The Government’s decision in the Autumn Statement to ban letting agent fees places yet more pressure on agents.

At the same time, consolidation in the industry continues apace, including some distressed sales.

But whatever the economic pressures or market trends, mergers between agents – both lettings and sales – are an inevitability. The ambitions of younger, upcoming agents and the retirements of older agents mean that independent agents are on a merry-go-round of changes in ownership.

For the ambitious, the bold or the well-placed there are therefore a range of opportunities to complete strategic acquisitions.

Typical reasons for merging include acquiring territories, taking out competitors, increasing the lettings portfolio and strengthening the acquirer’s brand.

At my own firm, we have also seen a significant increase in confident, ambitious agents looking simply to increase their turnover, spread their costs and improve their profits.

So how do you deal with a merger?

When the possibility of a merger arises, the partners need first and foremost to understand with clinical precision what the purpose of the merger is and to be certain that the merger will achieve the intended aims.

Absolute clarity is paramount: too often mergers fail because their original purpose was inadequately identified.

A specialist business transfer agent – someone who specifically deals in sales of lettings and sales agency businesses – can advise here, and help with the valuation and price negotiations. Seeking legal and tax advice at an early stage is essential.

Structures

Legally, estate agent mergers are usually structured either as:

• a transfer of the corporate vehicle which owns the agency; or
• a transfer of the agency’s assets.

Lawyers and accountants must be consulted to get the structure right as the choice of structure has tax and risk consequences for both parties.

Due diligence

In each type of merger, it is paramount that there is full due diligence from the acquiring agency and, by the same token, that the directors of the acquired agency understand the buyer’s reason for the deal:

That knowledge will help both sides to secure what they want from the deal.

Having said that, there are a number of distressed sales where the transaction takes place at a real pace, without any meaningful due diligence, in order to preserve the assets or to preserve the price.

The benefit that thereby accrues is usually the preservation of jobs or the reputation of the acquired agency (or of its staff or directors). Whilst a lower price may be paid, the real price to the buyer of moving quickly is a greater degree of risk.

The price

The value of the agency is always a function of the negotiation and what the parties are willing to pay or be paid. Again, an experienced business transfer specialist can advise – and negotiate.

The lettings portfolio and financial advisory income has a definable value based on the recurring revenue, but the value of the pure agency work is temporary at best. Buyers usually pay for the brand, the location, the reputation and the expertise.

Sellers though must always insist on additional payment for the pipeline – with value being paid for properties on the market, sales agreed but not exchanged, sales exchanged but not completed and overdue (but not doubtful) invoices. The art of the negotiation is how much value should be paid for each.

The price is also affected by the risk. The chief factors in the risk are:

How good are the sales staff? Is the owner staying on to secure the goodwill? How strong and long are the leases? Are the employees an asset or a liability?

Issues and pitfalls

Behind only the risk of the merger not achieving its aims, the second and third most significant issues for potential buyers and sellers to be aware of are:

• the deal distracting the owner from the core business; and
• leaks causing unintended damage to the agency and its value.

Only experienced buyers and sellers will appreciate the amount of time and focus that mergers require. Most deals will take, at the very least, a month to negotiate and a month to execute.

Our experience is that the average is more like six months to negotiate and ten weeks to execute.

That process will distract both parties and cause lost sales unless the parties are supremely well-resourced and organised.

The staff might also notice changes in the behaviour of the partners – closed doors, meetings out of the office, lots of paperwork, increased email traffic and phone calls from people other than customers.

They will speculate and they will talk and the market will quickly hum with gossip.

Some buyers and sellers manage the process of telling the staff what is going on in stages and without spooking them.

Others take the view that it is better to say nothing at all until the deal has actually been done.

The final message is that mergers are specialist deals requiring real expertise and experience.

Make sure your advisers have genuine experience and understanding of the sector.

Mark Lucas is partner at Barlow Robbins LLP and has experience in advising on mergers between agents

www.barlowrobbins.com