The M&A Business: Experts Dispense Advice at REAL Trends’ DealMAKERS Conference

The M&A Business: Experts Dispense Advice at REAL Trends’ DealMAKERS Conference

The real estate market is softening, and home sellers who were accustomed to being in a strong negotiating position are seeing their advantage slip away. As go homes sales, so go brokerage sales, said Scott Wright, vice president of REAL Trends at the DealMAKERS conference, a precursor to the annual Gathering of Eagles meeting.

In 2017, REAL Trends hosted the first DealMAKERS conference, which was designed to answer the most important questions brokerage leaders have about how to value their companies and teams. That year, the seller’s market was peaking.

What a difference two years make, said Wright, adding that some brokerages that were once candidates to sell may now be deciding to buy instead. Since valuations have come down, they may look to merge with or acquire another firm rather than try to wait for another upturn to improve their own acquisition deal.

In a panel presentation called “Valuation and Deal Terms,” Wright was joined by Alicia Vivian, the chief financial officer of REAL Trends, who works with Wright to determine the valuation of brokerages as part of REAL Trends’ consulting work. The panel was rounded out with two executives from franchises that have been actively acquiring brokerages: Chrissy Oliver of Compass and Alex Seavall of HomeServices of America.

The biggest change for brokerage acquisitions is that the transactions are commanding less up-front cash, much to the chagrin of sellers, noted Wright. “We’re seeing an environment with margin compression at the top,” said Wright. “Valuations are determined by the last 12 months of activity, which hasn’t been as strong.”

Brokerages, said Wright, do not get to cherry-pick their best year from several, “it’s ‘what have you done for me lately,’” he quipped.

The key to preparing for a potential transaction, said Vivian, is to ensure the proverbial house is in order with regards to financial statements, contracts, and agent productivity. “It makes the process much easier when you have clean and organized data available at your fingertips,” she said. “Someone in the organization who can speak to the financials should be prepared to do so.”

Another factor in the M&A environment is that Realogy Holdings, which had been busily acquiring brokerages, announced in January 2019 that it was going to suspend acquisitions. That’s taken some pressure off buyers to act, the panelists agreed. It’s worth noting that HomeServices of America recently displaced Realogy’s NRT from the REAL Trends Five Hundred ranking of brokerages, although NRT still beats HomeServices when it comes to the total dollar volume.

Will this have any bearing on future acquisitions?

Seavall of HSA said “our formula has evolved,” adding that the organization looks for brokerages with strong leadership who are demonstrating growth despite the declining market. “We believe in the local ability of management to make the best decisions,” something they had “learned the hard way.”

Acquisitions have helped Compass quickly grow from its launch in 2012, said Oliver, who oversees strategy and growth for the New York-based tech brokerage. Oliver said that Compass is now focused on its 22 markets and gaining market share in those areas. She said that 2018 was an expansion year, in which the franchise opened in 11 new markets.

In a session that followed, “Legal and Tax Issues,” attorneys Jim Thomas and Barbara Wells of Minor & Brown law firm discussed how the 2017 Federal Tax Act will impact the business. It’s paramount to choose the most favorable corporate structure as you consider an M&A down the road, they noted, reviewing the differences between S Corporations, C Corporations, and partnerships. Acquiring stock to buy a brokerage is too risky, they said, and does not confer tax advantages. It’s risky because the buyer is “acquiring every skeleton in the closet,” said Thomas.

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After earning her bachelor’s degree in journalism at the University of Central Florida, Tracey set out in the real world at Florida Realtors in 1994 as a communication assistant, working her way up to editor in chief of Florida Realtor magazine. In 2004, she left the association to start her freelance writing and editing business. One of her first clients was REAL Trends, and she started working for the organization in 2005. In 2014, Tracey was promoted to editor in chief of publications for REAL Trends. She handles the writing and editing of all REAL Trends publications and marketing materials, including LORE Magazine, the REAL Trends newsletter and the blog. She is also the primary podcast interviewer where she conducts interviews with top real estate industry leaders and affiliated industry leaders. Tracey is married with two children.

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