This article was originally published in the Fall 2019 Edition of Appraisal Buzz Magazine.
The mortgage sector is undergoing major change and consolidation. There has been a rapid shift during the past few years to meet regulatory compliance policies and streamline technology. In particular, acquirers are embracing tactical acquisitions of Appraisal Firms to shore up product lines, capture customers, and increase market share.
Preparing Your Appraisal Company for Sale
It’s never too early to start establishing concrete long-term goals for your company. For many C-level executives, this involves contemplating the eventual sale of their business. The primary objectives when selling a business are generally maximizing shareholder value and finding a good home for the employees and business going forward. In the mortgage market, we find these objectives are often aligned.
There are many factors to think about when positioning your company for an acquisition. Taking the time to prepare and plan ahead will help make your business an attractive acquisition candidate. Laying the groundwork for the successful sale of a business represents one of the most significant challenges in the life cycle of a company, and often simultaneously for its owners.
With this in mind, there are four fundamental ways to help prepare your Appraisal Company for a merger and acquisition (M&A).
- Stay focused on both short and long-term goals. Reflect on what you hope to gain from selling and how you want it to be executed. How will it affect your career, your company’s brand and future, and the company’s growth? Research the buyer market ahead of time and consider which acquirers would be a strategic fit for your company. Keep your options open from a buyer and structure prospective. And during all of this, never divert attention from current and new customer sales. Always run the business as though you’re not selling.
- Get ahead of potential acquirers. Analyze the historic financials to uncover growth and margin trends, and EBITDA (earnings before interest, taxes, depreciation, and amortization) adjustments. It’s imperative to have your finances in order. Undertake a financial audit or review for at least the previous two to five years by an outside accounting firm. Speak with a tax adviser in order to best structure the deal for tax purposes.
At the same time, accumulate and organize performance metrics that support the business model and valuation. Uncover all potential non-recurring and/or personal expenses that might be in the P&L (profit and loss) statement, as they would be considered as add-backs to EBITDA, thus increasing EBITDA.
- Document your company’s policies and procedures. Keeping a record of these documents will contribute to a sense of continuity, ensuring whoever takes over knows how to run the business.
- Ask for help internally. Keep the process confined to a small team of executives. Have a main-point person who serves as a liaison with advisors and acquirers. This keeps the process transparent and prevents confusion. Creating positive momentum while in process is crucial.
Key Attributes of Driving Value
For Appraisal Firms, it’s important to consider the key attributes that strategic and financial buyers typically base their valuation on. Not surprisingly, the acquirers with the strongest understanding and vision for the company are usually the ones that maximize value.
If you’re large enough to be acquired, there’s a decent chance you’ve already given it some thought. If you’re not large enough to be acquired but have an attractive solution and company, it’s prudent to explore ways to monetize some or all of your equity interest in a market that is experiencing historic transformation and above average M&A multiples.
Three key attributes stand out amongst good acquisition targets. Each of these, which often go in tandem with a motivated and experienced management team, will likely contribute to above-average valuations in the Appraisal Industry.
- Revenue Growth. The ability to demonstrate year-over-year revenue growth provides acquirers with a sense of confidence in the target’s ability to generate and predict future revenue. The type of revenue is also important. Acquirers will recognize the different revenue streams from which the company generates cash and use them as a tool to determine performance. In addition to revenue growth, acquirers will pay careful attention to EBITDA margins.
- Operational and Scalable Technology. Acquirers look for companies that can increase sales and expand their products without having to increase staff or make other investments to the same proportion.
- Minimal Customer Concentration. It’s vital to have a diverse customer base and even more valuable to have no single customer generate 25% or more of the company’s overall revenue.
Since the primary goal for many large vendors is to create end-to-end solutions, mortgage technology platforms that add to existing overall systems and help the acquirer create critical mass are some of the most sought-after investments. With the increased amount of interest in the Appraisal Industry, it has become a necessity for business owners to recognize the market landscape and begin initiating a plan of action in order to take advantage of current opportunities.