What is the best way to expand? Should you buy a business or build one from scratch? It can be a tough decision and different companies have come to very different conclusions.
Residential Sales Businesses
Let’s look first at residential sales businesses. If you have a strong brand and a talented manager, it is certainly possible to cold-start a new office in a neighbouring town. The process is well-proven. It usually involves touting other agents’ unsold instructions, flooding the area with marketing material and possibly offering discounted or even zero percent fees for an introductory period. The cost, however, is considerable. You need to fit out the shop, pay for the marketing, make an allowance for the cost of the discounted fee period and pay rent, rates and staff salaries for six months before the money starts coming in.
Buying an existing business is therefore an attractive proposition. It reduces the set-up costs and gives you a pipeline of under offer properties and a register of instructions to sell from day one. Residential sales businesses are in my opinion still under-valued. Whilst exceptional businesses are now selling for good prices again, many sales-only businesses can still be bought for little more than their pipeline value and even long-established and profitable businesses rarely sell for more than two to three times their profit. This is often much less than the cost of a cold start.
Residential Letting Businesses
Letting businesses sell for much higher prices. The main reason for this is that it is much harder to build a letting business from scratch. It is difficult to tout other agents’ un-let instructions because the landlords don’t live there. Most marketing material is ineffective for the same reason. Even if you do manage to reach the landlords, you will find many of them are very loyal to their existing agent. Even if they are prepared to consider using a new agent, they will not be able to do so until the next time the tenant gives notice which may be months or even years away.
For these reasons, good letting businesses can sell for as much as twice their turnover and exceptional ones sometimes make even more. Whilst it sounds a lot, it can still be cheaper than the cost of a cold start. If you buy a letting business in your home town or a neighbouring town, you will get considerable economies of scale. The cost of marketing, tenancy administration, property management and accounts will all be reduced and the profitability of a bought-in letting book can be as high as 50%.
What to Look For
It is very important to buy the right business. What you should be looking for in a letting business is a long-established well-run business with a high percentage of fully managed properties and a high percentage of longstanding landlords. As long as the handover is handled properly, you can expect to retain nearly all the business for many years to come.
Recently-established businesses, businesses where most of the landlords are dealt with on a let-only business, businesses with a transient client base and businesses with compliance problems are much less certain propositions and consequently they sell for much lower prices. A really scrappy let-only business with poor compliance might sell for as little as 50% of turnover if it can be sold at all.
For the sales business, you should be looking for a long-established business with a good reputation and a stable profit over several years. Recently established businesses sell for less. You should also be a little cautious about buying a business that trades under the proprietor’s own name. The client’s loyalty is often to Joe Blogs personally rather than to Joe Blogs Estate Agents Ltd and when the proprietor leaves, the goodwill can leave with them.
Finding a Business
Businesses are usually sold because the owner wants to retire or change career, because partners no longer wish to work together or because of financial difficulties (which may often be caused by divorce or other personal issues rather than any problems with the business). You will probably be able to draw up a list of possible acquisition targets in your area. It is best, however, to approach them through a professional intermediary such as your lawyer or accountant as your competitors will naturally be cautious about admitting to a competitor that they may be selling. Businesses are also available via business transfer agents and the smaller ones may even be advertised in Dalton’s Weekly or on the specialist websites. The owners will probably want you to sign a non-disclosure agreement before they met you and you should ask your solicitor to draw one up.
Agreeing a Price
There are several different formulae that are used to value an estate agency or letting business but ultimately the only thing that matters is what profit you will make from the acquisition. In order to determine this, you will need to put the current and anticipated income and expenditure into an Excel spreadsheet. The offer that you make should be based on a multiple of the anticipated profit. Don’t be frightened to walk away if the price is too high. There will always be another opportunity and you may get another chance to buy the business later at a lower price. Many businesses, especially those that are offered for sale by their owners, go to the market at too high a price. If you are patient, the price will often come down.
The Legal Process
Once the offer has been agreed, you will be expected to confirm it in writing. This document is known as Heads of Terms. It is typically four to five pages long and sets out all the key terms that have been agreed in addition to the purchase price. It will need to be prepared by a solicitor. Before instructing a solicitor, you should ask them three key questions. One, are you an expert in mergers and acquisitions and do you spend 100% of your working time in this field? Two, have you been involved in the sale or purchase of an estate agency or letting business before? Three, will you agree to a fixed fee for the transaction?