Opinion: Does your title M&A strategy add up?10 min read
Most title business owners dream of the day they can sell the firm they’ve built for the maximum multiple. Others look forward to building their brands with strategic acquisitions when the timing is right. Here are some tips and pointers on crossing that finish line with maximum results.
Although it might be their dream to sell, title business owners cashing in on the decades of blood, sweat and tears they spent building their businesses often face challenges. When the time comes to enter the mergers and acquisitions stage, either to cash in or to accelerate growth, so many of these same professionals cast caution to the wind and step into the market with little to no experience or understanding of the possibilities.
Similarly, other title business owners eagerly anticipate the moment when the market is right for them to grow their own brands via M&A. However, more than a few aggressive growth strategies relying on M&A are executed without thoughtful planning. It’s one thing to throw buzzwords like “due diligence” around when the time comes to build an M&A strategy, and yet, quite another to walk away with maximum ROI.
Making a plan
As is the case with any other business endeavor, the M&A phase starts with careful, educated planning. That shouldn’t start with the wishful determination of the multiple one might wish for in selling a business, nor the lowest possible valuation for the target of an acquisition. Instead, it starts with the “why.”
For many seeking to retire, exit the industry ahead of a tough market cycle or even start a new venture, that “why” is simple enough. For others, though, such as the owner of a mid-size firm seeking accelerated growth via M&A, difficult questions need to be asked. What is the business model after the acquisition activity, and what kind of business best fits that model and/or offers the most potential growth after acquisition? Is the target being chosen for past performance; geographic or market location; market potential or something else?
As you begin to flesh out your objectives, it’s never too early to start collecting information. Consider, for example, the source of your target leads. Some leads may come to you from a third party, such as an M&A advisor. In such cases, just be aware that firms that are known to be on the market are also more likely to be coveted commodities as that advisory firm drives up interest from a wider market.
As you define your goals and strategy, consider the motivation of the owner selling your target business. Get an introduction to the owner. Listen to the “chatter” of real estate agents or underwriters at local conferences. You never know what you might glean from a friendly underwriter agency rep who walks into your target firm’s business after a particularly challenging day!
Another big element of the planning process is experience and expertise. If you’re an owner who has been involved in the M&A process before, you have an advantage over one who hasn’t. However, that doesn’t mean you wouldn’t benefit from having additional experience or expertise (a business partner, a consultant, etc.) to ensure your vision is objective.
And although one who has built and operated a title business over time likely has some quality insight when it comes to evaluating other title firms, that experience is all but irrelevant when it comes to knowing the ins and outs of M&A. So, unless this isn’t the first (or second, or fifth) rodeo for your team, don’t go it alone!
Know thyself. Know thy buyer (or seller)
If “know thyself” is sage advice, then “know thy buyer” is just as important to owners seeking the highest multiple possible in selling their firms. The title industry, in particular, brings several wrinkles to the game. Each potential buyer has different priorities, different ways of evaluating a potential purchase and different motivation.
So whether it’s a national title underwriter, a mid-sized agency seeking to grow its footprint or a private equity firm entering the title market for the first time, it’s imperative to have access to the understanding of which players are looking for what at this moment, and in the near future, and how they value what they’re seeking.
Similarly, if you’re making the acquisition, your seller’s motivation should also inform your strategy. The seller who’s simply looking for a payday and who indicates little motivation to help you transition is also signaling to you that the transition may be a little bumpier. Your target acquisition’s historical growth revenue could well take a hit in the early days after its seller has moved on.
On the other hand, many operators have spent decades building something more than just a title agency. Many times, they’ll want to know that their team is being put in the hands of a good operator. Those owners are often willing to stick around for a year or two to ensure that the legacy they’ve built remains strong. And they’ll be vetting you for culture, integrity and industry reputation before being willing to sell to you.
You’ll also need a good understanding of a number of factors before putting a number on your selling point or final offer. Obviously, market conditions, both now and as forecasted in the next year or two at least, are important. Understanding the state of the M&A market itself is just as important.
Right now, the market is hot in the title industry, with insiders and outsiders vying for firms seeking to sell. Is the firm you’re seeking to acquire a hot commodity in the eyes of your M&A competitors? Or do the unique characteristics of your target mean you can set the pricing without fear of being outbid?
Only once you have a reasonable and informed grasp of all of these factors is it time to set your offer price or selling point. Even then, plan to have some flexibility.
Again, this is a term with a wide variety of meanings depending on what level of experience and expertise the buyer and/or seller have in M&A transactions. Some elements are fairly obvious: performance and P&L; operating and production systems; the drivers of a target’s success (or lack thereof). You’ll likely seek indicators of how an acquisition would likely perform once its previous leadership has departed.
However, it’s a bit surprising how many title business owners seeking to acquire fail to account for some very important factors in their due diligence process. Anyone, for example, planning to merge two or more existing businesses will likely know the general title production system being used by the agencies coming together.
However, brand name alone isn’t enough. In a time of heavily customized integrations and modifications, one agency’s SoftPro may be worlds apart from another’s. The ResWare system your target firm operates may have dramatically different workflows from yours.
