Business owners who don’t consider market share when crafting an M&A strategy for their companies are taking a risk, says Howard W. “Hoby” Hanna IV, president of Real Estate Brokerage at Howard Hanna Real Estate Services.

“I can’t speak to every industry, but in a sales industry, you’re looking at your customer base and you’re focused on market share,” Hanna says. “That’s how you know if you’re succeeding. You can always adjust your expenses and the operational aspects of your business. But in a sales-oriented business, whether consumers are choosing you and how often they are choosing you is what we pay a lot of attention to.”

Hanna has guided Howard Hanna to more than 25 deals in the past 15 years, including the pivotal acquisitions of Smythe-Cramer in 2003 and Realty One in 2008. Both companies were themselves market leaders, which is consistent with Hanna’s approach to making deals.

“We really only want to deal with the No. 1 or No. 2 in a marketplace,” Hanna says. “As good as we think we are, we don’t think we’re turnaround experts.”

It’s a strategy that often requires a delicate touch. The acquisition of one market leader by another market leader can quickly create bruised egos if you’re not careful. The numbers indicate Hanna has threaded that needle effectively. Howard Hanna is the third-largest real estate company in the nation with $17.5 billion in 2016 sales, up 38 percent from the year before.

Smart Business Dealmakers spoke with Hanna about negotiating deals with a key competitor, the value of developing an M&A formula and sticking to it, and how he responds to market pressure to keep pursuing more acquisitions.

Use tact when negotiating with competitors

It can’t look as if you don’t respect the values or traditions of the other firm, especially if it’s two firms that are not only in the same space, but the same geographic marketplace. When we do approach these competitors, what I’ve found is they won’t call you. If you wait for a competitor to call you and say, ‘Hey, should we do something?’ they might not do that. There could be a fear in their mind that you’ll use that against them.

Approach your competition in a very professional manner.We don’t come right out and say, ‘Would you sell to us?’ We’ll say, ‘Let’s look at some potential synergies and strategies. How could we create greater growth for both organizations?’ Like-minded business people will find that there is always a synergy that can buoy both organizations.

Ego is a huge piece of it. Most owners of real estate brokerage firms, mortgage companies and title companies — they started the business. They are extremely entrepreneurial and incredible characters who have built their companies on the strength of their ego. You have to play to their strengths. We try to come in and say, ‘We don’t believe Howard Hanna does everything the best way.’ We can learn from these acquisitions and take the best of what another organization has done. If I didn’t respect their business, if I didn’t think that culturally it was the right fit, if I didn’t think their ego would add to my ego, we probably wouldn’t do that deal. That’s part of what has driven a lot of these entrepreneurial businesses.

Stick to your formula

The amount of time I spend looking at deals has increased drastically in the last five years. Whether that’s the market that we’re in, whether it’s in our industry, in the mortgage and real estate brokerage business, whether there are more entrepreneurial groups of owners who are in a certain age bracket looking for an exit strategy and so that’s why they’re coming to us, my time focused on M&A activity has gone up significantly.

Stay disciplined in your procedures.As we’ve grown and looked at multiple deals and have more people touching those deals, we look at a discipline financially of staying within our multiples and range of comfort. We go through a specific due diligence process, we go through a letter of intent and then we move to an asset purchase agreement. We really don’t deviate from that.

Even if somebody wants to move at a faster pace,they want to skip a letter of intent based on some conversation in the negotiation and just jump to an asset purchase, we will only go through our process. The other thing we stay really focused on is our team. We get our M&A team involved, which consists of the same four or five people and is a very close-knit group. We have dealmakers who are out there looking to bring us opportunities, but then we bring that team in and really keep it concentrated.

Assess your own needs

In today’s economy, the question of how much is growth a factor in our success and who is watching is something we struggle with internally.We have our constituent base, which is made up of our sales associates with us in our markets. We always said we wouldn’t grow, and won’t grow, if it sacrifices the services we can provide for our existing markets. We don’t have outside investors, we don’t have private equity and we don’t have shareholders other than family members. So we struggle with how much untapped potential is there and should that be where our focus is operationally and organizationally to improve our existing markets?

We’ve grown to a point of being one of three acquirers in the industry. We’re faced with wonderful opportunities that we struggle with. Is that too big of a leap? Is it the right size leap? We still have those constituents who want to see that growth and want to see the brand and the company continue to prosper. But we don’t need to grow for growth sake, any more than just organically where we already are, to keep improving.

The Final Word

If it’s the right deal, you’ll know it because you’ll have the feel that the culture is right and that you can blend and mesh people into your organization.At the end of the day, the numbers and multiples for all our industries come in at a similar range. Somebody may overpay, somebody may be a lower value proposition buyer, but you’ll work the numbers out. The math gets done.

It really comes down to the culture and making sure the companies and the operators that are coming together are going to work together well. Secondarily, what is that plan post close? To me, that’s a bigger piece than anything. What is the integration plan? We’ve been fortunate that we’ve probably put more time into that operational structure after the close and what we’re going to do and managing that transition plan than we sometimes do on the front side. I think that makes or breaks any deal.

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