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August 30, 2014

Acquisitions: Casting for Competitors

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Acquisitions: Casting for Competitors

Forget organic growth; buyouts are the name of the game in today's slow market.

Your sales associates are telling consumers that today is a great time to buy a home. Are you giving yourself the same advice when it comes to buying another real estate company?

With many real estate brokerages struggling to stay afloat in today’s slower markets, companies that wouldn’t think of entertaining your offer two years ago are showing a new receptiveness.

“When brokers are writing red ink, they’d love to stop the bleeding,” says Merle Whitehead, president and CEO of RealtyUSA in Orchard Park, N.Y., who has grown his company to 23,000 annual transaction sides through acquisition of 40 companies since 2000.

What this means for you, if you have the resources to get into the acquisitions game, is the chance to emerge from today’s downturn at a new level of competitiveness.

“The next six months will provide wonderful opportunities for brokers to reposition themselves through mergers,” says Steve Tufts, broker-owner of Keller Williams Realty in Jacksonville Beach, Fla. Tufts has completed three acquisitions since late last year.

Tufts and Whitehead are among the brokers who are approaching struggling competitors and offering to help them survive through a merger or acquisition. Here’s what you need to know to do the same.

Start Courting

You can’t start your growth strategy if you’re not making the market aware of your plans, so get the word out about your acquisition goals.

“It’s just like prospecting,” says Steve Baird, president and CEO of Baird & Warner in Chicago, whose company has acquired two brokerages since late last year. “We’re always out in the market asking.”

Once brokers know you’re in the buying business, they’ll seek you out if they think what you’re offering is a good fit for them. “When we announced that we’d merged with somebody, we got interest from others,” says Tufts.

How you approach potential partners depends on the size of the company in which you’re interested. With bigger, stronger companies, you want your approach to be soft because you’re proposing more a merger of equals that have much to gain by working together.

“I want to open a warm dialogue and relationship,” says Whitehead. “I say, ‘I’d love to get together to see if there’s any type of strategic business relationship that makes sense.’ It could be anything from buying coffee together in bulk to an acquisition.”

When your meetings have built up a level of trust, brokers who are struggling and who might welcome an acquisition will often tell you about their situation. “That provides you with an opening to say, ‘There may be something we can do,’” says Tufts.

When approaching smaller companies, especially if they’re clearly weakened by the slowdown, there’s much less reason to pretend your goal is anything but an acquisition offer. In these cases, says Tufts, “I’m very direct. I say, ‘Here’s the program. Here’s how we’re going to do it. Take it or leave it.’”

Overcoming Resistance

Don’t assume that even struggling brokers will welcome you as a white knight, however. If owners aren’t mentally prepared to accept the idea of being acquired, they will resist your initial overtures.

In these cases, you should concentrate on building a relationship and then let that go where it will.

“I say, ‘Could we have lunch, and I can tell you what I’m trying to do and maybe give you some ideas,’” says Dave Hanna, managing partner of Prudential SourceOne in Chicago, a company that grew out of the union of four Prudential companies earlier this year. “Anybody who’s smart will want to talk in this challenging time,” he says.

Start Researching

While you’re talking to brokers, you also need to be evaluating their companies independently. You can get their sales trends by reviewing your MLS data and doing Internet research. Supplement that hard data with information about the company’s culture and business philosophy, which you can get by talking to people in the broker’s community and vendors who supply products and services to it.

If the acquisition makes sense based on the information you’ve gathered, and the broker is interested in pursuing talks, the hard work of hashing out the details begins. Do your homework or the deal can collapse.

“The biggest challenge is in valuation,” says Tufts. “In today’s market, it’s hard to establish a value when you’re acquiring a company.”

That’s because many brokers are like sellers who’ve had a hard time comprehending that their asset may have dropped in value during the downturn.

“Often I come in and say, ‘I’ll offer you ‘x,’ and owners think their company is worth ‘x’ plus ‘y,’ and they’re insulted,” says Baird. “They didn’t think to sell at the top of the market, and now they’re having a hard time adjusting.” To determine what he’ll offer, Baird looks at projected revenues from the sales associates who’ll stay with the company and then structures the payout over several years.

