Some have suggested that the market for growth through mergers and acquisitions has fallen significantly over the past year. While it is true that activity among the large national purchasers, such as Berkshire Hathaway, Peerage and Compass, have declined quite a bit, activity among privately held firms within the same market has not diminished nearly as much.
It is important to note that every one of the major national networks, those listed above, along with RE/MAX, Anywhere, United Real Estate and HomeSmart, are still active with local combinations among both their company-owned operations and their affiliated firms.
RTC Consulting has continued to see the same level of valuation work in the past 12 months as we saw in each of the proceeding years. While not all these valuations are for the purpose of a merger or acquisition, many are. In fact, the level of in-market combinations has not declined much at all.
The big difference
One big difference, of course, is that valuations are down from where they were in 2020 to midyear 2022. Rather than a multi-year average of EBITDA or Gross Margin as the basis for the value of a brokerage firm (or their related counterparts in mortgage, title, escrow, and property management), valuations now are based Trailing Twelve Months (TTM or LTM) results. This does mean that the value of nearly all of our clients is down from where they were 15 months or more ago.
Terms have slightly changed
Furthermore, the terms of most transactions are characterized with less cash at close and more on the contingent part of the transaction (often referred to as the Earn Out). Earn Outs continue to run for a minimum of two years to a maximum of five years. Some of the most recent transactions we’ve handled are structured to include some “back-side” or “upside” opportunity to make up for the recent decline in base valuations.
Among the most active parts of the market are combinations between two local firms that have contiguous operations and similar cultures. This last point, having similar cultures, has long been overlooked as a key point in attempting to bring together two local firms. Unlike in the past, the variations in business models have made local combinations more challenging. Combining two brokerage firms with widely disparate commission or fee plans is very difficult no matter the economics.
Another very active part of the market is that of residential property management firms. In this segment, multiples are higher than for a similarly sized residential brokerage as the financial results of this segment of our industry have not as materially impacted as has the brokerage segment, along with title and mortgage, which are all transaction driven.
While there have been some comments about the decline in mergers and acquisitions, we continue to have a normal number of clients interested in either being buyers or sellers.
Steve Murray is a senior advisor for HW Media and a partner with RTC Consulting, the leader in valuations and acquisitions over the past 35 years.
