Transcript
Dean Wehrli:
Welcome to the New Home Insights Podcast, the John Burns Real Estate Consulting Podcast. I’m your host, Dean Wehrli. Tony Avila is here with us today. How are you doing, Tony?
Tony Avila:
Just living the dream.
Dean Wehrli:
He is the Founder and Managing Principal of Encore Capital Management. Encore is one of the premier capital sources in the country. They’ve secured over a billion dollars of investment capital since 2009. That’s probably outdated. I bet you it’s more than that. Tony also has Builder Advisor Group. They raise capital and they also help new home builders and others through merger and acquisitions and IPOs. Tony, tell me if I’m wrong. I think you’ve been an integral part of about seven-ish mergers and acquisitions and how many IPOs?
Tony Avila:
We’ve done, right now, we stand at almost 90 M&A transactions that we’ve done since ’96. This year, seven M&A transactions in 2021, which is a record for a five-month period. Then IPOs, I’ve been involved in six builder IPO since the 1990s.
Dean Wehrli:
Yeah, I’m sorry. I should’ve said that. I meant this year.
Tony Avila:
No, it’s all good.
Dean Wehrli:
That’s the part of your world that we’re going to focus on, the mergers and acquisitions, the IPOs. Start us off though by just telling us a little about yourself and about Builder Advisors and about Encore as well.
Tony Avila:
Yeah, sure. In my family, we always invested in real estate in the greater San Francisco Bay Area. I always had a passion for real estate. I went into real estate investment banking focused in home building. There was a tremendous amount of opportunities that we also, I also focused in golf. Ironically, golf is very popular in the ’90s. I had the distinct pleasure to represent the buyers of Pebble Beach and the entire Pebble Beach Company, which was a historic transaction. Rarely you’d get to work with the likes of Peter Ueberroth, and Dick Ferris, but also working with Clint Eastwood and Arnold Palmer, an all-star cast of buyers that today own Pebble Beach. A lot of wonderful people and wonderfully structured transaction that took many aspects of the capital stack. A lot of that experience I’ve leveraged today, especially working on transaction, with M&A transaction, debt transaction, an equity transaction, and a preferred equity transaction all at once. That was great, but really a passion focusing in home building.
Also, a passion of still wanting to invest back in the land. What makes us very unique and quite frankly, the most successful, is having our Encore fund. Art Falcone and I within our Encore funds. Yeah, today it’s actually about 2 billion of equity capital. We’ve been able to deploy that successfully across really six, seven different vehicles that we’ve invested, both in multifamily and also in single family. A lot of lot development where we’re selling land and lots to home builders. Then of course, we have our Builder Advisor Group. That’s been my bread and butter that I’ve been working since I’ve been in the professional world focusing on mergers and acquisitions, but also capital raising for builders.
Dean Wehrli:
Let’s jump in. Let’s start with the builder selling part of it of the equation. Why are builders selling their companies these days?
Tony Avila:
Well, first of all, valuations are the most attractive I’ve seen since 2005. Valuations are good. Builders are, in some instances, they just went through the pandemic and were nervous. Some of the guys who were selling also went through the financial crisis back in seven, eight, nine, and so they don’t want to live through that again. A lot of the guys who own their companies, they have 90% or more of their net worth all in one vehicle, that would be their own building vehicle. They say, “Hey, let’s get some chips off the table.” In some instances they’re going to sell half their business or more. There’s a lot of drivers today for somebody to exit. Sometimes they just want to retire within the next two to three years. It could be personal diversification net worth. Could be exiting, just, “Look, I’m ready to retire. I don’t have a good legacy of who to hand this off to.” There’s a lot of reasons right now. Also, just valuations are kind of driving that decision as well.
Dean Wehrli:
I’ve heard that by the way. Sometimes you’re looking for that longtime builder where the founder is ready to go and maybe his kids aren’t that smart, so he’s a logical target.
Tony Avila:
Or maybe their kids are too smart.
Dean Wehrli:
I’ve thought about that. Who are these sellers then? I mean, you don’t have to name names, but do they tend to be the smaller private or the regional? Kind of characterize them.
