Acquisitions can be tedious and difficult. So, why do it? Simple: To grow.
The recent publication of our popular e-book Valuing Small- to Medium-Sized Brokerage Companies has prompted several questions. Mainly, why do firms go through the undertaking of acquiring other firms? Since acquisitions tend to not be for the meek, this is a valid question.
Achieving growth for a residential real estate brokerage firm is not a complicated endeavor. You either grow organically via effective recruiting and agent development, you grow via acquisitions, or you do both. Though the solution for growth is simple, the execution can be difficult.
The organic path is not an either/or option for successful brokerage firms. Broker-owners should be targeting various means to attract agents to their company. Equally important, they should be striving to improve agent productivity. Interestingly, success on this path allows firms to be more successful should they also choose the acquisitive route.
In our valuation and M&A work, we’ve seen every reason imaginable when it comes to why firms choose to acquire. Regardless of the reason, the process of a brokerage acquisition is not for the faint-hearted. Besides the undeniable fact that most acquisitions require upfront capital, they demand a tremendous amount of time, and when the primary asset being acquired is an independent contractor who can walk out the door at any time, the execution must be flawless.
Lately, we’ve seen a lot of activity from medium- to large-sized firms as they endeavor to acquire smaller firms, which was a big impetus for penning our e-book. A softer housing market is undoubtedly whetting the appetites of some of these buyers as smaller firms struggle to compete. Thus, there are bargains to be had, but most buyers are intentional in their acquisitions as it serves their growth strategies.
When it comes to why? in many cases, it’s merely a matter of buyers seeking to expand their footprint. In some situations, the buyer has already tried to expand but has had trouble penetrating the market. In other cases, all it took was a simple cost/benefit analysis to determine that it would be cheaper to acquire than to set up shop from scratch. Acquisitions can be challenging; however, so is finding a suitable office space, retrofitting the office, hiring staff, and recruiting agents.
In other cases, the why? is to take out and join forces with a pesky competitor. If you can’t beat them, join them, or in this case, compel them to join you. Interestingly, we find that many smaller firms are owned by folks who continue to list and sell, and as the landscape for operating a brokerage firm grows more challenging, these owners lose their passion for owning. As mentioned, if your firm is doing an excellent job on the organic side of things, then it will be a lot more enticing for a competitor to join forces. A seller will feel a lot better about a deal if they know their agents will find a good place to land.
There are, of course, many other whys? and for both buyers and sellers the why ought to be well defined and thoroughly vetted.