Having recently attended the RealTrends Gathering of Eagles and DealMakers conference in Austin, I can honestly say it’s some of the best money I have ever spent on a conference in 20+ years.
Within three hours at DealMakers, I already learned enough information to more than justify the time and money invested. The world of real estate brokerage mergers and acquisitions has been turned on its head in the past 12 months. Buyers and sellers alike must learn to navigate these uncharted waters.
Here are three valuable lessons I learned from Steve Murray about the new model of deal structuring.
1. Lower multiples
Most of us still remember hearing the stories about the large companies gobbling up brokerages at six times EBITDA, or even more. It’s safe to say that those stories will fade into real estate lore and could even be considered mythical in a few years.
Buyers aren’t willing to value companies at that level in this market, nor should they. I said several months ago that sellers have unfortunately missed the top of the market and that moving forward, buyers will be presenting offers with a far less fanciful multiple. In fact, several panelists weren’t quoting over a three multiple. Now, every deal has its own quirks but overall, the high multiples are gone.
2. Less cash up front
Every seller would love a duffle bag of cash dropped on their desk. While it’s fun to dream, the reality is that buyers are not looking to expend operating capital for major purchases. What many want to buy is positive cash flow or market share. One panelist at DealMakers said that they don’t offer more than 8% cash down on an M&A deal. That’s a far cry from the 50-75% that some buyers are said to have given in the past. Purchasing companies are much more risk-averse than one or two years ago. Cash up front isn’t a gamble they are largely willing to make.
3. Longer earn outs
Sellers looking for a quick escape plan are not going to like this. While not every buyer will want the seller to stick around that long, the deal structures are being slanted toward extended earn outs with stop-loss measures built in to protect both parties from a plunge. A two-year earn out is not going to be very attractive to many buyers unless the seller is taking a major haircut on the overall valuation of the brokerage. Four to five years or even more could become a trend as buyers look to spread their risk out over longer periods.
While we are certainly at an inflection point in the M&A space, it’s not a “forget everything you know” situation. At the end of the day, sellers want to sell, and buyers want to buy. Conversations are being had and deals are being made.
It’s important the sellers understand that things have changed, and they may not get everything they had hoped for. Buyers should also remember that this is someone’s company that they built.
For some, it’s like a child. Have some empathy when dealing with a seller and try to think how you would feel on the other side of the table. If the deal is a win-win, both sides come away better off.
Stephen Meadows is COO of Coldwell Banker Premier in Virginia, a firm that was named a 2023 RealTrends GameChangers for its growth in transaction side percentage over the past five years.
