Given the state of the market over the last year, some have commented that the merger and acquisition market has gone quiet and that it is nearly impossible to get large deals done. We were honored to represent the owners of DPP in Pasadena, Calif., and Realty Austin in Austin/San Antonio, in their transactions with Compass over the past few weeks. Obviously, with these two announcements, it is clear that some great combinations can still happen.
In both cases, our clients and Compass had to design new ways to structure the transaction to get a favorable outcome for all parties. Without revealing any confidential details, for example, Compass is using mostly its own equity rather than cash to deliver value to the sellers. While earn-out terms continue to be mostly based on some metric of future performance, in both cases, there were brand-new features that granted important incentives for our clients to stay engaged for several years, if not longer.
Certainly, the expectations of brokerage firms did not change in terms of the multiple of EBITDA upon which valuations are based. The reality is that in all the deals we have worked on since July 2022, EBITDA in absolute terms is not what it was in calendar years 2020 and 2021. In each case, the sellers have a real possibility of increasing their ultimate purchase price returns dependent on the future performance of Compass’s equity value and their own performance under the earn outs.
A major point to make here is that so long as both parties are clear about their goals in trying to create a successful merger of interests, then the possibility remains for a great outcome. While it is true that overall valuations are down from where they were in 2020-2021, this is mostly due to the decline of profitability in brokerage and related services. Concerning future earn-out returns, it is an opportune time to structure deals as the next two to four years are likely to be better than the last 12 months. That makes the opportunity to receive most or all of the earn out higher than when selling into a market getting ready to decline further.
While these two transactions were among the largest we worked on this year, most of our work is between local firms combining their operations. This remains the most active part of the market. For medium- to large-sized brokerage firms, this is a great time to reach out to determine which other firms in their markets would be open to a combination of some form.
Steve Murray is a partner with RTC Consulting and a senior advisor to HousingWire.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
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Steve Murray at [email protected]
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Tracey Velt at [email protected]