The year 2016 was an eventful one for home building.
Positioning Your Company for a Fast Start
In the April 2006 GIANTS, we anticipated a period of uncertainty that would materially slow the mergers and acquisitions market. While several experts are now describing this period in detail, this article considers the period ahead, when we believe a tipping point will be achieved and M&A activity will resume.
In the April 2006 GIANTS, we anticipated a period of uncertainty that would materially slow the mergers and acquisitions market. While several experts are now describing this period in detail, this article considers the period ahead, when we believe a tipping point will be achieved and M&A activity will resume. The next period will likely be a slower-paced market, but buyers will react positively to the stability. Uncertainty and the desire to understand the changes are what slow the M&A market.
The usual buyers of home-building companies are telling us they still have considerable interest in M&A as a growth vehicle, and the question is timing: not if but when. In fact, behind the scenes, we see a loading at the starting gates now, as several companies interested in transactions are using this quiet time to position themselves for a fast start when the gates reopen. We are advising our clients that the appetite for acquisitions will likely be fierce, as buyers catch up on their annual growth plans. The sellers who have used this time to prepare themselves for presentation will be ready to meet this hunger.
Consider where your company could be in five years in terms of closings, revenues, profits and new markets. Spend time documenting where you have been, what you have learned, where your strengths and weaknesses lie, and where you are going. Assess your competition's strengths and weaknesses, too. Develop your story in narrative and also in financial projections that show you — and ultimately someone else — a road map for achieving your five-year growth plan. A thoughtful plan will give you important feedback on current and future staffing needs, required land and lot pipeline, and capital requirements. It is also a key marketing document when considering a sale of your company.
Even if you aren't thinking of selling, you can benefit from knowing how you compare to other similar home-building companies in profitability, delivery times, warranty costs, etc. Many senior managers we meet are not sure how their companies rate competitively. Through participation in Builder 20 groups, conversations with builders in other markets and working with industry consultants, builders can learn what can be achieved. The best operators we meet are great executors, doing everything a little better and earning more than 10 percent pre-tax.
Ensure your house cost budgets (base houses and options) are updated and accurate so that historical and projected house costs are credible. Historical statements must be accurate, and you should have budgets for the current year at a minimum. Confirm the files detailing your land or lot purchases are organized and complete, and make sure all new land contracts are assignable. If you are involved in partnerships, review the documents regarding buy-out provisions. Verify you have written agreements with your subs and suppliers. Buyers gain confidence in accurate and organized documentation, and both sides will benefit from a shorter due diligence period.
|Michael P. Kahn and Associates is a financial advisory firm specializing in housing industry mergers, acquisitions and capital formation.|