Time To Quit? Should letting agents prepare an exit strategy?

Uncertainty over the coming recession, wholesale reforms of the rental sector, higher interest rates and National Insurance payments are all reasons why letting agents may want to consider an exit strategy, an expert claims.

Lucy Noonan - who runs a sale and acquisition service called Atomic Consultancy - says that while agency staffing costs are at an all-time high and recruitment is difficult, the actual value of property businesses has risen in general and may have already peaked.  

Noonan claims that during the last five years, standard multiples for lettings and estate agencies have been 1.5x managed incomes and in some parts of the country, businesses are now selling for 2x their managed income – a significant premium. 

"Our advice to all lettings agency businesses is that they should have no more than 40 per cent of their overall costs in staff. In some instances, we are seeing this peak at up to 80 per cent, which makes businesses much less profitable. An increase in NI will further impact this. A huge benefit from merger and acquisition activity is the ability to pool and combine resources, allowing businesses to benefit from synergies which will positively impact their staffing costs and, in turn, their bottom line" she says.

“In times of uncertainty, it's normal for businesses to hunker down and focus on stability rather than growth. This can often have a knock-on effect on M&A activity, as borrowing becomes harder and demand for businesses falls, making them less valuable. However, despite the challenges faced by the industry, there are still plenty of opportunities for those looking to sell their business. In fact, now could be the perfect time to maximise the value of your organisation” she insists.

Noonan says demand for businesses is high "but this could change if buyers struggle to borrow, which will in turn affect market value. We are seeing a real trend forming here, with businesses such as Preston and Baker and Smart Homes, selling their lettings portfolio whilst the value is high, and retaining their estate agency portfolio. This is a clever decision that mitigates risk, whilst maximising value in these uncertain times."

She claims there are four reasons for agencies to at least consider a possible sale.

1. There is still high demand from buyers - Despite the current challenges faced by the industry, the demand from buyers is still running high, for businesses in the lettings and estate agency sector. This industry is ripe for consolidation, with many small businesses looking for scale and the efficiencies that come with it. There are also a number of private equity firms that are looking for opportunities in this sector;

2. You can take advantage of favourable market conditions - The current market conditions are actually very favourable for sellers, with businesses in the lettings and estate agency sector fetching high multiples. This is because there is a lot of money chasing a limited number of quality businesses, which has forced the increase of prices.

3. You can negotiate a good price - With high demand from buyers and favourable market conditions, sellers are in an incredibly strong position to negotiate a good price for your business. This means that you can maximise the value of your business while securing a good return on investment in the process.

4. Uncertainty over the future - With so much uncertainty for the future, estate agency businesses could be severely impacted due to the nature of their business and a lack of guaranteed income. Managed lettings, however, are seen as more stable, with longer-term contracts in place, making lettings agencies higher in valuable at present.