Mergers, Acquisitions, and Roll-Ins

Growth on a geometric scale

Why?

• Grow geometrically• Grow productivity• Grow selectively

What we’ll cover today:

• What’s the difference between a Merger, an Acquisition and a Roll-In?

• How do you value a Merger or Acquisition Target?

• Where we are today• What does this mean to a

Nextage franchisee?• Q & A

Definitions

• Merger: Union of two or more real estate firms using each firm’s value and/or cash to determine equity in the merged product.

• Acquisition: Buy-out of typically smaller competitor for strategic reasons.

• Roll-Ins: Broker or agent led group of agents “walk-over” to a competitor.

Approaches to Valuing a Real Estate Brokerage

• Market Approach. The market approach to valuation derives business value in comparison to historic sales, earnings, and/or assets of other similar businesses.

• Asset Approach. The asset approach to valuation determines the value of a business by assessing the fair market value of its assets.

• Income Approach. The income approach to valuation, which is most commonly used for valuing brokerages, establishes value by evaluating a business’s ability to generate economic benefit for the owner. – Apply the right multiplier factor to earnings and then add value (if

appropriate) for the business’s assets.

Value of a Merger or Acquisition?

Real Estate Brokerage Valuation

• EBITDA

– Earnings Before Interest Tax

Depreciation and Amortization– Earnings: in real estate brokerage

maybe yes, maybe no!– In a real estate brokerage, what are

Profits?– “Before” ITDA– Where do you look for EBITDA?

• Balance Statement• Tax Returns• P & L • Income Statement

Real Estate Brokerage Valuation

• What is “Goodwill”?– Any amount paid over “book value”

• Listings, value of current agent productivity, reputation of firm, tenure in business, leadership and organization, market share, cost to recreate

• What is a “multiple”?– Factor derived from the Net Present Value of the cash flow– Discounted cash flow

• What is an “earnout”?– Most brokerages sold do not derive all cash settlements

• Earnouts typically provide for opportunity to increase overall sales proceeds depending upon performance post-sale.

• What is “an asset sale”?

Income Statement Exercise

• Carl Jones is seriously considering selling his 15 year old real estate brokerage with 22 agents. He has consented to “confidentially” permit you to review his financial statements, i.e., Income Statement, in order for you to determine an offer price. – Carl wishes to remain in a management capacity after the sale.– Carl owns all his office FF&E outright and will convey at an appraised value

of $7,000.00– Carl’s office lease expires in three months.– Carl has heard from colleagues that he should expect to sell for a multiple of

3 times his EBITDA.– Average agent commission split is 78%

• Using Carl’s Income Statement (handout)– Normalize the Income Statement to better express your Business Plan for

the purchase and compute an offer price for Carl.– Assume an economy of scale based on 40 agents total.

Today’s Market

We’re not in Kansas anymore…

Prospecting in Today’s Market

• Do the research– List the targets– MLS stats: trend analysis– Company website– Social Media– Talk to vendors

• Make the call– “I’d love to get together to see

if there’s any type of strategic business relationship that makes sense.”

• Follow up, follow up, follow up!

M&A in Today’s Marketplace

• Why?– Be very clear in your

objectives.– Be able to articulate your

objectives to the prospective seller.

– What’s your plan?

• Caution EGO Ahead!– Don’t overlook “family”– Intangible value?

• What is the Target’s “identity”?– Market– Culture– Operating systems

What is “breakage”?

M&A in Today’s Marketplace

• Confidentiality– Trust but verify– Pore over details– Focus on culture

• Build a Relationship with the Target Broker and Stakeholders– Stakeholders include

spouses, partners, key personnel

– Walk don’t run

Successful M&A is a process, not an event!

M&A/Roll-Ins in the Nextage “We” World

• “Trade your overhead for overrides.”– The Team Building mystique– Is holding on a financial

reality?• Can you survive in the “New

Normal”?– What’s the commitment level?

• Financial and psychological – Can I provide my sales

associates what they need?• Tools to compete?• Lead generation?• Office systems• Brand building

M&A/Roll-Ins in the Nextage “We” World

• Final thoughts:– The pendulum swings both

ways• Keep an open mind to the

possibilities– A good poker player

• Starts with a bankroll• Knows when to hold and fold• When to bluff…or not!• Knows when to go All-In