For the first time in nearly four years the market for the sale and purchase of brokerage firms has started to cool off.
by Steve Murray, publisher
Major purchasers have started to back off on the prices they are willing to pay; the terms have tilted in favor of less cash and more years in earn-outs, and most firms of all sizes are far more particular about what firms in which markets they are willing to consider.
Why the Slowdown?
Some of this is due to, of course, the slowdown in residential housing sales. While many allocate blame for the slowdown on the national elections (as does the NFL for its decline in TV viewership, for instance), it doesn’t appear that this alone is the causal factor. The imbalance of supply in the entry-level portion of the market versus the demand and the supply/demand imbalance in the upper end may be far more important. Another big issue may be that despite affordability factors to the contrary, price increases have outrun income increases for several years now. The slowdown may be a result of that.
A Short-term Adjustment
Valuations, therefore, are likely to be lower than they have in the past three years and the resulting prices and terms are likely to be more favorable to the purchasers. This is not a huge change and is more likely a short-term adjustment rather than a long-term trend. The underlying desire of large regional and national firms to grow, and the challenges of doing so in an organic manner remain. So, we expect that while there may be a tightening in the market short term, it doesn’t mean that there won’t be deals done. It does mean that purchasers are pickier and more careful about which deals get done.
As we have said before, we also expect that successful system–driven teams will become more attractive. They offer a means of adding measurable business volume without the challenge of additional fixed overhead and other impediments in normal brokerage transactions. Often the purchaser is in a position to scale the system and incorporate the business system within the firm without too much disruption.
This article originally appeared in the November 2016 issue of the REAL Trends Newsletter and is reprinted with permission of REAL Trends Inc. Copyright 2016