By Lloyd R. Manning
Editor’s Note: Although there are some drawbacks, merging with another appraisal practice with similar problems and objectives is one of the ways to achieve greater success.
Have you ever given thought to merging your appraisal practice with another to improve efficiencies and the bottom line? If the concept is new to you……keep reading.
As a seasoned appraiser with several or many years’ experience and a growing client list, without question you would consider yourself in a profession where the needs of your clients are first and foremost. But the facts of life are that you are running a business that incorporates market economics, efficiency, productivity, changing demographics, and the foresight to meet present and future challenges. To survive and prosper it is necessary to make a profit; this, in the face of declining revenues, increasing expenses, and more competition.
To meet these and other tests, many smaller and specialty appraisal practices are looking to merge with other smaller appraisal practices that have different specialties or are more diversified. The objective is to better enable themselves to compete and prosper in today’s business environment. Although there are some drawbacks, merging with another appraisal practice with similar problems and objectives is one of the ways to accomplish this goal. Most times, when put altogether, merging two or more practices into one makes sense.
Many professional practices and businesses, for that matter, are merged for synergistic reasons. The total benefit to be attained by the larger firm is greater than the sum of the individual practices. Two plus two equals five or more. Economics of size often produce cost savings. Greater utilization can be made of the combined resources, fixtures and equipment, waiting room, office area, washrooms, storage and common areas. It can be more cost efficient in that there will be better use and less duplication of ancillary and clerical staff, services, and billing systems.
Cost savings will be realized through joint usage and the pooling of financial resources. It will allow a greater ability to acquire and utilize more recent and updated computer and other equipment. Today’s business environment requires substantial amounts of investment and working capital. New technology is expensive and because of constant updating so much of it has a short shelf life. Many clients, particularly developers, are not fireballs when paying. Banks are often reluctant to extend substantial amounts of credit to professional practices, particularly start ups, and you seldom have the luxury of obtaining outside investors.
Bigger Is Often Better
All appraisers strive for zero defects or to get as close to it as is humanly possible. Although professionalism is paramount, flexibility is ultra important. This requires constant practice, control and peer review procedures that only the larger appraisal practices can support. Still, underlying all else is client satisfaction and retention coupled with the requirement to provide exemplary service; this must be correlated with the economics of scale. To survive in today’s business environment, all professional practices, including appraisers, must expand their rosters of professionals and technicians who possess the required expertise to offer differing services to a wider variety of and more demanding clients.
The principal advantage is that a merged practice of two or more appraisers, each with different specialties, offering a full range of services, is better able to provide better and more diversified service to its clients and compete in the marketplace. A larger practice can garner and retain business where it otherwise may not have been able to do so. And, it benefits the individual appraiser in that it allows him/her to advance their profession beyond what they could have previously done. An appraiser can perform those functions in which he/she has a high level of expertise while passing other clients to a partner. However, the marketplace will always dictate size limitations and compatibility.
Other advantages include a greater ability to adapt to changing circumstances, and improved negotiating ability with larger clients, including banks, mortgage companies, law offices, insurance companies, and government departments. A merged practice should be able to more readily recruit other appraisers and like professionals. Each appraiser is now able to better advance him/herself in the profession that would not have otherwise been possible.
On the other hand, there are disadvantages. Sometimes amalgamations are brought about because of a crisis situation, which is the worst of all reasons to merge: it won’t eliminate all of the problems and could exacerbate some. The larger the practice, the more direct control management will be required. Not all appraisers are good managers (they would deny this) and some who might be good do not want to assume the responsibility. Where one does, agreeing on suitable compensation can be a touchy issue when taking into consideration that time spent managing the practice is time away from professional practice duties. If the practice is of the size where full time management would be beneficial, it is often wise to employ a person competent in this area.
The principal shortcoming is incompatibility with the other merger partners and differing expectations of what the merger will accomplish. Not everyone is a team player. Yet, this is what each must be if the merger is to be successful. Incompatibility problems can take different forms. There are conflicting objectives, differing talents, ability, work ethic and financial contributions. Some wish to work hard and develop their practice, others are more interested in family life or recreation. There are leaders and there are followers. Still, all must promote the welfare of the group, not that of any individual appraiser in preference to others. The hierarchy among individual practitioners must disappear. There cannot be a pecking order.
Where to Begin
The starting point for a merger of two or more appraisal practices is a meeting with the prospective merger candidates and having a general round table discussion of what is wanted and what is expected by the individuals, what the group hopes to accomplish, what each brings to the table, and procedural matters. When there is a melding of objectives, all have agreed to the basics and have laid out the rudimentary guidelines, the next step is to undertake a detailed pre-merger assessment and valuation of each individual practice that is intended to participate. It is best to have one neutral professional analyst and/or a professional practice appraiser conduct this task. By this assumedly all bias is eliminated. The analysis should include:
· Market value of each individual practice, the tangible and intangible assets, including the goodwill;
· History of each practice, annual billings, collections;
· Details of the services each practice offers, particularly specialties not available everywhere;
· Staff of each practice, their salaries, duties, competency, length of service, etc.;
· Facilities that could be occupied by the new practice, or abandoned;
· A general economic analysis of each practice with a clear understanding of what each brings into the merger. (Senior professionals are seldom interested in supporting poor performers.)
· Untapped or undercapitalized potential;
· An economic and personal analysis to ensure that all are compatible;
· An assurance that each will be better off after the merger.
**Merging Appraisal Practices Part II: Nuts and Bolts will be in a future edition of Working RE Online, OREP Members / Working RE Paid Subscribers can access it online now: click here. (Am I a Working RE Subscriber?)
About the Author
Lloyd R. Manning, AACI, FRI, CCRA, a commercial real estate appraiser, broker and consultant for over 30 years. His most recent book is Winning with Commercial RealEstate: the Ins and Outs of Making Money In Investment Properties. It covers the entire field of appraising, buying financing, leasing, managing and selling a wide variety of investment, commercial, and industrial properties (Booklocker.com, Barnes & Noble, Amazon, or Chapters-Indigo).