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Webinar Recap: Understanding the Housing & Mortgage M&A Market

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2017 has seen a slew of mergers and acquisitions in the mortgage industry. In the last few months alone, we’ve seen Stearns Lending acquire Primary Capital Mortgage’s production channels and New York Community Bank selling off its mortgage division, showing that this trend shows no signs of stopping.

There are many complex issues when looking at M&A in the mortgage industry, both internally and externally, that companies must think about. So what are these issues? We brought in industry experts John Guzzo, managing director of industry M&A firm Berkery Noyes and Richard Bitner, consultant and former President of HousingWire, to discuss their insight and experience in the M&A market. Their webinar, “Understanding the Housing & Mortgage M&A Market,” was unique because you not only got to hear from a company specializing in M&As in the mortgage industry, but a satisfied customer.

So what should you expect… when expecting a merger? Here’s what John and Richard had to say.

Industry Insights

First some background – we are witnessing several strong trends in the mortgage & real estate markets. Growing industry trends include:

  • Point of Sale (POS) solutions – CRMs and marketing systems
  • Compliance and Quality Control – diligence firms and niche AMCs
  • Investment & Innovation of the traditional LOS – Blend Labs and Optimal Blue
  • Single-Vendor/building-out product suites – interest in the title sector
  • Overseas and/or outside of industry interest

Examples of these are CRM company Velocify being acquired by Ellie Mae, niche AMC reQuire acquires Service 1st Valuation and LOS GTCR acquiring Optimal Blue, and rapidly building-out, all within the last 2 years.

So let’s say you want to buy a company or be bought out, what do you do?

Preparing for the sale

Laying the groundwork for the successful sale of a business represents one of the most significant challenges in the life cycle of any company and, often simultaneously, for its owners. There are generally two primary objectives when selling a business – maximizing shareholder value and finding a good home for the employees and business going forward. In the mortgage market, we find these two primary objectives are often aligned. The acquirers with the strongest understanding and vision for the company, are also often the ones that maximize value. In this sector, unlike heavy capital intensive industries, the most valuable assets are often the people, reputation, customer relationships and in some cases the intellectual property. Most acquirers do not want to “tip the apple cart” when acquiring a company, and will look to make sure the staff is happy and incentivized to continue growing the business.

Here’s what you should know:

  • Staying focused on the business’ short and long-term goals
  • Focusing on current and new customer sales – cannot emphasize enough!
  • Get ahead of potential acquirers, by analyzing the historic financials to uncover growth and margin trends, and EBITDA adjustments
  • Asking for help internally, by keeping the process confined to a small team of senior executives
  • Designating one main point-person to liaison with advisors and acquirers
  • While in the process, create positive momentum
  • Keeping options open, from a buyer and structure perspective

What’s the value of a business?

The top five value-drivers include:

  • Revenue growth for the last 2-3 consecutive years
  • Operational and technological scalability
  • Minimal concentration of customer revenue
  • Motivated and experienced senior team (post deal)
  • EBITDA margins

EBITDA margins are last because, while they it is important for the price, it’s not particularly relevant for value since the value will change once the business is acquired.

The “type of revenue” is also important:

  • Project-based / episodic – least valuable since it’s hard to measure in the future
  • Transactional (preferably with minimums)
  • License / Maintenance (generally, 80% / 20%)
  • Subscription (monthly, annual, multi-year)

What is the sales process like?

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Prior to reaching out to the broader market:

  • Leverage extensive knowledge of the buyer universe to gauge interest from a more
    select group (no more than 4-7 parties, generally strategic buyers)
  • The objective is for one or more parties of the select group to move quickly towards an
    indication of interest and then LOI – at a Premium Value
  • If successful, the Fireside Chat may save significant time in the overall process (2 – 3
    months time savings on average) and also allow for a quieter process
  • There are several other variations to the standard process, as one size does not fit all.
  • For example, at times our clients receive unsolicited offers – and request assistance to
    keep the value and the process on track.

While this is a good summary of the presentation (if we do say so ourselves), we think the best way to learn about this topic is to listen to John Guzzo and Richard Bitner and their presentation yourselves. If you want to check out the entire presentation, click here, or if you want to skim through the slides, click here.

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