REAL Trending Episode 14
On this episode of REAL Trending, Steve Murray discusses what the housing market look like and how it will impact brokers about the market for mergers acquisitions and what’s going on with valuations of brokerage companies.
Housing Market Update
First, let’s talk about a market where unit sales are slowing down, price increases are slowing down, the total volume of business will, therefore, slow down in almost every market in the United States.
We have a myriad of new low-cost brokerage competitors, whether we’re talking about Compass or we’re talking about Exp or Uber Real Estate which we’ll get to in a minute. Redfin, HomeSmart, Realty One Group, and dozens of high powered successful local firms that are very low cost for agents we’ve seen this before. The market in the United States between 1988-1993 was very sluggish, had very little growth in unit sales, and had very little growth in the pricing of those unit sales. The economy was okay but not great. And we had explosive growth in the latter part of the 80s in the early 90s with Re/Max the original low cost brokerage company thriving in the industry. This much is true.
Having been through that market as a consult for REAL Trends five or six of the nation’s top 20 brokerage companies did not make it through that kind of market condition. They didn’t reduce costs. They didn’t pull back and in fact they leaned forward into a market that was going nowhere. Five of the largest 20 brokerages in the country did not make it through that time; But a whole lot more did. And many of them are still present today and still successful.
This is a time when brokerage companies in this kind of environment need to do a few simple things.
1. Get closer to your top agents, your sales management and your team. It’s important that those relationships be established, built, nurtured and made closer than ever before.
2. Control your costs. All of them. This could be for six months or it could be two years. We don’t know and no one we know knows. There are those who believe we’ll have an economic recession in 2020. As former Fed Chairman Ben Bernanke said not too long ago, “this is going to be not a bad time but a challenging time.” And the number of firms that are offering low cost brokerage splits that are paid to agents is not going away, not with the nature of some of the very well funded entries coming into the market today. Most of these guys, these new competitors, are not bootstrapping they have capital and they have access to more of it. They’re not going away. So brokers need to get closer to their people. Watch your costs, avoid unnecessary expansion and look to grow internally rather than continue to expand horizontally. The other challenge of course is that margins in businesses like mortgage, title insurance, and others are being compressed also; because of overcapacity of supply of those services in a shrinking or flat housing market.
As we’ve said for the last 18 to 24 months, the M&A wave is starting to crest. We have an abundant number of brokerage companies of all makes, models,brands and locations who are considering it may be time to exit ownership of their brokerage company. For many that’s probably a good reason, the market has clearly passed its peak for the moment. We also see the fact that their incomes and their balance sheets are still in very good shape. We don’t know where this market is going as we said in other episodes. So we see that these brokers are looking around to see if there a good fit with their company with another company and asking the question, ‘Is there liquidity?’ ‘Are there buyers in the marketplace?’
We can report to you that while the buyers are getting a little bit more cautious there are still several that are aggressively pursuing expansion and will continue to do so because it’s important to their overall strategic plan of growth. This marketplace is characterized by multiples, large firms, large markets, in a range between four and six times trailing 12 months EBITDA earnings before interest taxes depreciation and amortization. For instance, medium sized firms in medium size markets. You can expect between 3.5 and 4.5 multiples on the same basis if you’re a medium or large firm in a small market. Then the expectation is probably somewhere in the vicinity of 2.75 to 3.5 trailing 12 months EBITDA.
Now are there outliers? Of course there are. You may be a large firm and a large market and there’s another large firm and there’s going to be a lot of synergy, you may see higher multiples but anything above 5.5 to 6 is fairly rare. And there may only be 20 to 30 brokerage companies in the country that would warrant that kind of a multiple. A lot depends on how good a shape they are in and what their market share is. How big is their market and how many buyers may have an interest in that firm and that market.
Terms are also good. Maybe not as strong as they were a year to 18 months ago but still in very good shape. You can expect a decent amount of cash at a reasonable earn out over three to four years these days.
So summing up the market for acquisitions of brokers by other brokers is still very, very active – is still at the top. There are many buyers and new ones coming in all the time particularly private equity for the first time in U.S. history we have investor interest in brokerage companies. All in all, still a healthy market. And we expect transactions and volume of transactions to continue at their near record rate of the past two years.
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