The finer points of buying a lettings business

Most Letting agents are finding it harder and harder to get new instructions. There are a limited number of new buy-to-let investors and existing landlords are often very loyal to their existing agent. You can write to them, cold call them, even offer to manage their property for nothing for an introductory period but most will stick with the agent that they know.

Because of this an increasing number of letting agents are increasing their market share by buying up their competitors. So what sort of businesses are available, how much do they cost and what are the returns

The businesses that come to the market are of all shapes and sizes. A lot of residential estate agents entered the lettings market in 2008 and many of them have found that it is not as easy to make money from lettings as they thought.

The typical cost of this type of small lettings book would be in the range of £50,000 - £200,000. A lot of these books have been poorly managed and there are often hidden compliance problems so you need to look very closely at the files before you proceed. It is also best to buy the assets of the business rather than the limited company as this means that most of the liabilities remain with the vendor.

A specialist letting agent will usually be able to offer a far better service than a sales agent who dabbles in lettings, so you may well keep the vast majority of the landlords. You should make an excellent profit margin on this marginal income so the payback time is likely to be around 2 years, a return on capital of 50%. Very few companies achieve this margin from their core business.

Buying a larger letting business is much more difficult and expensive. Once the price gets to around £250,000, most of the vendors will insist that you buy the limited company rather than the assets because it is more tax efficient for them. However, if you are buying the limited company you will inherit all its known and hidden liabilities so you need to conduct much more extensive due diligence. Consequently, the legal fees and accountancy fees will be much higher.

If you buy the business, the staff will have the right to be transferred with it on their existing employment terms and you may also be asked to take over the premises. The whole point of buying a business in your existing area is that you get the economies of scale so you need to calculate the rising costs of the combined business very carefully in order to ensure that you get an acceptable rate of return.

Finally, there is the option of buying a standalone business in a new geographic area. A lot of large lettings firms have done their maths and concluded that it is cheaper to buy an existing business than to cold start one from scratch. However, you need to be very sure that you have the management expertise and time to supervise another office, as well as the marketing and business expertise to improve its profitability to ensure that you get an adequate return.

In conclusion then, if you buy right you could get a return of capital of between 20% - 50%. But if you buy it wrong and buy a business without carrying out the proper due diligence the liabilities could ruin you.

*Adam Walker is a business transfer broker, management consultant and trainer and has specialised in the property sector or more than 25 years.