A Guide to M&A In The Title Industry

The merger & acquisition (M&A) trend in the title industry is showing no signs of slowing down. In fact, industry experts are predicting an increase in acquisition activity throughout 2018 and 2019. Past deals in the title industry have included private equity firms investing in the industry, acquisitions of underwriters and title companies by other underwriters, title companies purchasing their competitors, and insurers making deals to broaden their offerings. We at ProsperitasForward are very involved with this part of the industry, having designed and implemented multi-million dollar mergers. Based on our experience, we can offer a few guidelines for those wanting to learn more about how M&A works in the title industry and some of the reasons why companies buy and sell.

Why Sell?

There are a number of reasons why title agencies sell their company. It’s only good business sense to have an exit strategy. Title agency owners are often approaching retirement age. Owners who hope to retire soon will find economic benefit in selling their company. Why not capitalize on a lifetime of hard work and relationship building?

Running a small title agency can be extremely intimidating and risky. The horde of risks include wire fraud, escrow losses, and potential title claims. Each new deal comes with a possibility of doing damage to your company. The cost to mitigate the risk of frauds like wire fraud can imperil an agency’s financial viability. Moreover, insurance doesn’t guarantee protection since they will often find any reason not to pay. To illustrate, in a socially-induced wire fraud situation, the cyber theft insurer may say that your system was not hacked and that you should call your E&O insurer. The E&O insurer may then tell you the loss should go to the cyber theft insurer. It essentially turns into an endless cycle of deferring responsibility.

An inconvenient truth in the title workplace is that employee loyalty is rare. Even if you believe you have a great relationship with your employees, often times they’re only concerned about money, and the ‘relationship’ is truthfully nothing beyond the fact that you sign one side of the check and they sign the other. Employees have a tendency to drive owners crazy, making a good case for selling the company. Not having to deal with employees anymore is one of the biggest drivers for sales of title agencies.

Lastly, some title agencies can’t always hold their own against the larger, more developed companies. Large companies can often process the same deals as smaller companies far more efficiently. This is because they have access to technology, resources, and knowledge unavailable or unattainable to smaller companies.

Why Buy?

It is important to note that the reason for buying varies among different sized agencies. According to an M&A trends report from Deloitte, the top driver of M&A deals is the acquisition of technology assets. 20% of the respondents to their survey stated that this was the main reason they followed through with a deal. The next driver was the expansion of customer bases in existing markets, with 19% of respondents citing that as their primary reason. Rounding out the top three drivers is the chance to expand or diversify product and services, with 16% stating that as the motivation to buy.

Mergers make sense as well. We have seen numerous companies consolidate. This works well by eliminating duplicate infrastructure, thereby adding value.

One plus one equals three. Often times, the acquiring entity has a fixed cost infrastructure that may not be fully utilized, so that adding incremental volume only increases their revenue while not increasing their cost base. This is especially true right now for shops that were refi or default focused, who may struggle with how to fill their excess capacity.

How To Set Yourself Up For a Sale

If you are seriously considering selling your title insurance company, there are a few things you need to do to prepare. Below is a list of everything that will ensure you are ready for a sale:

  1. Have a clear profit and loss (P/L) statement. Small businesses are usually creative in their efforts to minimize their tax bill. For sales purposes, the purchase price is usually a multiple of your EBITDA – so you want to be as forthright as possible about your true income and costs. Everyone who works in the agency should be paid a market salary. Sometimes, the owner of smaller agencies will forego a salary and instead take their money out as a dividend. That practice has the tendency to cause confusion.
  2. Have a clear understanding of where your business comes from and whether it will follow you through the transition. Expect any deal you make to have performance guarantees.
  3. Have an asset list with realistic values.
  4. Have current organization charts and job descriptions. Include: employee name, job description, years of employment, the employment contract in place, salary, licensee, bonuses, and vacation/sick time allotted.
  5. Have a list of contracts. Including: underwriting contracts, equipment leases, vehicle leases, building leases, search and/or plant access leases, memberships, software maintenance agreements, and joint venture/affiliated agency agreements
  6. Have clean underwriter or state regulator audits handy.
  7. Make sure your policy production is current.
  8. Make sure your corporate setup allows you to sell. Is approval required from others? Are the Bylaws current? Does anyone have a first right of refusal? Having a list of officers and directors is recommended.
  9. Be mindful of the fate of your employees. This is essential if they happen to find out you are selling before the sale closes. You (the seller) should control the story.
  10. Have a list of state licenses.
  11. Have a copy of your Strategic Plan.
  12. Have a list of underwriters, the splits and allocation of volumes to each, and an explanation of what drives that choice.
  13. Have tax returns from the last three years.
  14. Make sure you have a confidentiality agreement.
  15. Have a list of discretionary expenses. This can include spouse’s car, club dues, or children on payroll.
  16. Have a list of both escrow and operating bank accounts.
  17. Have the current escrow account reconciliations.
  18. Have copies of all insurance policies as well as declaration pages for current insurance.
  19. Save all your software.
  20. Take inventory of all office equipment and furniture.
  21. Have a list of customers. For each include: the average amount of orders per month/year, the average amount of closings per month/year, the average premium that was charged, the cancellation rate, and the mix of business between residential and commercial along with trends for the past three years.
  22. Finally, understand the options. These can include a sale, roll up, merger, etc.


Final Thoughts

The increase in M&A activity in the title industry stems from a variety of factors including the aging of leaders in small, independent agencies as well as concerns about coping with regulation and sophisticated technology. Remember, title is a relationship-driven business and the magic that buyers often seek to gain is the benefit of national scale with localized presence and knowledge. Title agents are largely unmatched when it comes to delivering local expertise.

We hope we have improved your familiarity and understanding of M&A through this guide and we wish you the best of luck for any future deals.