Consolidation fever

In turbulent times, some businesses do whatever they can do to stay afloat in the moment, while others do whatever they can to position themselves for success in the future.

The mortgage industry is undergoing a period of consolidation at the moment, and there are plenty of companies in one or both of those camps. Some smaller lenders can’t afford to do business given the compliance costs and razor thin margins, and other companies are looking for a way to round out their business model through acquisitions. Xinnix recently hosted a webinar “Transcend the Turbulence: The New Era of Change in the Mortgage Industry” in which Mitch Kider, chairman and managing partner of Weiner Brodsky Kider PC, discussed how originators and lenders should approach mergers and acquisitions, regardless of their particular side of the transaction.

Whether or not anyone thinks consolidation is a good thing or a bad thing for the industry, there are some things that both the buyer and the seller should acknowledge.

For buyers
The first thing that comes to mind might be the financial side of the deal, and that obviously plays into the deal. But the most important thing from a buyer’s perspective, Kider said, is the company culture.

“A buyer really wants to know that you have the same goals, are working off the same performance metrics, that they can sit down and have dinner with you, that they like you as well,” he said. “And remember, when your operation is being bought or you’re selling your assets and you’re moving into another operation, a buyer’s big fear is, what’s that’s going to do to everyone else? So culture is probably the number one concern.”

Another concern of the buyer is going to be the company’s organizational structure. If a buyer is buying an entire company, or even if they’re only buying some assets of a company, they’re looking for strong centralized leadership. Similar to culture, a company’s organizational structure is difficult and messy to change, and a mortgage company with lots of individual branches that operate fairly independently might be more difficult to unite and get on the same page.

“Buyers tend to frown upon companies like that because they need to maintain their own leadership, and they need to maintain their business in a concise, coherent manner on a going forward basis,” Kider said.

A buyer is also going to be watching out for any legacy liabilities that the seller may have, and ensuring that they do not cross over once the sale takes place.

Seller side
The most important thing during the course of the deal are the particulars of any non-disclosure and non-solicitation agreements, Kider said. Once negotiations move toward the LOI stage, things can take a life of their own, and the seller wants to make sure that everything remains business as usual.

“Word seems to seep out often, and a big fear of a seller is word seeps out too quickly and their branch managers or their employees say, ‘well, I don’t need them to find me a new home, I’m going to go find me a new home myself.’ So you need very tight non-disclosure and non-solicitation to make sure the company that you’re negotiating with is not going to solicit as well,” Kider said.

The earn-out calculation is going to be another important thing to the seller. After all, Kider said, in today’s marketplace, that’s all a seller might get. Once the company is sold, that’s where the seller’s decision-making powers end.

“Once he sells that company, he doesn’t control many decisions that are going to get made. He doesn’t necessarily control the charges, the overhead charges, and other charges that are going to be placed upon his unit in that company itself. And all of that is going to go to the earn-out calculation. And so that has to be a calculation that is looked at over and over again, and a seller has to get themselves comfortable with what that is.”

Growth, still concerns the seller after they sign on the dotted line. The seller wants to know if there’s room to grow, and how that growth is going to be credited and facilitated across state lines, especially if one of the parties already existed in that state. So where is growth happening physically, and then how can the company culture merge and grow together?

Sometimes, after all has been considered, it becomes clear that the deal just isn’t a good fit for the companies involved.

“We’ve done more [M&As] this year than I think all of last year as well . . . it’s increasing at quite a pace. There are a lot of good reasons for it, but I think a seller needs to understand what the buyer’s needs are, and the buyer certainly needs to understand what the seller’s needs are, and if it’s not a good fit, then move on to the next. Find someone else.”