For the past two years, mergers and acquisitions in title & escrow made headlines on a near monthly basis. Now, as market activity slows, the M&A landscape is changing.
At Qualia’s 2022 Future of Real Estate Summit (FORES), M&A experts sat down with HW Media Editor in Chief, Sarah Wheeler, to discuss M&A trends on the horizon. Aaron Kanter, Chief Legal Officer at Acrisure Real Estate Services, and Tony McGill, Head of Investment Banking at Zelman and Associates, discussed what businesses should consider on both the buying and selling side of the equation.
M&A activity was dominant for the last two years
For the past 2 years, M&A activity in the title industry made headlines on a near weekly basis. McGill boiled this activity down to 3 driving factors.
- On the demand side, the operating environment has been “as good as ever” for title companies. “Almost every metric—financial, operational—is as good as its ever been for most companies, maybe all,” McGill said. Kanter added that for acquirers, there is a lot of value in size. “The multiple that a larger company can generate versus an individual agency is significant,” he said.
- Also on the demand side, the trend towards “all-in-one” real estate offerings is pushing companies to consider title acquisition. “We have a theme that bigger is better. The more you can provide with less hassle, the better off you are positioned to prosper long term,” McGill said. As more businesses look to bring all services under one roof, there’s been greater activity towards acquiring title & escrow operations.
- On the seller side, the pressure around technology advancement and staying protected as malware and wire fraud increases makes the operating risks of running a title business much higher. Many title business owners are therefore considering a sale. On top of the fear factor, a portion of title business owners are nearing retirement and ready to sell off the business.
The variety of businesses considering title acquisition has reflected the power of the title market over the past two years. Kanter broke down a few different categories of buyers that were all active in acquiring title companies including title insurance underwriters, private equity, real estate brokerages, and even family businesses.
M&A is expected to slow—meanwhile, title companies are finally ready to sell
McGill noted that the purchase market is expected to remain relatively flat over the next few years while refis continue to dwindle amid rising interest rates. An overall decline in activity means M&A activity will also slow. “It got a little frothy and now we’re at a place where we have more interest from sellers than we did a year ago,” Kanter said. “A lot of title agencies had their best years and had zero interest in selling. We’re now seeing a lot more interest from title agencies wanting to sell but the margins are now more compressed.”
In light of this new environment, title companies looking to sell need to be more strategic than they were a year ago. Kanter noted that businesses must think about how they “fit a particular need [for an acquirer] rather than just if they run a great business.”
Title companies looking to sell must think differently to position themselves well for a sale
While activity and record profitability drove sales for the past two years, acquirers will now be more discerning as volume and activity slows down. Title companies positioning themselves for a sale must think differently about the acquirer’s motivations as well as how their title company can perform outside of a refinance or purchase boom.
Kanter noted that when his team considers acquiring an agency, the first thing the team looks into is the seller’s motivations for leaving the business. It’s important that the seller still has a strong management team behind them to support the business and help it grow beyond the owner’s departure. This is especially important in situations where an acquirer is purchasing a title company in order to expand to new regions, as the management team often holds the strong local relationships necessary for the title business to thrive.
Additionally, the selling company’s books should be strong. “We want to see three to five years of financials in a fashion we can make sense of,” Kanter said. Title companies that proactively provide these numbers as well as other information such as underwriter agreements and audits will be better positioned to sell. Effective and consolidated reporting will be necessary for title companies to present a compelling pitch.
Businesses looking to acquire title must increasingly consider their tech infrastructure
On the buying side of the M&A equation, it’s increasingly important for businesses to consider the role of technology to effectively integrate newly acquired businesses.
Kanter noted that connectivity is increasingly important for businesses to create a seamless process for the homebuyer. The ability for the acquired title businesses to integrate effectively with the rest of the business (in the case of all-in-one shops) or partner businesses will be paramount in an environment where consumer expectations have reached new heights.
Additionally, acquiring businesses should be exploring technology as a means to avoid “getting caught in the cycle of waves.” Kanter noted that title agencies that leverage technology to move from fixed to variable cost can maintain greater stability with their staff amid up and down swings in the market. This will enable title businesses to keep key personnel on staff for the long term and avoid difficult layoffs down the line.
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