Tony Avila:
Yeah, sure. I mean, it’s been all of the above. We’ve had some larger players, some larger names. We’ve had some smaller guys. I mean, we’ve done transactions that are in, the Buescher family had Mercedes Homes, which was one of the largest private builders in America. They decided that their reincarnation was called Vintage Estate and very successful in both Florida and Texas, and decided to sell and sold to Landsea. Landsea is two firms because you have Landsea, you got some Chinese capital, but then you also had, they did a SPAC transaction. You had SPAC also doing the deal as well, effectively right now to de-SPAC of course, but acquired the Vintage Estate quite successfully. Who are the sellers today? We’ve had regional, Michael Dilworth sold to one of the subsidiaries of Clayton. That was a relatively small Alabama transaction.
We’ve had quite large Shea Homes in North Carolina. They sold out to Empire. These are cousins of the more notable Sheas in California but a very, very successful Charlotte-based group. Two of the team members are delivering for Empire today, but a very successful transaction. It’s varied. It’s been varied geographically and it’s varied by size too.
Dean Wehrli:
Do you ever have a situation where they sell a part where they say, you know what, we can’t support a given region, let’s say, any longer. We want to sell just that region. How often does that happen?
Tony Avila:
Definitely, yeah. We’ve sold off. We did that for Hovnanian and Rally. We did that for Bill Clark Homes. We’ve sold just a part of the region of the business in several instances. Certainly, we’ve been involved on that on both the buy side and the sell side.
Dean Wehrli:
Okay. Let’s flip it to the other side of the equation here. Who are the buyers? Is it always the big guys?
Tony Avila:
No. It’s such a diverse group of buyers today. It’s the largest group of buyers we’ve ever seen. I mean, our potential buyer or investor list to invest into home builders is really in the hundreds. But I’d say active, we’re north of 40 active folks that are just very active today in buying a builder and investing into a builder. We have a wonderful group of high net worth individuals that got together called the American Southern Homes that we’ve worked on these two transactions with them so far and has them as a buyer group. All your publics and nearly every one of them are considering, or would consider or have executed on it on a transaction, but there’s close to whatever 20 public buyers that are out there. Private builders have gotten certainly very active in this. There’s wonderful companies like a Rausch Coleman or a David Weekley Homes that are in there doing deals.
But then you’ve got, of course, we’ve mentioned Berkshire Hathaway’s subsidiary, Clayton. They’re wonderful buyers. We’ve got international. We’re talking about Canadian, Asian. We actually had another country has been heard from, we just got contacted by a new player to the scene that’s contacted us to represent them very confidentially. We’ll most likely be starting to work with them in July. A little bit European capital, lot of Canadian capital.
Dean Wehrli:
What is motivating the buyers? Is it all about market share, pipeline growing in that sense or are they a lot more nuanced?
Tony Avila:
I think one of the things we’ll talk about, the American economy is kind of the cleanest dirty shirt in the international economy, in the laundry of… We tend to be doing, and then the prospects today look extremely strong. You see a huge amount of investment dollars here in the U.S. or money coming into the U.S. because they see such tremendous growth prospects. They also see obviously the millennial generation being our largest generation just starting to enter that home, either home buying or home living. Depending if you’re a single-family rental guy, but there’s definitely an undersupply of housing. They see that as a tremendous prospect for investment. Those are both domestic and international foreign investors that are coming into the U.S. I think those are biggest drivers right now that we’re seeing. Obviously, in a post-pandemic world, many, many people are realizing how important the home is. I need that extra space. I want that yard. I don’t want to be in an apartment. I don’t want to be in an urban environment. Not everyone, but many people, that’s also exacerbating the demographic shift to housing single-family detached.
Dean Wehrli:
Is that a safety thing, Tony? Is that like, it’s almost a double, a twofer in the sense that the U.S. economy with our laws that we mostly respect is a very safe place to invest, and real estate is seen as a safe sector. Is that fair?
