Growing through acquisition - Part 1

Bringing businesses together can expand a client base, increase access to resources and data, potentially cuts costs and bring in new blood and fresh ideas with which to plan for the future.

Earlier this year, the broking industry saw a significant acquisition of its own when Aussie purchased the boutique aggregator National Mortgage Brokers (nMB).

The move was about growth, with the purchase taking the value of the Aussie group’s loan book to more than $50 billion. Executive chairman John Symond said Aussie was on the expansion trail and that he saw the acquisition of nMB as a strategic move to build the company’s distribution capability.

nMB continues to operate as a separate entity with its own brand.

Conversely, in March, Australia’s biggest independent aggregator, AFG, had to combat speculation it was on the shopping list of the big banks. In this case, AFG saw its independence and ownership as integral to its branding and success.

In the case of smaller operators, bringing two or more companies together may not be an industry ‘game changer’. But that doesn’t mean there aren’t benefits and opportunities – as well as risks, processes and costs – that are worth considering.

In the first of a two-part series on growth through acquisition, The Adviser looks at how smaller players in the broking market can use mergers or acquisitions to grow their business and improve their market share.

Choose very carefully
Merging companies is like a marriage, according to Frank Paratore, general manager of Ballast – you have to choose your partner carefully or you risk forming a partnership that won’t work long term.

Peter Garbett, who with Marie Belfiore operates Mortgage Achievers, agrees. Mr Garbett had previously run The Mortgage Factory while Ms Belfiore had her own business, Landmark Financial Solutions.

The two had known each other professionally for nearly 15 years and had often thought about bringing their businesses together.

In September 2011, they purchased Mortgage Achievers together while still operating their own separate businesses. After the purchase, they brought all three businesses together to form a joint company.

Having the right partner was crucial to the success of these transactions. If you’re considering a merger or acquisition, you have “to choose your people well”, Mr Garbett says.

“The beauty with Marie and I is that we think alike,” he says. “Our business acumen and our work ethic are mirrors of one another. That’s what makes our business work.”

David Merison, director of Vault Plus Mortgage Consultancy, has similar advice, based on his experience merging his sole-trader operation with Andrew Garside’s business.

Mr Merison and Mr Garside became friends at an aggregator’s PD day and the two realised they’d be a good fit commercially.

“After quite a few discussions, we had a shared philosophy of growth,” Mr Merison says. “We wanted to grow our businesses at a reasonable rate.

“One of the best things is we have complementary skills – some things that Andy likes doing, I don’t, and vice versa. We are definitely not the same, but we gelled and we get on really well. That always helps in a small office environment.”

While a merger or acquisition will be primarily a business strategy, personality, culture, work ethic and personal relationships all need to be considered in any decision-making process.

Why merge?
Every business is different, and acquisitions can occur for a number of reasons.

Gerard Tiffen, managing director of Tiffen and Co, enjoyed a friendly rivalry with Alison Whittle and The Mortgage Detective before the two merged in 2007.

“Canberra’s not a big town, and I was in business against The Mortgage Detective – they were a rival, but a friendly rival,” Mr Tiffen says. “When I started out in the business, Ali was always very helpful if I needed help with anything. She was just a phone call away and we became friends.”

After the merger of Mosaic and National Mortgage Brokers in 2007, Mr Tiffen and Ms Whittle found themselves on the same platform and an opportunity for them to merge arose.

“I courted her for a little while, and then we did the deal,” he says.

The merger, he explained, was very much about volume: “There was a lot of pressure coming from lenders in 2007 and 2008 – they wanted more and more volume,” Mr Tiffen said. “At the time, we were settling about $12 million to $13 a month as an individual company, but it didn’t seem to be enough.”

Mr Garbett and Ms Belfiore’s merger, meanwhile, was more about sustainability.

“When [NCCP regulations] came in, we very quickly realised our business model as individual brokers probably wasn’t sustainable and we needed to get together and look seriously at either merging our businesses or buying something else,” Mr Garbett says.

Whether you’re contemplating a merger or acquisition for growth, volume, friendship or sustainability, a lot of planning is required. And, as both Mr Tiffen and Mr Merison note, while the beginning is important, you also cannot overlook the end.

Have an exit strategy
“You need to have an exit strategy,” says Mr Merison, whose own strategy is in place not because he foresees a collapse of the friendship or business but because he needs to be practical and plan for the future.

Mr Merison is a little older than his business partner, so he anticipates retiring earlier.

“You cannot work out an exit strategy at the 11th hour,” he says. “We set it up, and we’ve got it written down as an agreement.”

Mr Tiffen’s exit strategy, meanwhile, helped smooth the transition when Ms Whittle left the industry in December 2011.

The plan, which the pair put together with the help of solicitors and consultants, allowed for Ms Whittle’s stake in the company to be bought out and Tiffen & Co to continue operations.

“Having an entry plan is good, but you also have to have an exit plan,” Mr Tiffen says. “It’s all lovely when you’re together, but if something goes wrong you want to be able to pull it apart as well.”

Despite this advice, echoed by many mergers and acquisitions experts and across every industry, an online straw poll conducted in April by The Adviser found that more than 60 per cent of brokers had no succession plan or exit strategy in place.