“A multiple of net profit is a good baseline for establishing value, but in this market, it’s only part of the picture since past performance may be difficult to meet in the short term,” says Hanna. You also have to calculate possible increases in productivity, agent retention, and prospects for growth after acquisition into the formula, he adds. “There’s never an easy answer.”

How you assign value is contingent not just on market conditions but on what exactly you’re offering to buy.

“You can buy the whole company, the company’s stock, just its assets (but not its liabilities), or simply transfer the sales associates’ licenses,” says Tufts.

Whitehead structures his acquisitions as asset purchases because it limits his company’s exposure to the other company’s liabilities. “Typically, you want to make it an asset purchase rather than a stock redemption so that you don’t pick up the risk for the broker’s prior acts,” says Whitehead. “If you buy the stock and someone filed a lawsuit against the former company, you’ll own that problem.”

Structuring the deal as a transfer of sales associates’ licenses is another way to limit liability, says Tufts.

Brokers also recommend that you require the former owner to sign a noncompetition agreement. “If I’m going to be paying you for several years to purchase your company, I don’t want you to go out the day I make the last payment and compete against me,” says Whitehead.

Smoothing the Transition

With those details hammered out, it’s time to plan the acquisition announcement and transition. The best way to ensure a smooth process is to rely heavily on the acquired broker’s advice. “We have a checklist that we call our process for change,” says Baird. “How do we deal with the announcement? Do we presell it to certain people—the sales managers, key support staff? “We put together a battle plan and execute it, and for each acquisition, it’s a little different.”

Part of that plan is bringing top sales associates at each company more closely into the fold so that they’re not susceptible to the inevitable barrage of recruiting calls from competitors.

“We try to solidify relationships with key players before the deal’s ever announced,” says Baird. “We get their commitment that they’re going to be on board, and we may have to give them something. It might be a higher split or marketing allowance.”

Of course, if you meet with key players, be sure they won’t spread the word of the purchase before it’s announced. That’s just a matter of trust.

The announcement can be tricky. You’re bound to run into at least a few people who will resist the purchase. Rely heavily on acquired brokers to announce the sale in a way that draws on their trust with their team. After the announcement, make sure you explain the changes to your new associates promptly and ask them for patience.

“I tell them that everything they have, they get to keep—and they’ll get some new stuff, too,” says Whitehead. “We ask everybody to give us six months, and we tell them, ‘If you’re not raving fans in six months, shame on us.’”

Don’t burn bridges by immediately clearing the decks of managers, sales associates, or staff, either. “We don’t know as much about that company as they’re going to know by being inside of it,” says Hanna. “This isn’t about laying anybody off today. It’s about creating a better business that includes that office. We give everybody an opportunity to show their skill set.”

“The key to a good acquisition—like a good marriage—is communication,” says Whitehead. “We have to talk and talk and talk so that the left hand knows what the right is doing.”

Saying Yes to an Offer

Even in today’s market, it’s hard to convince struggling brokers that they’re better off teaming up with another company. “The biggest thing inhibiting more transactions is owners’ egos,” says Steve Baird, president and CEO of Baird & Warner in Chicago. “I’ve had many, many transactions where it made sense financially for the owners and for us, but the owners couldn’t change their role and save their company. In almost every case, the company shut down after rejecting our approach. Often I view it as a race between when the owners will get over their ego issue and when the company will go out of business.”

If you’ve been approached about a merger or acquisition, how do you know if it may be right for you? Baird suggests you ask yourself these questions.

  1. Is holding on a financial reality? “Ask yourself whether you have the resources to carry your company for the next couple of years—without business improving,” he says.
  2. What’s my commitment? “Do you really want to continue to do what you’re doing on a day-to-day basis?” Baird asks. “A lot of owners don’t. They’re really beat.”
  3. Am I willing to provide my sales associates what they need? “The world is changing,” says Baird. “What an owner has to bring in terms of capital, technology, and marketing is much different today. A lot of small companies were doing fine when the market was rolling, but now that it’s not, they don’t have the tools to compete. They have to ask whether they’re willing to do the things they have to do.”
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