Tony Avila:
Yeah. We have good rule of law in this country and that’s certainly something we’re seeing as a challenge in other sectors, in other countries where you’ve had investment capital but there’s been some issues and challenges. We clearly have great rule of law. Real estate is seen as a hard asset. Potentially in an inflationary environment, that’s something that definitely people want to go and hold as oppose to holding cash. You see, TINA is one of these investment acronyms you hear, there is no alternative right now. There’s not great alternative and equity is not a great alternative in bonds. Commodities obviously are getting rocked right now. Obviously, we can see where lumber and copper, but even like a cryptocurrency where it’s like, okay, I’m going to go and invest in this nothing, this thing that earns me nothing, but it’s just a speculative investment.
In fact, many people don’t even know what it is, but I’m going to invest in it because I see it’s going well. Well, that’s obviously been halved. People know what single-family homes are and they can see, feel, and touch them. They can see the rent check coming in. They can see their home price appreciation, their HPA, if they own their own house and living in it. I think from an investor or from an investor perspective, it’s definitely become institutional asset class where in 2008, it was not.
Dean Wehrli:
We can put a picture of a cute dog on homes, and maybe a Shiba Inu, just throwing that out there. We have an extra enhancement. Is there anything else they hope to gain, market share, safety? Are they also sometimes the buyers are hoping to gain efficiency, maybe internal efficiency? Is that ever true? I don’t know, entering the hottest market or something like that.
Tony Avila:
There’s a lot of motivations, a lot of motivations for investing in the sector right now. Certainly, a lot of the public builders will have challenges growing. It’s hard to keep growing at 20% without doing M&A. If you looked at D.R. Horton from 1995 to 2002 when we closed the Horton Schuler merger, I think Don with Rich Beckwitt actually way back in the day, and Don Tomnitz. A wonderful group of cast of characters at Horton, they did 17 acquisitions from ’95 to 2002 and they’ve become America’s builder. Certainly for growth is a big part of it, certainly for growing top line revenue, growing closings, but also creativeness looking at the bottom line, certainly invest in capital. If you ask a Japanese investor, why they would be coming? Why would Sekisui or Sumitomo Forestry or Misawa or Daiwa, all the different players that are coming in the U.S., they’re generating tremendous cash.
They’ve had tremendous success investing with home builders here in the United States. There’s better growth prospects demographically if you look at the demographics of Japan versus United States of America. They really liked the demographics here in the U.S. Then just from return on capital perspective, a little bit better return prospects here, so certainly that’s it as another big driver.
Dean Wehrli:
Tony, how forward-thinking… Let’s take a big builder, right. Are they placing bets? Are they like, “We’re betting on market A and market B, it’s going to be the big driver”? Do they sometimes want to diversify like price and product? Like, “We should have some stuff that’s more bread and butter or we need some stuff at the high end.” Are those kind of considerations happening too?
Tony Avila:
You see diversification in product, diversification in geography, diversification on strategy. We see much of that occurring. We also see, “Hey, we’ve been successful in this segment. So this is a segment we want, perhaps in that geography. Or we’ve been successful in that geography, we want to buy another company that’s also in that same geography, same product line. We’ll buy a competitor out because we’re running out of inventory or running out of land, running out of lots.” We do see diversification. We see an incremental investment within an existing segment of the product segment as well.
Dean Wehrli:
Let’s start to talk about the process. As we know here at JBREC, because we’ve very often been the folks on the market analytical side of this process, there’s a lot going on behind the scenes before the world at large hears about a merger and acquisition or even an IPO. How long does a typical M&A take from start to finish when you just start this conversation to when you make the big announcement?
Tony Avila:
My record is 42 days on the fastest that we’ve ever done it from first discussion to closing. When we went through the pandemic, we took longer than a year. For some transaction, we just put it on a pause and hang on. Generally, we’re talking about a process that’s three months on the shortest and five months on the longest. That’s one of our goalpost for going and get a transaction done. If you want to talk about from all the way from when we start creating an information, memorandum, signed confidentiality agreements, and then get letters of intent in the door. Really once you pick a buyer, then give that buyer 90 to 120 days to close. Sometimes to get that buyer and agree with that buyer. Right now we might be selling a company and you’ve got five, six, eight, 12 different offers for the company. You got to pick through that and that can take some time to pick a winner, pick a horse. Then once you pick the horse, then usually again, three to five months on the outside.
