Everything You Need To Know About Real Estate M&A
Baker Tilly partner Frank Walker leads his firm’s financial advisory services practice, leveraging more than 20 years of public accounting and private industry experience to provide valuation, litigation, transaction and advisory services to a diverse range of clients. When deciding who to consult for our comprehensive guide to real estate M&A, he stood out as the ideal candidate.
What’s Driving M&A Activity?
The reasons for a merger or acquisition—leveraging an acquisition to expand into different geographies, practice areas, diversifying product mix, or simply expanding head count—vary tremendously, Frank says. He sees consolidation and new market penetration as current chief drivers of M&A activity.
However, organic growth is almost unequivocally preferable to expansion primarily accomplished through acquisition, which can be unsustainable. Departments deteriorate if this occurs too rapidly without the requisite infrastructure in place.
The Nature of Transactions
Frank says that overall, deal volume is down. He anticipates fewer $100M-plus deals in the near future. Markets are less active and hungover from peak activity two years ago. Notably, the deal mix is close to 20% financial or private equity-sponsored, whereas 80% are executed by companies that occupy the same or related sectors.
Also interesting is how these different buyers handle the transition and decide whether to install their own C-suite executives or rely on those already at the company.
“If the acquiring company’s seeking access to a particular customer base, it’s very likely that management won’t be retained, because they’re redundant or used to operating autonomously,” Frank says. “But every deal is unique. They might be given an earn-out to facilitate the transition if they have unique knowledge or a niche skill set.”
Multiples are often examined by comparable companies to gauge value, used alternatively or complementarily to intrinsic valuation based on future cash flows. They’re like the inverse of cap rates, which are expressed as percentages. When multiples go up, sellers get eager and excited.
The Role of the Investment Bank
Frank says sellers are smart to engage reputable investment banks, which receive a percentage of the proceeds from sale in exchange for positioning the company and leveraging their extensive networks to target appropriate buyers. The bank, then, has a vested interest in getting the highest number for its client.
“Banks have a regimented process: marketing the company, soliciting offers, conducting due diligence, exchanging a purchase agreement, etc. Sellers benefit from the discipline,” Frank says. “Banks are the quarterbacks, in a sense.”
“People often say time is the enemy of all transactions,” Frank tells us. "Generally speaking, the speed at which a deal is completed is directly proportional to how happy the seller ends up."
With each day, companies stagnate on the market with their imaginary “for sale” signs, the likelihood of the transaction actually occurring falls precipitously. Franks says most successful deals close in 60 to 90 days.
Is it the seedlings or established firms that are most coveted by buyers? Frank says both, for different reasons. Buyers purchase innovative, tech-centric startups for their intellectual property. Private equity and financial buyers gravitate toward more mature companies with track records of success and reliable cash streams.
Frank advises companies to assemble a team of seasoned accountants, tax advisers, lawyers with transaction experience and investment bankers well in advance. From what he’s seen, the buildup to sale isn’t a duration measured in months—it often takes years.
A frequent and pernicious deal-killer is the inability to forecast earnings with precision, or back up those predictions with evidence. This telegraphs to buyers that the investment is a risky or volatile one they may be unable to tolerate in their portfolio or on their balance sheet.
Lastly, sellers should be aware that the secondary layer of managers, those subordinate to the C-suite, will be scrutinized for their growth potential.
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