The Ramblings of a Title Man
by Michael Holden
Last month, I focused on the upward trend in the title industry of growing by acquisition and the steps and considerations on how to buy a title agency. I was surprised by many replies, and one in particular caught my eye. Someone asked: “If I am interested in selling, how should I proceed?” IThis is a great question. What should you do if you want to prepare your company for a sale? There are things sellers can do to make their company more appealing to buyers, but first, let’s review the rule of thumb from last month on value of a title agency.
Last month I wrote: “A title agency is an asset that produces income…it has a value, based on what it earns and produces in profit.” That is true if you are a seller as well. There are many ways to value a company, but the one I like to use is “one times gross vs. five times net.” This evaluation technique takes the financial statements of the company to be acquired and reviews and compares its gross revenues against its net profit. A healthy company will calculate the same exact number for a potential purchase price. Here is how it works:
|Target company: Yearly gross revenue: $500,000.00 Annual expenses: -$400,000.00 Annual net profit: $100,000.00||One times gross method: Yearly gross revenue: $500,000.00 Value of company: $500,000.00||Five times net method: Yearly net profit: $100,000.00 Five times net: $500,000.00|
In our example above, because the company has the normal industry average of 20% net profit as a percentage of gross revenues, this company values the same with both methods. Companies with lower profit margins value lower, and companies with higher profit margins value higher. This method of value gives most companies a good barometer of the value of which to start.
But if you are selling a title agency, how do you maximize your value and get the most for your company? There are two fundamental strategies – grow revenue and eliminate expenses. Anything you can do to add dollars to the top line revenue number will help you. I evaluated a company for a purchase that had $3 million in top line gross revenue. However, the company did not recognize the revenue from their closing fees. The company’s closing officers were paid as 1099 employees and they earned the closing fee as their income. This company had over $1 million in closing fees that were not being counted as top line revenue. By counting closing fees as a pass-through to the closing officers, they missed the ability to cast their company as a $4 millioncompany versus a $3 million company.
The other side of the formula above is the expense piece. Many title agencies are closely-held family businesses. They often have expenses on the books that do not represent the cost of running the business. Another title agency I evaluated for purchase had six company cars – that cost the company about $36,000 in lease payments, gas and insurance. I found out that five of those cars were used by family members who did not work in the business, including two of the owner’s children. These hidden expenses make companies look less profitable than they are. Getting these expenses off the books and showing as much profit as you can on the tax return is a sure way to increase the value of the company.
Lastly, now that your company is showing the most revenue and the least expense on its books, the next step is to market your company for sale. There are many benefits to using a business broker for this step. A business broker can expose your company to the widest audience of potential purchasers. Talking to your underwriter is also an excellent step, because they may know of an agent who is in the market to acquire another title agency. As part of offering your business for sale, you also must decide what your personal exit strategy is going to be. Will you stay on to train the new owner? Will you stay on for 3-5 years in what is typically called an ‘earn-out’ type of sale? Or do you just want to walk away and retire? Having an exit plan when you talk to potential buyers is key, and being flexible is also helpful in opening you to the most possible offers.
“I haven’t quite got the hang of this retirement thing.” – Walter Cronkite, 1916-2009, American Broadcast Journalist, CBS Evening News anchor, once named ‘The most trusted man in America’