Dean Wehrli:
What makes this kind of deal go really smoothly? Have you noticed any factors that okay, when those are in play, these things tend to go better?
Tony Avila:
Strong communication between buyer and seller, where you have the buyer and seller interacting well. You don’t go through attorneys. You have to have the principals in charge of the attorneys and not vice versa. I see things go awry where it’s a guy who talks to his attorney, attorney talks to the other attorney, attorney talks to his guidance. Game of telephone. The game of telephone that we played when we were six years old in kindergarten is exactly the same today. Bad communication is anathema to successful M&A process. Every time, I’m really trying to get that buyer and seller to communicate well.
Dean Wehrli:
Is there anything else? I was going to ask you, but you kind of answered it both in one. Is there any factor that makes things go not so smoothly? And it sounds like the antithesis of good communication.
Tony Avila:
Yeah. Faith, trust. You have to have a buyer and seller that trust us, trust the process. Our clients that hire us, they have incredible faith that we’re going to be doing the right thing. Creating a win-win, we work on that where it’s successful for both buyer and seller. That’s a hallmark. If you look at our track record in our deal pipeline and what we do, you talk to the buyers and sellers, I think that’s a hallmark that you’ll hear and be, oh, okay. There was tremendous amount of faith and trust on both sides and a successful process was run.
Dean Wehrli:
Is it sometimes not just the lawyers but the IT folks too? We hear a lot about technology sometimes being a problem when two companies try to get together. How deep in the weeds do you go on those operational issues to help solve those kinds of problems? Do you get to that level?
Tony Avila:
We’re typically quite involved within every aspect of the acquisition. I’d say that most of the integration efforts in the IT side where it gets bogged down and there gets to be a lot of headache is definitely post-acquisition. Anytime you do a systems integration, it’s a massive headache. As much as the set of systems integration, also an accounting integration. When you’ve gotten a choir in there, they’re going to have reporting standards that are needed, and you’re going to have a seller that’s just not used to doing. That is something that there is some post-acquisition work that needs to be done, and it is painful. We’ve all been through IT systems integrations, but that is usually what you’re asking about. 90% of the pain and suffering is really post-acquisition as you’re trying to get the systems put together. Usually pre-acquisition we’re prepping for, okay, what are we going to do? What’s our migration plan? A lot of times that’s being worked on, and that is one of the box checks that we have to pre-acquisition that we work on.
Dean Wehrli:
I mean, you have to be careful here, I know, but what was your toughest deal that you’ve ever worked on? If you have to use a clever code word, feel free.
Tony Avila:
I would say, the toughest transaction, it’s always hard to get into names, but the toughest transaction has been where you’ve got ego. Where you have a tremendous amount of ego on the part of the book, either the buyer or the seller. That’s where it gets real, real challenging is to some extent, checking the ego at the door.
Dean Wehrli:
Isn’t that always a problem? Honestly, in this work. No?
Tony Avila:
No, absolutely not. No. You have so many amazing home builders that you think they’ve got this big ego and that’s their way. But when they go, the reason why they’ve been so successful is because they surround themselves with strong team members. They have faith in their people, in the process, and they can be relatively humble and unassuming when you’re going in and working on a transaction. I’d say, yeah, the biggest, the worst deals are where you have this massive ego and you don’t have a sense of compromise and you don’t have a sense of… Then also that lack of communication as well is really challenging. Without getting into specific deals, I can tell you that’s been the biggest. The other thing is just the lack of knowledge and a lack of understanding and fear. These are all things that can make M&A challenging. And impatience, you got to have patience and persistence in this. For M&A, it’s patience and persistence.
Dean Wehrli:
I was just teasing home builders, though. I’m actually talking with Mike Forsum at Landsea here in a couple hours. I was tweaking them. Is there a hit ratio? In other words, you got to a lot of these deals and they don’t happen. Do you have a rough idea of out of how many M&As you look at, how many actually come to fruition? Does that make sense?