Mutual benefits
A successful merger benefits each party involved and the greatest reward for Ms Belfiore was being accepted by the clients of each business – Mortgage Achievers, Landmark Financial Solutions and The Mortgage Factory.

“It was really rewarding when clients we acquired with the new business came along to make an enquiry, either about an existing loan or a new purchase, and were open and able to talk to me and Peter as though we already had an ongoing relationship,” Ms Belfiore says.

Mr Merison’s greatest reward was the complementary business skills and personal attributes that his business partner, Mr Garside, brought to the table.

Regardless of who brings new clients through the door, the two partners split the upfront and trail commission equally.

“I really do believe that’s got to happen,” Mr Merison says, “otherwise you’re going to be favouring your own transaction, and it gives us access to clients we wouldn’t have had otherwise.”

Aside from the bottom line benefits and economies of scale that came with bringing two businesses together, Mr Tiffen says his greatest reward was his staff.

“We went from being a little company to something that’s pretty big,” he says. “It makes me proud to work with really good people. I think it can also lift your professionalism.”

And just as merging brings with it some risks, it can also mitigate others.

Mr Garbett’s Mortgage Achievers office is in Brisbane while Ms Belfiore’s is in Melbourne. “Geographically, it fitted our business model to have a spread of risk through a couple of different state economies,” Mr Garbett says.

Challenges to be faced
Brokers contemplating a merger or acquisition should remember that important decisions need to be made about office location, aggregators, software platforms, business structure and, of course, staffing.

For all the upbeat talk of economies of scale, some staff may not want the merger – plus, they may no longer be needed once the deal is completed.

“All of those decisions, whilst not much individually, you’ve got to make them all within a short space of time,” says Mr Garbett.

It can also take longer than expected to get the new entity up and running smoothly, especially when it comes to merging and accessing data.

“One of our main challenges was that we had three databases with various pieces of information recorded to various degrees of completion,” says Mr Garbett.

“When we had decided which database we were going to go with, migrating that data from different locations was quite challenging. A significant amount of work goes into data migration.”

Vault Plus’ main challenge was one that many brokers and brokerages face, regardless of whether they have experienced a merger before – the challenge of getting the business name out there.

Mr Merison and Mr Garside decided on the name Vault Plus after coming together in October 2010, and brand awareness was to be crucial to their success.

“I think our greatest challenge is continuing to get our brand awareness out there and also educating our clients on the range of services that we provide,” Mr Merison says.

Even Mr Tiffen, who saw the merger process as entirely positive, experienced a few teething problems.

“I guess initially there was a bit of a power struggle with some staff,” he says. “That’s just human nature. People want to know where they stand and what they do. They want to make sure that they’re still valued.”

Both he and Ms Whittle, however, put considerable time and thought into building their new team.

“I think we held on to everyone we wanted to hold on to,” Mr Tiffen says. “None of our brokers left. It was just a couple of support staff that didn’t want to work full time hours and things like that which just no longer fit the culture.”

Cost considerations
Many of Tiffen & Co and The Mortgage Detective’s potential problems were overcome by engaging solicitors and consultants to help with the transition process.

According to Mr Tiffen, the cost was unquestionably a worthwhile investment.

“To be honest,” he says, “I think if we hadn’t employed a third party – a company to come in and consult, do financial models and show us basically, ‘Look, this is the economies of scale, this is what you are going to achieve at the end of the day’ – we probably wouldn’t have got there.

“There were some initial costs – I think it was an $80,000 to $85,000 transaction, including the solicitors and consultants – so it wasn’t cheap.”

But for Mr Tiffen, the monetary benefits outweigh the costs.

“When we started, we had an $850 or $900 million book,” he says. “It’s now up to $1.4 billion three years later. It was definitely a good thing.”

Mr Merison, who was running a much smaller operation, experienced comparatively lower costs.

He estimates the cost of bringing his sole-trader operation together with Mr Garside’s business – including new branding, marketing, printing costs and developing a new website – was around $7,000.

With one of Vault Plus’ greatest challenges since formation being developing brand awareness and educating potential clients, Mr Merison and Mr Garside have also invested in advertising.

Their most prominent advertisement is on a stretch limousine which travels through NSW’s Sutherland Shire.

“We’ve had it labelled with our logo,” Mr Merison says. “We’ve had some business partners join us too and they have their data on the vehicle as well. It’s really like another billboard for us, which is regularly around our local area.

“We thought we’d get that point of difference out there and it’s working quite well.”

Mortgage Achievers estimates their merger cost them upwards of $30,000 but they believe that, ultimately, the time involved was the greater cost.

“We’ve probably put a dollar figure of around $30,000 for new licences and everything else,” Ms Belfiore says. “A lot of the work was actually outsourced to a consultant because Peter and I were very, very busy with running our own businesses and organising the merger. I think the time was a bit more expensive and valuable to us.”

Time and money are important considerations when choosing an office location and despite the initial investment required, having one office rather than two will ultimately prove more cost-effective.

Mr Merison believes that when it comes to mergers and acquisitions, many of the benefits, challenges and principles hold true both for smaller and larger companies.

“We are finding that aggregators and some of the industry’s biggest players have merged or been acquired,” he says. “I think that the principles for those mergers hold true for the lower branches of the industry like ourselves.

“We can share costs, but we can also share ideas and skills and contacts and clients. The factors motivating aggregators and big businesses to merge are often the same as ours.”