Contributed to Growth & Scale Report by Jonathan Holfinger, Esq., OLTP, NTP Northwest Title Family of Companies & Northwest Law
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How does one value a title agency when the owner is trying to sell it? That’s actually not a simple question. I’ve been involved in a merger, several asset purchases, and two majority interest buyouts. In my experience, the value of the assets of the agency, or the agency itself, was not clear and was a different evaluation in each situation. In my opinion, it isn’t (and shouldn’t be) formulaic. The value of a title agency varies on a lot of different factors that are not as easy to measure as one would prefer.
The most common question I hear about valuing a local title agency is, ‘what multiple do you use as a starting point’? My answer to that is, ‘Starting at a multiple and working up or down for there is not very relevant for small title agencies.’ That would only be relevant if there was some type of generally agreed upon value for an agency, as though all agencies have the same value propositions. Rather, the valuation of a local agency is so intrinsic to the relationship between the agency’s owner(s), customers, and its employees, combined with the nature of the marketplace it competes in. And that varies widely.
Each “acquisition” is going to be dependent on whether the agency has an identity and brand loyalty that is not tied to the owner or any key employee. In other words, the relationships that the agency’s staff & owner have to their customers is the value. For example, if you acquire the agency and then a key employee leaves - whether because they don’t like the idea or new ownership, or because competitors jump in an offer the employee a lot more money to defect - you just lost a lot of future revenue out the door. The customers will likely value their relationship with the employee that left over the relationship to the name/brand of the agency.
In our title agency, we preach “gluing” the customer to the company. We talk about having at least 3 people that have a relationship with the customer. For example, the Branch Manager, the Closing Services Officer, and a Sales Representative. If all 3 of those people have a relationship with the customer at some level (e.g., cell phone text level of communication), then when there is a loss of one of those 3 people, there are still 2 that might be able to maintain the relationship and keep the customer’s loyalty.
I have yet to identify a way to measure how “glued” a customer is to a title agency that I’m in talks with to acquire. But yet that’s ultimately what I want to know, because that’s going to tell me if the future revenue will be at all reflective of past performance. Another example is that if the customers find out the owner sold the agency, even if that owner is going to work another 2 years, the gossip of retirement will cause some customers to defect and try other title agencies. Lenders and realtors are constantly getting called on by title sales representatives, so to presume that they won’t listen to those opportunities and give them a try when a change happens, is naïve.
Given that traditional business valuation models don’t work for local title agencies, what can be done to determine the value?
From my perspective as a buyer, I would say that the objective is to learn as much as possible about the employees, the customers, and the relative involvement they have with those referral partners, and whether they would be a culture and technology fit for our company. I would also want to know what size market the agency is in, for upside evaluation, and for whether there is a competent competition that is a relevant threat.
The more good options customers have, the more likely it is they will stray when they learn that an ownership transition occurred. Further, knowing whether there is business generated from the general public based on location (say across the street from the courthouse in a smaller county), website, history, or community connections, etc., are all relevant to determining future revenue. And really that’s the goal.
If you’re going to consider paying money to someone for ownership in/of their agency or their assets & employees, you’re making a gamble on its ability to withstand the change without losing employees or customers. The past performance doesn’t actually indicate the agency’s value for purchase, but rather the historical value of those existing relationships, which are subject to change and which the owner already capitalized on. What will happen going forward is more an evaluation of the agency’s ability to withstand change.
So, put aside the spreadsheets for a moment and look at the heart of the agency, whether it is your own or one you are considering. Is its value truly embedded within the company's culture, systems, and broad client allegiance, or is it precariously balanced on the personal goodwill of a few key figures? The most critical calculation you can make involves no numbers at all; it is an honest appraisal of the agency's fundamental resilience and its capacity to not only weather change but to emerge stronger, continually earning its place in the market. What are you building today that will truly withstand the tests of tomorrow?
About Jonathan Holfinger: Jonathan is the principal owner of Northwest Title Family of Companies and Northwest Law, headquartered in Columbus, Ohio. Northwest handles all types of commercial and residential real estate transactions through its 20 locations in Ohio and Northern Kentucky, and performs traditional local title services in counties with offices across the street from the Courthouse, as well as through regional joint ventures with lenders and realty brokerages. Jonathan is a Past-President of the Ohio Land Title Association, and is one of two individuals who have been awarded both the Ohio Land Title Professional and ALTA's National Title Professional designation.