Tony Avila:
Yeah, generally it depends on where we’re at in the process, but when somebody hires us, “Okay, look, we want to sell our company.” If they’re realistic on their price expectations, it’s going to be 80% plus confidence interval that we’re going to close a transaction. We have a real high success ratio as far as if you have a realistic seller. Then in that case, there’s high probability it’s going to close.
Dean Wehrli:
Does the builder that’s selling usually go through a lot of potential partners when it gets to you, or is it the first or second or so?
Tony Avila:
Yeah. Usually, we’ve known somebody for quite some period of time, they’re saying, “Hey, we think now is the time.” Sometimes people, there’ve been some other advisors. There’s some other advisors that work in the sector and we’ve had people contact us after working with another advisor. I’ve walked through, okay, those who forget history are doomed to relive it. Right? Okay. Let’s make sure we go through and understand what happened and we can talk about the how we could do things better than mistakes that were potentially made. Sometimes we do go in and kind of clean up messes that have been… There’s a lot of PTSD and things that we have to overcome there.
Dean Wehrli:
How about potential builder partners? In other words, X number of folks who look at that deal, does that make sense? They want to sell, and it’s the seventh person that actually does the deal.
Tony Avila:
Yeah. I mean, we’ve had definitely had transactions where we had to put a buyer to the curb or rear. We were working with a buyer and I’m trying to buy this one company. I did some work so we had to move to the next one. But a lot of times we’ll work with a company that’s selling and with the buyer that was the highest bidder, they’re just not performing or it’s not going to get done and we have to go to a backup. That doesn’t happen all too often, but it certainly happened. I don’t know that I’ve got to the seventh yet, but in one instance I’ve gotten to the third and sometimes might have been the third time was a charm.
Dean Wehrli:
It’s not bad, actually. That’s a pretty good hit ratio, I would say. We teased it a minute ago. Let’s talk about Dream Finders Homes. That’s a major builder. They’re based in Florida, I believe. They’re active in Texas and a lot of the Southeast. You helped them go public not all that long ago. Can you walk us through that IPO process?
Tony Avila:
Yeah. Dream Finders, we don’t have a conference. We host an executive forum. John Burns comes in and presents typically, but we do an executive forum every year. It’s invitation only. It’s an exclusive list of the top, kind of the faster growing, the more forward-thinking builders across the country and some land developers. We’ll bring them in. But we won’t have a research analyst so we won’t have institutional investors. We won’t have the press. Dream Finders has been coming to our executive forum for several years, probably four or five years. We’ve followed Patrick and what he’s done. When Rick joined the firm, what they’ve been able to accomplish. We’ve been working with them. The process was they formed, we’ve been talking with them and coaching, kind of giving them our thoughts.
They’ve seen our success we’ve done with LGI homes, with Century Communities on their IPOs. They wanted to get that secret sauce. Because if you looked at post-financial crisis, if you looked at the top performers, the two top performers were LGI and Century Communities. Those were the only two IPOs that Builder Advisor Group worked on. We’ve worked on a lot of M&A transactions for Century, and we’ve worked on a lot of M&A and capital raising for LGI, every deal since. What we did is formally we got hired in June of 2020, in the middle of the pandemic. Pandemic was really going strong. We said, you know what? Housing is looking like a clear winner. Timing is right. What they do is they have the faith in us to help them select an investment banking group to be that syndicate, to kind of place the stock.
Then at the same time, we also selected a syndicate to do an unsecured syndicated credit facility. Dream Finders with all their acquisitions had 22 or 23 individual credit facilities with 22 or 23 different lenders. That is untenable. You can’t manage that. What we were doing at the same time as we were dangling out there, “Hey, we’ve got this a potential for an IPO who wants to come in and do a syndicated unsecured credit facility.” We set it up like the process to let’s select a lead. And ultimately in this instance, the lead was Bank of America. Bank of America Securities came in in this instance, but there’s a lot of wonderful lenders that are out there. We talked to all of them on who wants to be the lead and put together, let’s say a half a billion, 400, 450 million dollars syndicated unsecured credit facility. Taken a builder to unsecured. The holy grail is once you’re an unsecured borrower, that just opens up, frees so much time. It’s such a wonderful thing. You don’t have to have mortgages. You’re just an unsecured borrower.
