are willing to pay or be paid, the buyer will pay for the USP and the price will be calculated on the basis of what value the USP has for the buyer.  

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. Often the buyer pays pound for pound, when the relevant commission is received; sometimes though the buyer will discount that pipeline, sometimes it can be persuaded to pay a premium.

The price is also affected by the risk. The chief factors in the risk are: How good are the sales 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?

Ultimately, the deal is not worth doing unless the price is right. Buyers and sellers must reach agreement on the price before anything else.

*Mark Lucas is a Partner at Barlow Robbins LLP, and is very experienced in advising on mergers between estate agents