What to Look Out For When Acquiring a Business

An estate and letting agency comes to market. 

The turnover looks healthy. Its EBITDA looks attractive, too. The balance sheet appears sound. There is a decent managed portfolio, and the business in question has a recognisable local name. 

On paper, the acquisition seems to make sense. 

So far, so good. 

But headline numbers only tell you so much. 

A business can look excellent in the accounts and still contain risks that only become obvious once you begin to look beneath them. Equally, something that appears relatively ordinary at first glance may have value hidden in its people, its client relationships, its market position or in opportunities it has never taken advantage of. 

That is why buying an estate or letting agency is about more than turnover and profit. 

You are buying the quality, durability and transferability of those earnings. 

And that is where proper due diligence begins. 

 

Start with the numbers – but don’t stop there 

There is no getting away from the financials. 

Any buyer needs to understand turnover, profitability, debt, cashflow and the balance sheet. EBITDA – earnings before interest, tax, depreciation and amortisation – is commonly used as one measure of the underlying operating performance of a business and will often play a significant role in valuation discussions. 

It matters. 

But EBITDA is not a quality certificate. 

Two businesses producing exactly the same EBITDA can represent very different propositions. 

One may have hundreds of recurring landlord relationships, a strong management team and revenue spread relatively evenly across its client base. 

Another may rely heavily on one or two major clients, one rainmaker of a director and perhaps even a handful of good people who might feel that this is a moment to take their careers elsewhere – maybe even as competitors; maybe even taking a few key clients with them. 

The number on the page may be the same. The risk attached to it is not. 

The real question for an acquirer therefore cannot be simply, “How much profit does this business make?” 

It has to be, “How much of what this business makes today is likely to remain after I buy it?” 

 

How good is the revenue? 

Recurring income is one of the obvious attractions of a lettings business, but even here it is worth looking deeper. 

One key question to ask – as alluded to already – is how concentrated the client base is. 

If one large portfolio landlord accounts for 20% of the management income, that has implications. If that landlord has been loyal to the current owner personally rather than to the company, there is a serious risk assessment to be made. What do the signed Terms of Business say regarding termination of management? Indeed, are there even signed terms, or is everything agreed on little more than a handshake?  

The same applies across sales, new homes, financial services and other income streams. What do the Terms of Business hold any client to? With regards to New Homes in particular, what specific agreements are there? If there have been land sales made within the last three years, is there an agreement in place with those buyers that assure the agent’s position as sole selling agent? 

A business with healthy revenue can still be vulnerable if too much of it depends on too few relationships – and even more so if the terms that the agent has worked with are less than robust. 

Buyers also need to get a grip on whether revenue has been generated sustainably. 

Has the company genuinely increased market share, with fees over time increasing as property values increased, or have fees been discounted to generate listings? And on that note, when it comes to the listings that sit on the book, are these priced reasonably, or were values inflated to encourage those listings and puff their chest out? 

Has an unusually strong sales year flattered the figures? A new build development swelling transaction numbers and fees, for example – and once again, who has the relationship with the developers? If the business owner, will new owners continue to receive business from this developer on further sites? 

Are management fees broadly in line with the market, or is there an underlying risk of churn if those fees are increased later? 

Due diligence is not simply about proving that income exists. 

It is about understanding how resilient that income is. 

 

What exactly are you buying? 

This might look like an obvious question, but that doesn’t make it a simple one. 

A purchaser might be acquiring a company that will continue to trade under its existing name. They might be buying a managed lettings book to absorb into an existing operation, rebranding as they go. They may want to extend a branch network, buy the experience of an incumbent team, take over a database that they find more valuable than the pipeline… or maybe it is as simple as geographic coverage and increased market share. 

Those distinctions are relevant because they change the value of component parts of the business – or, more to the point, the perceived value of those things to different buyers.  

A highly regarded local brand can be a significant asset to some buyers – but if the plan is to rebrand the business immediately, its value is very different. 

Likewise, a physical branch may appear to provide a strong presence in a town, but if your strategy is to centralise operations and close the office, the property itself could become a liability in practice, not just on a balance sheet. 

This is where it can help to think in broad SWOT terms, without necessarily reducing an acquisition to a four-box exercise. 

What are the real strengths of the business? Where is it vulnerable? What opportunities could a buyer unlock? What could threaten the value after completion? 

As a buyer, this is an exercise that is well worth undertaking. 

 

Does the business still work without the owner? 

This is one of the most important questions in agency M&A. 

Some owners build businesses that work without them. 

Others, to all intents and purposes, build themselves a job – or, in other words, a business that they work in and which remains, at the point of sale, almost entirely dependent on them. 

There is clearly an obvious and significant difference. 

If it is the owner who wins most of the valuations, knows every major landlord personally, deals with every complaint, manages the staff, is responsible for maintaining supplier relationships and remains the public face of the company, then the buyer needs to understand what happens when that person leaves. 

A business showing strong profits today can become much less attractive if its goodwill walks out of the door with the seller. 

That means understanding how decisions are made, who has those key relationships, and who staff turn to when something goes wrong. 

It is also important to establish whether the systems and processes are robust enough for the business to operate without the current owner at the centre of everything. 

In simple terms, are you buying a functioning business… or do you find that you have only temporarily rented the seller’s hard-won relationships? 

 

People and culture can affect value 

Culture is sometimes treated as one of the softer parts of due diligence. 

But it really shouldn’t be. 

