by Barry F. Flavin
I have been involved in the purchase and sale of a number of companies in the title business, and I’ve noticed that there seem to be more good reasons for buying companies than selling them. Sellers tend to forget about that when they have strategic or personal reasons to sell, and as a result, they tend to undervalue their companies. The purpose of this article is to make agency owners aware that being ready to sell—that is making their companies ready to respond to the typical motivations of buyers—will make them more valuable and, most often, better managed. I’ll also throw in a few observations about the process and job of selling.
The Process of Selling
The process of selling a title company is very time-consuming, and it is definitely work. The initial phase of collecting and reviewing the information necessary to evaluate the advisability and desirability of selling your business will usually take about three or four months. The time period from that decision point through negotiating and deal structuring is normally six to nine months, and from letter of intent to closing another two months.
If you make it your business to handle it all, you will find time for little else, and the value of your business will surely diminish in the meantime. So you need to find the right firm to assist you in the process or the right person in your company to take over day-to-day management and leadership while you take charge of the selling process with the same vigor with which you run your company.
By now you’ve probably noticed that opening your office every day is not enough to fill it with orders, and yet so many agency owners when faced with the prospect or opportunity to sell don’t bother to promote their companies—they simply offer them up for consideration. If those same owners were offered a chance to chase a big new customer in their town, they would launch a comprehensive plan of attack and fire every barrel to hit their target.
Yet when responding to a sincere inquiry from a potential purchaser or when soliciting the same, they foolishly adopt a passive “what’ll you give me” coyness that almost guarantees a discounted offer. When it comes to selling your business, you have to make it happen, instead of letting it happen to you. So get rid of that passive mentality by first dropping the word “acquisition” from your vocabulary. Mergers and acquisitions are both high-sounding terms, and the best buyers for your company are probably engaged in both, diligently and at a pretty high level. So unless your agency is producing over $500 million in revenue annually, you are still considered a small business for them. Small businesses grow by selling, and they are sold by selling.
Who buys title companies and why is an interesting subject, and there is one rule that you can count on:
“The buyer rarely buys what the seller thinks he’s selling.” —Peter Drucker
That’s why it’s so important to anticipate what motivates your potential purchasers and to position your company to respond to those motivations in a way that will maximize your value. Don’t get caught in the trap of thinking that any one formula or rule of thumb will help you determine your company’s value. There are as many formulas as there are companies, and none of them apply to you.
If you put your price at the mercy of formulas, such as saying your company is worth “fives times earnings,” I promise that some very skilled numbers people can always come up with a formula that takes all mercy out of the situation.
Maybe it’s easier to deal with the prospect of selling your company if you have some easily calculated benchmark for value, but easy may mean you don’t get what the company is truly worth.
BUYING & SELLING CATCH PHRASES
There are some catch phrases in the world of buying and selling companies that do have the ring of truth:
“One buyer is no buyer” is a pretty good rule; if the underlying value proposition for sale is strong, having more than one potential buyer can move the sales price upward. “The looser the terms, the higher the price” will generally hold true. Anything that softens the impact on the balance sheet of the purchaser will likely move the price upward. The inverse is also true: “Cash deflates value.”
When it comes to talking price, which I think is a lousy idea until you’ve provided solid support for your opinions, remember: “The buyer sets the ceiling, and the seller sets the floor.” That is, if either of them says a number first.
Finally, this is my own contribution: “The past is a bond, and the future is a growth stock. Never sell bonds.” You don’t want to be paid for what you have done; you want to be paid for what you will do with your new owner. In order to accomplish that goal, you will need to be prepared to present your company in terms of the buyer’s future, underpinned by the results of your past, and the key word here is prepared.
TIMING & DETERMINATION
If opportunity is what happens when luck meets preparedness, then the opportunity part of selling most often surfaces in the form of timing. The timing may be related to a surging market or a declining one, but it also may be related to a buyer’s strategic plan, the loss of a key executive, or the need to have an asset in place to support a larger plan.
But timing can also be related to the time frame the buyer has set for action. And in that regard, the critical issue is having a documented past that serves as a baseline for the buyer’s action. In fact, the key to selling your company can be defined in those terms: The buyer buys a credible future and a well-documented past.
If your documentation is sufficient, the talks with your buyer can stay focused on the credible future, where most of your value resides. And a big part of your success to date may have been rooted in your daring and courage, but for this exercise, it’s better to act like a Boy Scout than Indiana Jones. Be prepared.
In the process of building your documented past, you will discover the deficiencies in your operations, and you can take steps to mitigate them. That will make your company more valuable—even if you never sell.