Similarly, not all title businesses (agency or otherwise) are created the same. Is the firm you’re evaluating for purchase truly a “full-service shop,” or is it a refinance shop that changes its marketing materials when the market changes? Not every agency is equipped to manage some of the specialty lines either. If you’re not used to running a builder-focused agency, you don’t want to have to learn how after your latest acquisition.
Another common concern in title M&A considers what the operational team of the agency being acquired looks like underneath. Was the selling owner heavily hands-on? Were the top two or three managers, who are also leaving after the sale, involved in all aspects of the business large and small?
Growth potential is critical as well. Review as many years of financials as your potential purchase will provide. Are you purchasing a once-large firm that scaled back after a few tough years? Does the firm’s team have the capacity to grow again?
If your means of evaluating the nature of a potential merger or acquisition excludes any review of their compliance and cybersecurity policies and tools, it’s time to seek more expertise to inform your M&A strategy. Any number of unpleasant and ROI-killing developments that went undiscovered or unsought can easily emerge after the transaction is finalized.
Most owners involved in an M&A transaction will likely pore over the books and P&L statements of the businesses they’re about to acquire. But not everyone has an objective standard or formula for the true growth potential of those businesses. The best-planned and executed mergers or acquisitions aren’t simply the sum of the entities being brought together. Instead, the best deals create new entities that are greater than the sum of their parts.
Beyond the obvious, savvy entrepreneurs in the title M&A space find ways to drill down on the business model being acquired or merged, including how its rank and file are trained to do their jobs. If the operating plan of an agency acquiring another requires the specialization of tasks, for example, it is important to know that the rank and file of the agency being acquired is accustomed to owning entire files, rather than simply parts of the transaction.
Review service contracts. Understand the compliance program in place (or lack thereof). And investigate what (if anything) has already been put in place to protect the acquired office’s systems from cyberattack.
The asking or offer price in title M&A will depend heavily upon who’s buying, who’s selling and their respective motivations. Private equity firms tend to search for high-potential ROI, and that starts with Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). This formula leans heavily on an agency’s actual net income, which many feel is a much better indicator of a company’s potential profitability.
Title underwriters, on the other hand, tend to review EBITA plus remittance. And many title agents making acquisitions start simply with gross revenue. Again, their formulas will depend on what they’re seeking and why. For example, an agency with strong gross revenue but poor margins has tremendous worth to the acquiring agent planning to employ an extremely efficient management team and production model. I’ve even seen purchases made solely for the quality of staff to be rolled into a larger, central operations model. In such cases, EBIDTA fails to provide a true roadmap to the best targets.
Your valuation process must be more sophisticated than spit-balling what a savvy purchaser might consider in his or her own evaluation of the company you are selling. It all starts with knowing who might be interested in purchasing a business like yours. It is also critical to understand their motivation, as well as what they consider to be the most valuable elements of your business.
What a regional title insurer might look for in buying a title agency can be very different from what private equity firms want. Do you have intangible assets (such as proprietary intellectual property or a unique, robust database) that could increase the value of your firm in the eyes of a potential buyer? How do the most reliable forecasts and projections rate your firm’s likely performance against hard, historical data?
Far too often, title business owners begin and end their valuation process with revenue and/or profit, and add in the most common recent multiples. But without understanding what potential investors or purchasers truly value in businesses like title agencies, most sellers end up leaving cash on the table.
For business owners initiating a growth strategy, determining an accurate ROI on new acquisitions is a fairly challenging endeavor. While dividing the acquired company’s earnings by the purchase price is at the base of most transactions, there are multiple other difficult-to-measure considerations that can play a part in the equation.
For example, acquiring a well-known brand may well be measurable in part by its revenue, but there will likely be a very real impact across the acquiring company’s revenues because of the brand equity being acquired as well. Perhaps a newly merged company brings an especially efficient and skillful staff into the larger entity, with the obvious positive impact on the total business’ performance.
Another all-too-common mistake made by owners inexperienced with M&A is measuring the ROI too quickly or having grandiose goals. Plan on waiting at least two years to evaluate your transactions. Where EBITA is the primary indicator on an acquisition, most operators expect to need three to five years to regain their investment if the multiple was three to five times the indicator.
Of course, the goal is to employ efficiencies that will shave that number of years down. Almost no two title agencies or businesses operate exactly the same way. There are bound to be hiccups, surprises and bumps in the road when it comes to bringing such entities together. Expect some staff turnover as well.
No two mergers or acquisitions are ever quite alike. But considering the stakes involved for buyer and seller, experience and expertise can play a major role when it comes to M&A, especially in an industry as unique as the title industry. Even the most experienced, successful title agents can be at a serious disadvantage when selling their businesses to savvy private equity professionals or seasoned underwriters.
And far too often, it’s because those owners have failed to consider all of the variables or take advantage of tools they didn’t even know existed.
Aaron Davis is the CEO of AMD Enterprises.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Aaron Davis at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]