The big thing was figuring out how to go and do that. Once we did that and then we set up the right syndicate, we understood. Then from an IPO perspective, that’s a good blocking and tackling. I mean, I’ve worked with investors in the sector on the IPO side. If you look at our track record at LGI Homes, a guy who bought in the IPO was up 13, 14 times if they still hold the stock. We know the right investors. Also, there were some amazing investors that are already in Dream Finders that wanted more. If you look at what Boston Omaha did, they were fantastic. There were tremendous amount of friends and family, that I’ve never seen the amount of friends and family interests. We had an offering, ultimately we crafted an offering that was maybe 11 million shares, including the greenshoe. You had over a lot of option and we had a hundred million shares of demand.
When you have that much in hand and only that many shares and half the shares were being taken by existing investors or friends and family of the firm, we had a tremendous, a lot of demand, very little supply. We know where the price is going to go. We went out at 13 bucks and the stock opened at 20. First day of closing, the low 20s and has been up to whatever, 34 bucks. It vacillates quite a bit because the float is going to be kind of small right now. But what we’ve been able to do or what we do in these processes is we set up a process for success and make sure that you’ve got the right underwriting team. You got the right credit. You got to have the right capital stack. Then you got to bring in the right investor group too.
Dean Wehrli:
In this case, you kind of cleaned up their financial situation before you took them public, and that was a pretty critical part of it.
Tony Avila:
Mission critical was getting their capital stacks set right. That’s the both sides of the balance sheet, getting the debt side set up perfectly. Really, it’s all on one side, actually. Technically, it’s all on the right side. It’s both liabilities and equity and getting that in the right balance and with the right capital stack.
Dean Wehrli:
Did that demand that you’re seeing tempt you to push up that initial public offering amount? I mean, what kind of play goes into that $13 in this case?
Tony Avila:
Yeah, so we wanted to get public as soon as possible because the window was wide open. That IPO window can slam shut. We wanted to get out and get public as fast as possible. We did have a discussion about upsizing the transaction, but I think the company is very careful with dilution and not wanting to dilute their earnings per share. We were very careful on the number of shares that were issued.
Dean Wehrli:
Okay. Switching gears a little bit. I know Tony that you are an avid runner. In fact, you told me you do Ironman triathlons, whereas I can barely manage a dance 2021 session with my wife and I almost always lose. There’s this one song I’m better than her at. They say that there’s a runner’s high. Is there a deal high? You come to the end of a long process and you nail it. Do you feel something like that?
Tony Avila:
Yeah. When the wire transfer hits and the deal closes, then we have a fun closing dinner. We’ll take the victory lap and I’ll have the runner’s high. Runner’s high is different. In triathlon, you get a high when you’re cycling and certainly in the middle of the swim, you’ll have an amazing high there. It’s very different doing, as far as the high that you get. A lot of times the highs that you get might be right in the middle of the run. But when you finish, I mean, when I finished the Ironman World Championship in Kona in 2018, that was one of the greatest accomplishments in my life and having my dad at the finish line put the lei around me. Having my son when I qualified to go to Kona and Boulder, having my son put the finisher’s medal around my neck.
In my first Ironman where my wife put my finisher’s medal, you definitely have an incredible high. That was right before I went to the emergency room. In Ironman and in marathons, patience and persistence. In mergers and acquisitions, patience and persistence, there’s a huge parallel there. I’ll be out on a long run or a long ride, I’ll definitely solve a lot of our client’s problems while I’m out there. I’ll be thinking about how we’re going to get over this one challenge or what the right strategy might be. I’ll definitely do that while I’m out running or riding or swimming.
Dean Wehrli:
They would for sure have to fish my body out of the ocean. I make no bones about that.
