When starting a business, you don’t want to forget to plan for the end. Business owners spend a great deal of time investigating how to start their company. That same amount of care should be given when considering how you will eventually sell it. Getting an offer from a prospective buyer can be exciting, but if you aren’t careful in how you approach the deal, you could be missing out on an even better deal.
Acquisitions are on the rise in the title and real estate industry, should you sell your company too? Here are some things to consider if you own an agency or are thinking of owning one.
The state of mergers and acquisitions in the title industry
We saw some major mergers and acquisitions in the last couple of years. In March of 2018, Stewart Title announced their agreement to be acquired by Fidelity National Financial. Fidelity is already one of the nation’s largest title insurance and settlement services providers in the United States, and with the acquisition of one of their largest competitors, control of the title world is shrinking.
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Stewart’s expertise expands beyond title insurance. The company also provides appraisal and valuation services, loan origination and servicing support, loan review services, REO asset management, tax-deferred exchanges, and other services and technology to streamline the real estate process.
Fidelity’s CEO, Raymond Quirk said of the deal, “We are very familiar with Stewart in the marketplace and see multiple areas where we can assist and accelerate Stewart’s growth plans. We also believe there are significant operational efficiencies we can bring to bear by leveraging FNF’s shared services infrastructure that will provide meaningful long-term value creation opportunities for our shareholders.”
The final price tag for the deal was $1.2 billion. However, there are still some hurdles to clear from regulators.
Smaller regional title underwriters are also in the game of acquiring and merging with other title companies in their areas to expand their reach. The Real Estate Title Center, based in Springfield, Illinois recently merged with First Community Title Service, Inc. While the details of the deal haven’t been publicized like the acquisition of Stewart, one overseer of the transaction, Dana Lyons, stated, “This merger extends the exceptional service delivered by both organizations.”
Industry-changing deals like Stewart and Fidelity often are the ones to hit headlines, but according to one study by KPMG International, most executives surveyed expected the average acquisition deal to be less than $250 million dollars.
There are many reasons why an owner of a title or real estate company might want to consider an acquisition or merger. Some include:
- Nearing retirement
- A desire to expand their service reach and take their business to the next level
- An inability to compete with the bigger agencies
- Looking to get out of the industry and pursue other opportunities
Why selling your title or real estate company should be a part of your business plan
Success is not something that comes to a company unless there is strategic planning. Like tending to a garden, a business owner must know when to prune and when to apply fertilizer to accelerate growth. Your business plan should cover strategy and tactics on how you will grow.
Most business plans include evaluating important aspects of your title company’s operations as are marketing strategies that comply with government regulations. But what about a solid plan for how and when to let go of a business you’ve put so much care into?
Mergers and acquisitions should be a part of your growth strategy too. There are two major reasons for a company to consider mergers and acquisitions: strategic and financial.
A financial merger or acquisition is pursued as last resort to get some quick cash or as an investment so the company can continue to stay competitive in their industry. The acquired business’s desperation for cash injection is easily leveraged by the acquirer to get a better deal.
A strategic merger or acquisition is planned and offers a solution to a different business problem. These types of mergers and acquisitions are usually friendly and beneficial to both parties.
In order to find yourself in the latter group, you’ll want to consider what type of buyer fits with your brand and services/product. A truly high-growth strategy will be both realistic and futuristic. Know what your company is worth and where your company is heading.
Mistakes to avoid when selling your business
- Not having a plan or waiting too long to sell
- Thinking you can handle the deal by yourself while still running your business
- Underestimating or overestimating the worth of your business
- Not finding the right buyer
- Not cleaning up your financials
- Not taking a deep dive into the contract terms (get business contracts in order)
1. Not having a plan or waiting too long to sell
There are a variety of situations in which mergers and acquisitions make great business sense. An opportunity to be acquired or merge may require quick action. In order to get the best deal, every company should have a solid plan in place to navigate the offer. It can take years for a sale to finalize, so long-term planning is important.
During a strong economic upturn, it’s not unheard of that successful title and real estate businesses make for an attractive addition to a larger company’s portfolio. Remember that the value of your business is future-looking. The most recent fiscal year is the most relevant, so avoid selling your business after a down year.
