TheMReport — News and strategies for the evolving mortgage marketplace.
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30 | TH E M R EP O RT FEATURE force, where the leaders are pre- pared to stay engaged for at least three years. While an acquiring company should not insist that sellers stay on beyond three years, very often some of them do and end up joining and augmenting their executive team. Some sellers bring more to the table than the incremental loan volume. Perhaps they have developed expertise in loan products, a unique chan- nel, certain technology apps or regional relationships and partner- ships all of which enhance the value of the partnership to the acquiring firm. Passive or absent leadership in the selling company is usually a danger sign. Many firms have considered seemingly good candi- dates on paper, but as they work through terms and due diligence, it becomes clear that the execu- tive running the business was not the key driver of the company's success or salesforce. Early on, try to determine who is really leading the organization and whether he or she is likely to be committed and motivated to keep building the platform post close. Although most companies structure their acquisitions as "asset deals" (versus "stock deals") the greatest assets, i.e., the loan officers, are not "acquirable" assets and leave the building every day. Hopefully, these individu- als will follow the lead of their current management team but ultimately, as long as you have 12 to 18 months to work with the acquired loan officers, you should be able to retain the vast majority of the acquired sales force. Once the transaction is an- nounced, recruiters will exploit the uncertainty and perceived dislocation created by the deal and look to poach as many employees as possible. Therefore, maintain- ing deal secrecy is critical for both sides. Both the buyer and seller should anticipate that this may happen and develop communica- tion plans to manage this potential threat. Leadership has to take the time to sell the merits of the new partnership, emphasizing how key employees' lives will be improved. At a minimum, loan officers' day- to-day environments and compen- sation plans should stay the same but hopefully, there are identifiable improvements to brag about. Geography: For firms seeking geographic expansion, acquir- ers tend to look for the more dominant regional leaders in the marketplace that may be for sale. They analyze the candidate firm's market share, quality, and the productivity of its loan officers, production margins, and the reputations of its leaders and top producers. What does the selling firm see as its competitive advan- tages in the market? How healthy is the market and its prospects for the future? Companies generally prefer to acquire a firm that is geographi- cally concentrated. In most cases, it is just easier to acquire a collection of branches, concentrated in a new region, where there is very little overlap with the acquirer's existing footprint. You can be successful in merging offices but also under- stand the potential conflicts and challenges of combining territories. Retail Expertise: Most companies are generally stronger in one of the three origination channels—retail, wholesale or correspondent, and direct to consumer. You don't often see organizations that are strong in all three. For example, Guild is and has been a retail-focused or- ganization for more than 50 years. We understand this channel, have been successful in it and are less interested in developing channel expertise in wholesale or con- sumer direct. Sellers should clearly understand that partnering with buyers that may not understand their channel of expertise is likely more complicated and contem- plates more risk than if they were to team up with a firm that is intimately familiar with their day- to-day channel specific challenges. Entrepreneurial Spirit: In today's environment, acquirers can be selective. Take the time to find companies that know how to cre- atively solve problems and at the same time look for new opportu- nities and better ways to operate the business. How has the com- pany reacted to changes in market conditions? Has the company been successful through various business cycles? You want to know that the leadership team is agile and willing to listen to new ways to operate in changing times. Considerations for Sellers T he keys to success are similar for sellers. Some of the ques- tions they must consider include: • Do the cultures match? • Will the combination create new products? • What about pricing? • Does the buyer have experi- ence in successfully acquiring mortgage companies? • Have they managed through market cycles? • How strong is their balance sheet? • Does management own equity? • Does the organization have good corporate governance and meet regulatory and compliance requirements? • What is the status of their tech- nology? Is it an upgrade? Will the buyer's technology platform, systems, and applications add value and make my originators more productive? Larger companies are investing in artificial intelligence, automa- tion, and machine learning to improve the mortgage experience through better, faster, and more accurate processes in origination, servicing, compliance, home-loan education, and marketing. With new technology, companies are reporting happier staff who can plug into these new systems to reduce time spent on mundane, repetitive tasks. This gives loan officers, underwriters, and opera- The coming consolidation will see many marginal, small independents exiting the business. Larger firms with strong balance sheets will take advantage of potential fire sales to add top producing loan officers from firms that have closed or have been recently acquired, often because cultures didn't align.