During the process you will have to focus on areas of your operations that are not your favorite places to spend time. But you have to address every operational discipline, and optimally you will have a memorialized process and plan for each. In fact, the best possible documentation scenario is one that mimics an old-fashioned operating manual, which begins: “The light switch is to the right of the entry door,” etc. That’s a bit simplistic, but you get the idea.
Your financial records are critical too, and their format is important. If you’re still accounting using Quickbooks™ software, it’s going to be tough to get respect. If you’re using a more sophisticated system with an expanded chart of accounts, having three to five years internal statements is a good first step. If you receive a compiled statement from your CPA each year in addition to your tax returns, better yet. If you have audited financials, well, your buyer will love you.
But if you can put together good statements with solid unit-volume information, you are really showing the value of your company now and in the future. Order counts, policy types, fee summaries, and almost anything else your production software will report are very valuable in establishing your credibility.
ASSESSING EXPENSES & INCOME
A big part of the buyers’ exercise in assessing your past will be in recasting your results to reflect how their ownership structure will impact them. Since, as a small business owner, you prudently utilize tax-avoidance strategies as guided by your professional advisers, publicly traded companies will try to assess how those strategies may suppress earnings that would be available to them. They will also look for ways in which economies of scale or redundancies may reap savings for them going forward.
You should do that too, in anticipation of their efforts. Owner-related expenses, surplus or deficit staffing that was adjusted, extraordinary write-downs, debts, reserves, discontinued business lines, debt and debt service, and real estate are all areas where more profits for your buyer may be hiding in your statements, so drill down and find them.
In fact, every line on your Income Statement is likely to be impacted in a sale to a title insurance underwriter, so think through your statements in terms of the acquired entity, not the current entity. Remember that the buyer that can leverage its resources best will likely pay the most. And on a final note, make sure your chart of accounts will support the analysis required.
Also remember that Pareto’s law has a corollary here: 80 percent of your value is in future business and 20 percent in book value. In truth, for most title agents your value is skewed even more toward the future. For any potential purchaser, return on investment is the key. But when looking at the post-acquisition period, buyers will question the adequacy of the present organization in terms of the size and structure needed to meet future goals.
So if you’ve run a too lean and too mean shop for all these years, don’t expect to dazzle your buyers. They will more likely discount your value for the systemic weaknesses that they will be forced to address. One of the reasons your buyer is buying is because he believes he can take your company’s performance up a notch. He can bridge a notch, but he doesn’t want to risk leaping a chasm.
WHO IS THE BEST BUYER?
So who’s the best buyer for you? The correct answer is more than one, of course. But publicly traded companies are the premium buyers. They generally have available funding in the form of stock, they usually have some experience in buying companies, they’re likely to seek a strategic fit, and they always have the need to grow.
For most agents the public companies of choice as buyers are publicly traded title insurance companies, and each of them has the qualities mentioned. Those whom you don’t represent as an agent may have an additional incentive in the form of new money, provided that your cultures don’t clash. (And by now you have surely figured out that who you spend your days with is always more important than money.)
To determine which ones might be in the auction to be your best buyer, consider what new resources and dedication each could bring to your efforts to grow. Do a competitive analysis and demographic analysis of your market, to provide a baseline on each potential buyer. Consider what internal factors will enhance your value for each company: facilities, people, managers, and market niche. Forecast your profitability for at least three years forward for your leading candidates.
BE ALL YOU CAN BE
Your value is wrapped up in what you can be, not what you are. Don’t forget that there can be compelling reasons for buyers to be interested in you that can overcome market-cycle issues. These include the ability to achieve growth more rapidly than by internal effort, avoid the risks of internal start-ups or expansions, gain meaningful market share, either by volume or location, acquire outstanding management or technical personnel, and open markets.
Some of the best transactions were driven by these elements, and they were initiated by the seller, not the buyer. If you position your company for sale as an improvement exercise, you may be surprised to discover that the next best strategic step for you is to get up under the wing of a larger bird so that you can soar to new heights. Being able to express your future in terms of potential buyers will help clarify that path and lead to your obtaining a fair value for your company.
The sad truth of many acquisitions is that they were driven by the number one reason for acquisition — according to the mergers and acquisition world — the buyer took advantage of his awareness that the seller’s company was undervalued.
Take a closer look at who you are, think in terms of who you can be, document both, and find the buyer who agrees. That’s how everybody wins and stays happy with the sale. And if you decide not to sell, you will still be ready for the alluring gaze of lady luck, should she be in your town one day.
|Barry F. Flavin is the Sr. VP & southeast regional manager of The Talon Group, Clearwater, FL, a division of First American Title Insurance Company. This article is an excerpt from his presentation at ALTA®’s 2006 Tech Forum. Barry can be reached at firstname.lastname@example.org.|