Two agencies, one buying and absorbing the other, might look perfectly compatible on a spreadsheet and yet be entirely incompatible when brought together.  

One business may be highly entrepreneurial and informal, while the other is process-led and tightly managed. One may grant near-total autonomy to its branch managers, while another centralises decisions. Working practices, incentives, bonuses and commissions, leadership styles… all these things can differ, agency to agency. 

When an acquisition involves absorbing one business into another existing operation, these considerations become all the more important. 

Because if key members of staff leave after completion, due to a cultural clash, some of the goodwill you have paid for may leave with them – and we have already outlined what that might mean and what the risk is, especially if losing these key people damages or eliminates equally key landlord, vendor or developer relationships. 

An acquisition plan therefore needs to consider not just headcount, salaries and contracts, but who really matters to the performance of the business – or, more to the point, how likely they are to remain after a change of ownership. 

 

Systems, processes and historic liabilities 

A buyer does not only acquire the good parts of a business. 

Historic problems can be transferred too. 

For an estate or letting agency, that means understanding the strength of its compliance and operational processes. 

Is client money properly protected and reconciled? 

Are anti-money laundering processes robust? 

Have deposits been handled correctly? 

Is the company compliant with its redress obligations and data protection responsibilities? 

Are there unresolved complaints or historic issues that could resurface? 

The important point is not merely whether a policy document exists. It is whether the business actually follows its processes as documented. 

A beautifully written compliance manual might well sit untouched in a shared drive – but that is very different from a business that can show audit trails, consistent management information and processes that are demonstrably followed by staff. 

The same applies to property management systems. 

What does the existing platform look like? How clean is the information in it? Can it integrate with or migrate into the buyer’s systems? How much work would be involved in moving thousands of tenancies, property records, landlord and applicant details? 

These questions may sound tediously operational, but they have a direct impact on the cost and risk of an acquisition. 

 

A database is as valuable as the data inside it 

“50,000 contacts in the database” sounds impressive. 

But 50,000 database records are not necessarily 50,000 relationships. 

If a large proportion are duplicates, incomplete records, dead email addresses, applicants from many years ago or entries containing placeholder telephone numbers (amazing how many people seem to own 07000000000), the headline size becomes considerably less meaningful. 

Likewise, when we carry out audits on clients of ours, it is extraordinary how many applicants have a budget set between £0 and £9,999,999. 

A buyer needs to understand not just how much data there is, but the quality of it, the permissions attached to it and whether it can be migrated into the systems they intend to use. 

In practice, database quality is one of those areas where the reality can be very different from the headline figure. 

 

The pros and cons of premises 

Where branches are involved, any leases need thorough scrutiny. 

How long remains on each lease? 

Are there break clauses? 

What are the rent review provisions? 

Is the lease full repairing and insuring? Is there an original schedule of condition? Have repair obligations been met?  

It is a question a buyer needs to contemplate. If the premises is 8 years into a 10 year lease, for example, should the acquiring business be liable to 100% of the repair costs, or only 20%?  

This is all detail that needs to be thought about in order to be negotiated. 

A prime High Street branch may look like an asset until you discover there are eight years left on an FRI lease and a significant repairing liability sitting behind it. 

The point is not that every branch or lease is a problem. 

It is that the financial accounts rarely tell the entire story. 

 

Where is the opportunity? 

Due diligence is not simply about identifying risk.  

It should also uncover value. 

A buyer should be thinking about what the business could become in their hands.  

Perhaps it has a very strong sales operation but little mortgage penetration, as one example.  

Perhaps there is a sizeable managed portfolio but minimal ancillary income. 

Perhaps there is a particularly large Let Only client base – often overlooked, but what an opportunity for a buyer to be able to convert to a fully managed tenancy, particularly since the Renters’ Rights Act has begun to drive such landlords towards professional management. 

Perhaps the business dominates one town but has never expanded into an obvious neighbouring market. 

Perhaps it has fantastic landlord relationships but is let down by weak systems, poor marketing or a lack of focused business development. 

The strategic value of an acquisition may therefore be greater than the current financial performance suggests. 

A sensible buyer is not just asking, “What am I buying today?” 

They are asking, “What does this become when it is part of our business?” 

 

Why is the owner actually selling? 

There are plenty of perfectly legitimate reasons to sell an estate and letting agency. 

Retirement. Succession. Diversification. Burnout. Lifestyle change. A desire to release capital. Sometimes an owner has simply reached the point where they want to realise the value they have spent years building. 

But a buyer should still not only ask the question, but also listen carefully to the answer. 

Why now? 

What has changed? 

What does the seller believe happens next in the local market or within the business? 

Are there challenges on the horizon that are not obvious from the financial statements? 

The seller has an advantage the buyer might not. 

They already know what it is like to own the business. The buyer’s job is to get into that same mindset. 

 

The numbers are only the beginning 

Acquisitions inevitably begin with a look at the financials. 

The accounts tell you what the business has done. EBITDA helps you understand its operating performance. The balance sheet shows you what sits within the company at a particular point in time – its assets and its liabilities. 

All of that matters. 

But proper due diligence goes further. 

It asks whether the earnings are sustainable. Whether the clients will remain. Whether the key people will stay. Whether the systems stand up to scrutiny. Whether there are liabilities hiding behind the headline performance and whether the opportunity genuinely justifies the price. 

In estate and letting agency M&A, the headline numbers may be what hook a potential buyer and get them interested. 

Nevertheless, it is everything underneath, in the background and round the next corner that determines what they are really buying.