2.Thinking you can handle the deal by yourself while still running your business
According to Investopedia, an acquisition takes anywhere from six months to several years. The last thing you want to do is take your eye off of your business during an acquisition or merger. The company could suffer without your oversight in favor of a deal that may not even go through. Additionally, should your profit margins and loss take a dip, the great deal you took so much time negotiating could vanish.
Take some time to vet the right broker and/or consultant to help you sell your business. Find someone who knows your industry well, has a history of successful deals, and has a realistic approach to making the sell.
3. Evaluating your business for the wrong price
Too high or too low, neither is an ideal situation. Many business owners have an emotional attachment to the company they built. Much like a homeowner who wants to put their house on the market for an inflated price, your evaluation might not match reality. This is one area where hiring outside help will serve you well by giving you more realistic expectations. Conversely, some company owners may be surprised by how much their business is actually worth when an accurate and thorough evaluation is applied.
4. Not finding the right buyer
While the first offer you get might sound great, it might not be the best. The right buyer for the continued success of the business isn’t always the one with the highest offer. Some things to consider before settling in with another business on an acquisition or merger include whether they make a good brand fit. Will there be a loss of brand strength for either party? Is there a good cultural fit between the two? Will your current client base continue to receive the same or better level of service?
An optimal merger or acquisition designed for growth will strengthen both companies. It will fill in critical gaps in service offering or client lists, create an efficient way to acquire the right talent and intellectual property, leverage cost and revenue synergies through consolidation and reduced competition in new territories, and lower the learning curve of adding and developing a new service.
The perfect buyer could increase the value of your business if they bring additional assets, but these buyers may be reluctant to pay for what they’ll bring to your business. In order to woo this type of buyer and encourage them to share some of the expected increased earnings with you, be sure to highlight how your company is a strategic fit for their growth and follow the next tip.
5. Not cleaning up your financials
Work with your accountant or hire one so you have clean and transparent financial statements and business tax returns available for interested buyers. Your broker will likely have suggestions on how to clean up some of the numbers to make them more presentable. This will also help with your evaluation process.
If you’ve allowed a high level of perks and non-essential expenses, it’ll have a negative impact on the value of your business. Buyers will be scrutinizing the numbers, so eliminate any discretionary expenses from your financial statements.
6. Not taking a deep dive into the contract terms
Noncompete agreements, asset listings, employee agreements and guidelines for the use of the website domain names are just a small sampling of the different documents included in a purchase agreement. This comprehensive document can typically be anywhere from 25-50 pages long. Tracking down and compiling all that information can take time. Fortunately, this task can be outsourced to a professional or may be part of your broker’s services.
Often a deal will also stipulate that the owner remains in an advisory capacity for a certain period of time to ensure there is a smooth transition. These consultations can last for a year, so be prepared to spend that time with the new executives and owners and make sure the terms of the contract reflect this so you’re compensated for your time appropriately.
Create your mergers and acquisitions plan with growth in mind
In the end, the right plan will be futuristic thinking. It won’t simply be a reaction to past market movements, it will be about where you want to see your company go, how you will get there, and what you need to do to make it happen.
It also won’t always be the most popular idea. If everyone agrees that it’s a great plan, then it most likely isn’t taking the appropriate risks. Radical growth doesn’t come by repeating what your peers are doing.
It will require buy-in from everyone. Obviously, senior management and executives will have to sign off on the idea, but the employees’ sentiments should also be measured and weighed. A smooth transition will require that everyone is enthusiastic about where the company is heading. Explaining the reasoning behind the choice for a merger or acquisition and the overall benefits it will bring to everyone will help build trust during the change.
Careful planning and implementation is an important aspect of every business strategy, especially as you plan to let go of the reins.
Like all growth strategies, be sure that you have a clear vision of how a merger or acquisition will impact your client base and your brand perception. In order to achieve the best results, be sure your understanding of the marketplace is accurate and based in reality, not your feelings. Do your research to affirm what each party – the acquired as well as the acquiring – will bring to the table.