BrokerageOpinionReal Estate

Opinion: Beware of the hidden losses of real estate mergers and acquisitions

As someone who worked for a large, nationally branded brokerage for 30+ years, I had a front-row seat to many mergers and acquisitions. I would love to say they all went well, but they didn’t.

Back before iron-clad earn outs and claw-back clauses, I witnessed a time when two days after an acquisition announcement, the entire agent population walked out with the managers. That was fun. We learned not to assume anything.

Since independent contractors are just that — independent — they clearly don’t often immediately see the benefit of an acquisition or merger. And the competition knows that. The burden of proof rests squarely on the shoulders of the leadership team to create a welcoming and inclusive environment for the agents. You have to give them a reason to stay. 

Owning a brokerage isn’t what it used to be

More and more aging broker-owners are considering retiring or moving on from real estate. They rode the unexpected Covid boom and are now exhausted and ready to get out. Without succession plans in place or heirs to take over, and no readily available buyers, they find themselves having to figure out a game plan. 

Since the seller’s market for brokerages has passed for the moment, valuations have taken a hit. Now it may mean taking over their debt and leases to get the owner out from under them. I suspect we will see more walkovers and big teams also making moves as they seek to improve their take on each transaction which creates even more uncertainty in valuations. 

We may also see more mergers as brokerages consider the mutual need to cut expenses through consolidations of staff, leases, and resources. These can greatly improve a broker’s market position as well. 

The transition can be particularly rough if the company doing the acquiring is a fierce competitor. It can be perceived by the agents and staff as a money grab by the owner who is selling.

Sometimes, the broker gets to a point where they have no other choice but to sell or merge. Don’t overlook how that makes the agents and staff feel and the long-term damage it can do if they are left in the dark. As much transparency as possible will go a long way to reinforce loyalty. Nobody wants to feel like something is being done ‘to’ them. 

Take it one step further

We need to consider their agent’s mindset. Would a big change be the straw that breaks them? Having witnessed some very poor onboarding, it is wise not to take anything for granted, particularly when the agents are fragile in times like these. They need to be treated with kid gloves to ensure a seamless transition so they aren’t inconvenienced in any way. Will the designated and trained team who is the recipient of incoming company-generated business perceive this change as a loss of revenue? Or do you have more to generate for them than they got before? Either way, address it.

Trying to treat the onboarding process as a checklist can be a recipe for disaster. While the leadership and staff may know what needs to happen to make the transition, that doesn’t mean it will make the agents feel good about it. It needs to be customized and personal. They shouldn’t lift a finger or spend a penny. The FAQ should be constructed by actual agents who have gone through it. How it is handled sets the tone for the entire relationship, particularly for those who are wary of the situation. 

My husband recently started a new job. One week into his new role, a beautiful bouquet of flowers arrived at our house with a note addressed to both of us. What a simple, but thoughtful way to set the tone for the future. Set the tone however you feel it will resonate with the agents and staff, but it may not be the same for every office or agent. Take time to think about what their worries are. Maybe a party or a one-on-one meeting will resonate with them. It’s not a one-size-fits-all situation. 

Peek behind the curtain

When looking at a company to buy, it is critical to examine all of the external sources of business and revenue. There are brokerages out there with upwards of 40% of their business from outside sources that are not generated by their agents. Ask any broker that had become dependent on the USAA Mover’s Advantage Affinity Account. Some nearly went out of business when the program shut down with no warning in 2018. It’s great to not depend solely on your agents to bring in the business, but it can be just as tricky to put all of your eggs in one basket. 

There are many professional companies who expertly establish broker valuations and perform due diligence, they may not know to investigate the less apparent sources of company-generated revenue they may present as regular transactions. For example, if a broker is part of a referral network that is exclusive to a brand or requires independent status, we can be assured that the minute the announcement is made, the broker will be bounced from that network and all of that future business will be lost. 

There are times when a relocation management company, affinity organization, corporation, or a lead source may refuse to continue to work with certain brands or companies, particularly if the department who have managed those partnerships is a casualty of the acquisition. That business is built on relationships. Removing the person in charge or staff may be very damaging. Before making a quick decision about their fate, determine if they might be repurposed or job shared until you can determine how critical they are in the retention of business and to the agents who benefit from that business. The relocation agent team may leave if they believe their incoming referral and lead opportunities will be lost.

Make decisions regarding staff and space slowly. It is a great opportunity to upgrade staff and offices and helps the agents feel better if some of what they are accustomed to can remain intact. You end up with the best of the best. Really investigate what the relationships the outward-facing staff, such as Relocation Directors, have and how removing them might affect the incoming flow of referrals. Including someone who understands company-generated business lines in the due diligence process is crucial. They know which business lines may be retained and which are likely to go. 

What are you really buying?

As brokers start to think about the future of their own company or buying one, the key is to know what might be at risk. Are their ancillary services and unique company-generated business sources transferrable or is that revenue lost? That would include the usual ancillary service partnerships but don’t forget about corporate relocation, broker network referrals, affinity partnerships, concierge programs, internet and mortgage lead sources along with fee-based services such as paid rental assistance, area tours and finder’s fees, etc.

As time went on in my career, I realized I needed to create a questionnaire for our leadership to use in their due diligence helping them uncover any potential lost revenue that they may not think to investigate. It is customary to focus on agent production and all of the other metrics that drive value. Besides scouring the books, and considering the leadership and management team, customer base, agent loyalty, culture, values, strategic vision, potential risks, and market demographics, there are other elements that may establish what the future holds.  

While there will always be surprises in any acquisition, doing our best to mitigate the unknown is key. Don’t forget to look at the company-generated business lines that may disappear if the company is acquired. It might be a significant amount of revenue and transactions that may dramatically affect the overall long-term value of the company and the ability to retain agents.

Teresa Howe, SCRP, SGMS, is the founder of TRH Consulting.

This column does not necessarily reflect the opinion of RealTrends’ and HousingWire’s editorial departments and its owners.

To contact the author of this story:
Teresa R. Howe at [email protected]

To contact the editor responsible for this story:
Tracey Velt at [email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *

Most Popular Articles

3d rendering of a row of luxury townhouses along a street

Log In

Forgot Password?

Don't have an account? Please