There’s no dressing it up – recent economic events have presented significant challenges to the real estate industry. The total turnover of properties has dropped in practically every marketplace around the country, by more than 50% in some areas.
Tony Warland has had 20 years experience in the real estate industry, the last ten in various corporate franchisor roles across Australia and New Zealand. In that time, he has been involved in numerous business start-ups, acquisitions and mergers. We talked to him about a recent upward trend – businesses joining together with other businesses creating bigger, stronger units more able to survive and thrive in the current market conditions.
Market conditions have continued to change rapidly. The attractiveness of falling interest rates was contradicted by tighter lending criteria from the banks. Stimulus provided by the Government’s First Home Owner’s Grant created a sudden spate of activity in the lower price segment. The threat of rising unemployment became a reality. Australia is experiencing the effects of a global recession that shows no sign of abating any time soon.
That’s not to say everyone is doing it tough though. Some business owners are thriving, taking the opportunities offered by the current downturn to grab market share. Some are managing that growth through organic means, but increasing numbers of principals are taking a different route. They’re joining forces with other local principals to create stronger, merged business units.
Although some may consider a merger to be some sort of concession or an admission of failure, the reality can be quite the contrary. Truly successful business people make decisions based not on pride, but based purely on the facts of the conditions they face. In a market such as the one we are currently facing, a merger may well be the smartest possible move to ensure the viability of some businesses, regardless of size or quality. There need not even necessarily be any exchange of money – the smaller business owner may just take a smaller percentage of the overall business.
With such a significant drop in transactions in the local trade area, even businesses that are maintaining their market share or actually growing it are still likely to be suffering a drop in overall turnover. Unfortunately, fixed costs like rent aren’t based on turnover, so a significant drop in sales will usually equate to a drop in profit. Sometimes that drop can threaten the liquidity of the business. At the very least, it restricts the principal’s resources and hence his ability to grow market share to counter the effects of the drop in transactions.
When two or more businesses merge, there can be multiple benefits for all parties.
One immediate and obvious benefit is increased market share and increased market presence in the form of advertising and signboards. A bigger presence gives the average consumer more confidence, particularly critical for listings and sales in a challenging market. Ideally the growth in turnover after a merger should be more than the sum of the parts – the partners will be aiming for a premium in growth through the opportunity for momentum gained by becoming a bigger business.
On the flip side, expenses can be rationalised. Economies of scale can be realised in terms of general overheads including but not limited to fixed costs like rent and equipment plus other variable costs like staffing, marketing and consumables. For example, when two or more businesses are merged there is often an opportunity to reduce the total number of support staff and save directly on wages.
Not only is the new business unit better able to face the current market conditions, but it also gains a good position to weather any future weakening in the overall environment. One principal who recently joined forces with two other independent operators in his area called it “storm guarding”.
There are some key things to consider if a merger seems like it could be a good way to go for your business. Most importantly, the question of “who” has to be raised. There is clearly no benefit to be gained by merging with a sub-standard business or partnering with a difficult personality. In fact, a merger in those circumstances could prove to be catastrophic.
Make a wish-list of your ideal partner and what they might bring to a merger. Think also about what aspects of your business might appeal to a prospective partner. Consider the type and condition of your office equipment and what you might need in the future. Evaluate your staffing levels and structure and ways in which performance could be improved. Pay particular attention to your property management department and think about ways in which it could be more effectively run if it were a larger operation.
Once you’re clear on what you have and what you want, look around at who is in your marketplace and start getting to know them. Like any marriage, having a clear understanding of what you really want and what you are actually getting before signing on the dotted line can avoid heartache down the track.
If you find a suitable partner or partners, there are a whole lot of things you’ll need expert advice on including the legal and financial terms of the agreement. But the critical key to success is to get the right fit between the businesses and the owners, in every possible way.
The old adage of “two heads are better than one” may never have been truer than in the current environment, and sometimes even three or four could be the ideal combination.
