Following a blistering pace of deals through the first three months of 2024, the pace of merger and acquisition activity has slowed but remains steady in the home building sector. Excluding the blockbuster acquisition of M.D.C. Holdings by Sekisui House, the majority of deals in 2024 have been public builders purchasing regional private builders.
The strong balance sheets and cash positions of public builders are partially behind the accelerated pace of deals while many would-be sellers have posted record profit and revenue numbers to help drive up valuations and multiples.
During Zonda’s recent “Mergers, Acquisitions, and Market Share” webinar, Zonda principal Mollie Carmichael and Whelan Advisory CEO and co-founder Margaret Whelan spoke about growth and opportunities in the home building sector, M&A opportunities, and growth factors. In particular, Whelan highlighted six valuation drivers that carry importance for buyers and three important elements for sellers seeking buying partners.
Valuation Drivers
1. Market
“When you think about growing a home builder, you need two big things: lots and talent. But from a buyer’s perspective, when they’re thinking about M&A, they need to understand the geographic market they want to be in relative to where they are [currently],” Whelan said during the webinar. “If they want to go into a new market, they’ll pay a bigger premium than if they want to get bigger in a market that they are already in and they just want to buy lots. So, the geographic market is the first screening tool [for buyers].”
2. Product
Whelan says product type—the second screening tool—is where value can be added to a selling company. The seller has an understanding of the types of builders in a market and their strengths and the types of product offered can be a differentiator and value-add for buyers.
3. Lot count
“[The lot count] is a bit like Goldilocks, not too hot [or] not too cold. [High value is given to] about three years of lots,” Whelan said. “That’s where the buyer is going to apply the biggest premium.”
4. Management
The tenure and reputation of the owners and executive team carries significant weight for buyers and partners, according to Whelan. “There’s nobody in our industry who has too much talent right now,” she said.
5. Growth
Buyers will pay a premium to accelerate the growth of the companies they acquire. Whelan said the more growth a buyer anticipates, the bigger the premium they will pay for a selling company.
“Typically we’re seeing sellers that are going to double their unit volume every three or so years, and that’s what the buyers are looking for,” Whelan said.
6. Return on Invested Capital
“The way the private builders are being valued is relative to how the public builders are trading,” Whelan said. “ Today, [public builders] are trading at just over 1.4 times book value, higher than a ten-year average, and that means it’s a good time if you're going to sell your company because multiples are high.”
Whelan said because there are so many buyers with large amounts of capital post-COVID, small private companies that are less liquid are still selling at an average of 2.2 times their book value—a 50% premium to where the liquid public builders are being traded.
“Usually small, illiquid companies sell at a discount, not a premium. But [they are selling for premiums] because they are facilitating their growth and because the nature of the market right now is a seller’s market because we have so many buyers with so much cash that the sellers can realize these very strong premiums,” Whelan said.
Key Areas to Focus as a Seller
1. Readiness and organization
Of paramount importance for a company interested in selling is organization from a financial, legal, and strategic perspective, Whelan said. A company should ensure it will grow for the next six to 12 months and will have at least 3 years of lots.
“Small issues become big issues when small companies sell to big companies,” Whelan said.
2. Timing
Whelan said timing drives timing of the go-to market more than anything else.
“Buyers want to focus on being ready for the spring selling season, so they’re going to be more focused on buying companies and underwriting potential acquisition targets in the second half of the year,” Whelan said.
Whelan said another important element to timing will be interest rates. She said the next big move in rates will likely be down, which will make housing more affordable and improve access to capital.
3. Stay focused
Whelan said, finally, it is important for sellers to surround themselves with a strong team—including advisors—to help them position their company for a sale and make information “as easy to digest as possible, especially for the foreign buyers.”
Keep the conversation going—sign up to our newsletter for exclusive content and updates. Sign up for free.
