Merger and acquisitions become more popular in times of uncertainty - here's why

With the property market showing signs of a slow-down and the economic outlook rather uncertain, we spoke to Lucy Noonan, founder of Atomic Consultancy, to discuss why mergers and acquisitions within agencies are even more popular in challenging times.

What trends are you seeing in the market due to the economic outlook?

In a turbulent market, some agencies are deciding the time is right to sell rather than weather the storm. But this isn’t a one-sided picture, as many other agencies are taking the opposite approach and have become more acquisitive to get ahead of the competition, rather than relying on organic growth. One of the important trends we are currently seeing is the lower value of estate agency businesses, while lettings businesses remain buoyant.

In the current climate, estate agencies are seeing their pipeline portfolio reduce – i.e., properties that are part of a chain in which all elements of the buying and selling transaction are complete, or in the last stages. This extends the time it takes for the buyer of an agency to make money from property sales, reducing guaranteed income, which can be challenging and impact cash flow.

In recent years the value of estate agencies has been inconsistent, rising and falling in ways that make lenders nervous, so anyone looking to take out a loan to buy an estate agency might find themselves having to pay more to borrow. Even a business with a strong brand may find that the ups and downs of the last few years have made lenders wary of backing a purchase.

Lettings businesses on the other hand are holding their value due to high demand, the economies of scale they can provide and the immediate profit they can bring to a new buyer.

The risk of capital gains tax rising is also starting to motivate larger businesses to consider exiting sooner than they might have. There’s a lot of churn, and plenty of opportunity out there for those looking to seize it.

What are the risks of buying and selling in a slow market?

Buyers are scrutinising businesses more than ever before, so sellers need to prepare their business for sale and ensure they are up to date with business processes, compliance and ensure they have clear, accurate accounts.

Sellers need to be prepared for more due diligence as a result, along with a higher deferred consideration period. If you’re not prepared, the process is going to be difficult. If you’re not confident about your numbers or can’t reconcile your accounts, then the buyer may also ask for an additional deferred consideration, which increases risk. In a slow market, buyers and

lenders approach a transaction with additional caution, so to avoid delays and cold feet, it’s important to have a complete picture of your business and be fully prepared for a sale before entering negotiations.

What are the advantages of buying and selling in a slow market?

As a buyer, you can benefit from adding profit immediately to your bottom line, gain market share in your local area, take out a competitor, and fund from your cash flow. Going multi-site is your practical option for growth, and you can benefit from income synergies such as reducing the cost of CRM systems – you don’t need two! Premises can be sold off, workforces brought together in a single site, and all manner of other duplicate costs can be reduced.

In addition, there are many more businesses coming to market for sale, which means that growth via acquisition is more achievable than ever. In Nottingham alone, Atomic Consultancy have sold 7 businesses in 12 months to a variety of keen buyers. This trend is being replicated across the country.

For sellers, there’s a significant raft of regulation coming in, on carbon monoxide and changing EICRs, for example. Exiting now allows you to avoid resourcing to meet these new, regulatory demands. There are a host of ready buyers out there, making this a good time to sell.

What will a slow market mean to the value of your business?

A slow market means that organic growth has slowed to a crawl, at best. Many agencies are actually reporting flat organic growth. If you want to grow in a turbulent market, acquisitions is a practical way to go and can be a huge leap forward.

What's your advice for anyone looking to buy or sell in the current market?

From a buyer’s perspective, take the time to put together your ideal business plan and stick to it. What size of business do you want to buy? What average fee do you want the portfolio to have? What is the average rent per property, and is it similar to yours? Will you take on HMO’s, block, students, etc?

Rising interest rates mean that if debt is required to acquire a business, this could be more expensive for you to borrow in the short term, but we are seeing that cash buyers/equity funders are still paying the multiples, so if you want to grow via acquisition then getting additional security and looking closely at your lending options is vital.

From a seller’s point of view, there’s no cutting back on due diligence, of which there are 3 main areas – operational and compliance, financial, and legal.

There’s no getting around it – buying or selling a lettings or estate agency is a highly complex process that can often throw up unexpected obstacles. Going it alone is risky and

highly challenging, so it is worth considering the services of a consultancy like Atomic Consultancy. We’ve undertaken this journey 250 times in the past 7 years, and know every step of the way. We oversee negotiations, agree a price, establish Heads of Terms and guide clients all the way through to the end of the process, including integration.

If you’re considering buying or selling a lettings or estate agency business and feel you’d benefit from expert guidance, get in touch with Atomic Consultancy today. Alistair Trippett: “Lucy has a fantastic wealth of knowledge and contacts. During a fast paced, and relatively risky transaction I went to Lucy to provide structure, certainty and support.

Aside from the transactional support provided by Lucy and the Atomic team, I went to them to become a valued long term client. In the Sector Atomic operates, contacts is everything and by being a valued and paying client of Atomic, I have my foot in the door to future opportunities.”