Tony Avila:
You put a wet suit on. You can’t-
Dean Wehrli:
Put an orange one to make it easier to see my body. Let’s talk about your crystal ball here with the last couple of questions. Will we see a lot more of this activity? M&A or IPOs, are we heading toward a period with a lot of that?
Tony Avila:
Yeah. This is the most M&A transactions I’ve seen in my 25 year career. We’ll probably, knock on wood, we’ve got seven closed so far. About six in backlog and another three companies that are about to launch the potential for sale process. It’s an unprecedented time. I think we’ll see a tremendous amount of M&A in ’21 and ’22. Beyond that, I don’t have a good crystal ball. Anyone who does, I would either back them quickly or be suspect. But I think a good amount of M&A this year.
Dean Wehrli:
Yeah. Do you look at trends? Are there any trends or metrics that would signal that M&As or IPOs are going to diminish? Are the hot market conditions at present a big part of the attraction right now?
Tony Avila:
Yeah. I would say that where you don’t have a good land supply, there’s shortage in land, shortage in lot, shortage in people, you’ll see a need for M&A. What we started to see in 2006 was a backing away of land transactions. We definitely started to see a slowing of demand, and that pushed people away from you had a big mismatch between what the guys who wanted to sell their companies, what they want to sell them for, what the buyers were willing to pay. When you have that, that mismatch or that disparity, then your M&A deals start going by the wayside. When is that going to be? I’m not sure yet.
Dean Wehrli:
Yeah. It’s interesting you said people there, because a lot of times in M&As particularly, folks are worried. They’re going to lose job. It can get squeezed out, especially if you’re with the junior partner. But now, are they actually looking to enhance their team through M&As? Is that something?
Tony Avila:
Yeah, it’s definitely something we look at when we’re going and doing a deal is let’s look at who needs people. Oftentimes, the sellers really feel like the people in the organization are like family, so let’s make sure they get treated well. In almost any M&A transaction, there will be some impact with people, but the vast majority of people are needed in a transaction. You need construction people. You need salespeople. You need everybody that’s working on alliances. In some instances, there may be people at the home office, which may be the most visible to the ownership where it’s like, I don’t know how that person is going to necessarily fit and how that’s going to work. A lot of times it’s like, all right, well, we need to get some type of payments set up for that person so that we’re taking care of her being, or doing something for them. In this kind of environment though, that person is sorely needed somewhere.
Dean Wehrli:
Yeah. I’ve noticed that a few times over with folks, clients of mine, where, yeah, it seems like everybody lands on their feet somewhere in the recent deals because they are so sorely needed. Let’s end with policy. Do you see any policy changes from whether, I guess the federal government most likely that might change this landscape? Do you track that? Do you see anything coming down the pipeline that you’re worried about or maybe might actually enhance conditions?
Tony Avila:
Well, certainly capital gains and what the capital gains rate will be for anyone to C-corp. C-corp tax rates with those will be so tax will have an impact on the process for sure.
Dean Wehrli:
Okay. Any crystal ball there?
Tony Avila:
Yeah. I think we might still have a middle ground on, I don’t know that we’d end up at a 43% capital gains rate, but if we did, I mean, I would think there might be some kind of middle ground so there will still be a variance between the two. If there’s not, then it would be a big push to close some deals and then there may be a pause there as people kind of assess, “Well, now I’m going to be taxed the same so I’m not sure what I want to do.” But I think a lot of guys will still say, “Well, I still want to take my chips off the table.” In some instances, we’ll look at the 1031, seems like a 1031 exchange will still work. We will work to 1031 land positions and have some tax efficient. We’ll look at other efficient ways to structure a transaction. There might be some deferrals of compensation that eases the tax burden. But yeah, that would be something we’re certainly watching.
Dean Wehrli:
Awesome. Tony, thank you. I know I learned a lot. I hope you listener learned a lot. Thanks so much for coming aboard.
Tony Avila:
Happy to do it. Thanks a lot.
Dean Wehrli:
Awesome. This has been the New Home Insights Podcast with Dean Wehrli. Till next time. See you then.
